The future is unpredictable and yet, from time to time, we must take stock of what we accomplished and where we are heading. Over the past decade, better policies and rising integration with the global economy have pushed growth in South Asia upwards. By 2007, the peak year just before the global financial crisis, the region’s GDP growth had reached nearly 9 percent a year (just slightly behind East Asia’s). This growth acceleration extended to all the countries of the region.
The global financial crisis took South Asia’s growth down by about 3 percentage points (from 8.6% in 2007 to 5.6% in 2009). This was the smallest growth decline among all regions of the world and the prospective recovery is already underway. The World Bank expects GDP growth to recover to nearly 7 percent per annum on average in 2010-2011.
Dipak Dasgupta, a Lead Economist at the World Bank, points to four key factors that have cushioned South Asia’s growth decline during the crisis and are helping in the strong recovery.
(1) Remittances held up much stronger in South Asia than in other regions. In Nepal, the reliance on remittances is the highest, and without these flows, growth in consumption would have collapsed.
(2) The resilience of some key export-oriented sectors also helped. Garments in Bangladesh and IT software exports from India, for instance, have held up relatively well.
(3) FDI inflows to South Asia suffered a decline during the peak crisis period but have since picked-up sharply in India, Pakistan and Sri Lanka.
(4) Policy responded early in the crisis, helped by domestic factors such as the pre-election fiscal spending in India. The size of fiscal stimulus announced was over 3 percentage points of GDP in India and significant also in Bangladesh. Interest rates were lowered sharply in most South Asian countries.
Despite this overall positive story, the dispersion of growth in South Asia is widening. Setting the Maldives (a country with weak fundamentals) aside, it is possible to separate South Asia countries into two groups. India, Bangladesh and Bhutan are recovering quickly from the crisis. Pakistan, Nepal, Sri Lanka and Afghanistan face a more difficult situation because of bitter conflicts. Sri Lanka and Nepal have come out of civil wars, which weakened their macroeconomic management, but the end of conflict carries the prospect of a peace dividend.
In contrast, Afghanistan has seen sharply ratcheting conflict and an earlier drought. Both create poor prospects for growth. Pakistan is the most difficult setting, where the conflict has sharply aggravated its already precarious fiscal and balance of payments situation.
The region as a whole now faces at least two big challenges: food price inflation and fiscal imbalances.
Food price inflation is a major problem. The upsurge in global commodity prices preceding the global financial crisis had a strong negative impact in South Asia. While global prices have since declined sharply and disinflation was evident in the rest of the world, consumer prices have been under pressure in South Asia. In part, this reflects the lagged effects of higher food prices from global markets last year, and in part, the recent severe drought in India, which is forcing its imports higher and cutting back its exports. But consumer prices have been falling recently in other South Asian countries, such as Bangladesh and Sri Lanka.
"Large fiscal deficits are South Asia’s Achilles’ heel. Without gains in fiscal efficiency," says Dipak Dasgupta, "South Asia cannot meet its infrastructure and skills deficits." To complicate the situation, governments now have to deal with great volatility and uncertainties in the global context.
What should South Asian countries do? How do you think different countries in the region should respond to the current challenges?