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Is South Asia Moving Up?

Dipak Dasgupta's picture

The food, fuel, and financial crises during the last three years sent shockwaves throughout the world and its effects rippled across South Asia. It impacted growth, causing a reduction of growth by nearly 3% from the peak of 8.9% in 2007 to 6.3% in 2009, led to job losses, declines in stock market value, decreases in tourism, and increasing pressures on already weak fiscal, balance of payments, reserves and exchange rates.

I was based in New Delhi during the crisis, and the effects were palpable. For a moment, it looked as if confidence was ebbing---the construction cranes in Gurgaon (the fastest-growing township around Delhi) became silent, a young scholar at Delhi University ran a survey of what graduates might do as job markets became difficult, airlines ran half-empty and racked-up massive losses, jobs were lost heavily in diamond-cutting in Gujarat and IT firms stopped hiring in Bangalore, and people paused to consider the implications of such a dramatic change from the accelerating and heady growth of the previous years. But despite the circumstances, and thanks to strong and prompt government actions, confidence has swiftly returned, the region has proven to be quite resilient and a noticeable resurgence has taken hold.

As South Asia begins to recover from these impacts, we wanted to analyze the basis and magnitude of the rebound and to look for emerging trends and opportunities for future growth and development. While my earlier brief was India, the span was now wider, the region, even as I returned back to Washington. We sifted the sands with our network of country economists spread throughout the region’s eight countries, and they provided us the critical insights.

We were fortunate that we had strong support and assistance from Eliana Cardoso, the then Chief Economist for South Asia, as did Ernesto May and Miria Pigato, all pushing us to produce a deeper analytical understanding of prospects for a region of 1.5 billion.

With that, we held a workshop in Colombo with a small group of experts from all our countries in the region: from working economists to political scientists, and from cabinet ministers to the media. We asked our group in Colombo to collectively define the most important themes for our upcoming report: they suggested South Asia’s past success, and increased openness. As a working title, they also proposed, in part-jest, “from the highest mountains (Afghanistan, Bhutan, India, Pakistan, Nepal) to the finest beaches (Maldives, Sri Lanka)”. Working with our team of colleagues over the last few months, I am happy to release and share with you the South Asia Economic Update: Moving Up, Looking East.

Overall, we found that South Asia’s economic rebound since March of last year to be strong and sustained with growth rates expected to reach 7% this year and 8% next year. In fact, growth in the next few years is expected to be higher than pre-crisis levels of 6.5% between 2000-2007. This has been due to stout financial systems and effective policies, robust remittances and confidence, and comparative advantages in industries that have demonstrated integration to be beneficial. It was not that South Asia had not integrated with the global economy; indeed, South Asia was integrating fastest among all regions of the world, whether in terms of trade, or investment, technology and services catch-up. It was the type of integration that proved in hindsight most valuable.

Limited financial integration with foreign banks meant that the financial systems proved robust to the sub-prime shocks. Exports did better, as services such as IT in India, as well as garment and textiles in Bangladesh and Sri Lanka demonstrated their resiliency in face of a falling global demand due to their competitiveness and relative inelasticity of demand for the products. Foreign direct investment kept coming in.

And most important, South Asia’s workers kept sending their earnings home, and remittances increased rapidly everywhere, in sharp contrast to the rest of the world. Progress is, however, uneven between different countries and caution is warranted due to the bumps in the road of global recovery, as events in Europe and elsewhere is now indicating.

I will discuss new opportunities for the region with the advent of the "new normal" on Thursday.


See the World Bank's feature story as well as the full economic report to learn more about how South Asia is Moving Up and Looking East.

Comments

Submitted by Ram Bansal on
I am surprised at the people considered to be reliant experts - from working economists to political scientists, and from cabinet ministers to the media - for forming a view on the Indian economy. Some of these people don't seem to have an idea of an Indian economy where millions are unemployed and under-employed. What is shining forms only 15 percent population of India. Did you notice queues for submitting applications for BTC in UP as reported in various newspapers in India?

Submitted by Anonymous on
"Limited financial integration with foreign banks meant that the financial systems proved robust to the sub-prime shocks." Financial systems across the region did fare better than elsewhere, but that's not to say they proved robust. In 2009 the RBI had to call in the heads of commercial banks in order for them to reduce their interest rates. In late 2008 India faced a liquidity crunch that made it very hard for firms to access funds from banks. Meanwhile Pakistan had to turn to the IMF due to a balance of payments crisis. Pakistan's stockmarket was shut for an extended period in 2008, due to fears companies would be wiped out by investors fleeing the nation. Otherwise a very nice piece. Keep up the good work.

Submitted by NeyKou on
A classic case of sleeping at the switch by our theoretical economists, policy makers and the bureaucrats make it sound like India is a big player in making emerging markets shake up the world destiny. What is sad is that their myopia is of nth degree to model every policy move away from the centered India which is an average rural/urban and urbo-rural being who have been nibbled to the bare bone while we have accepted rolling over of gas guzzlers, e-waste from MNCs with total sell out to our roads, environment and a common man's existence. India's farms are bleeding while water sheds only tears through the hard labor and absence of it in irrigation channels, household vessels, and sucked up ground water. Our common man and even the affluent are subjected to indignation in the face of absent public relieving facilities, sanitation to keep infectious and communicable diseases at record numbers, our infrastructure cries out to keep any unaccompanied child safe (for they cannot guarantee safety!) and average citizen faces a death sentence just crossing a road. These are some of the very basics where we have failed and are failing our citizens regardless of our imaginary inflated GDP projections. Is it not surprising that an economist for a PM, the countrymen at a loss to understand who better to pick for governing? The question is not the the person but the policies of modern India that has ignored unemployment, job training, skill development without curbing the roadside inflationary cost of educational hubs. I feel average Indian today is worst-off than in 1980 when you assess the cost of housing, food, transportation, healthcare, and education. World projects come and make a show while making few rich at the switch rest of it fails with the end of projects. Average Indian is living a projectised life not a life to plan on living better. World bank needs to revise its assessment, measurement and evaluation goals before we declare a success in our efforts to alleviate poverty.

South Asia’s economic rebound is good news. Its tremendous potential lies in regional cooperation, regional trade and integration. South Asian Development Fund—the new iteration of regional fund now headquartered in Thimpu—needs dynamic leadership to turn it into a catalyst and promoter of innovative approaches to socio-economic development across all sector—public, private and civil society organizations. On the other hand due to geopolitical concerns and internal strife countries in South Asia are huge spenders when it come to defence. Several billions of dolalrs in trade offset from strategic import is available has accumulated in these countries and is growing every month with additional purchases. As an example, Assocham and Ernst & Young study estimates offset accumulation over five years to be $10 billion. There is no bigger security threat than poverty, therefore, the South African statement on defence expenditure and poverty alleviation (http://sar-offset.wikidot.com/offset-poverty) makes eminent sense and the Kuwait National Offset Company (http://sar-offset.wikidot.com/kuwait) an implementation model to examine. I am aware that defence is the holy cow squatting in the middle of the road to socio-economic development and no patriotic citizen or World Bank economist will want to mess with it even if it means loss of life or holding up progress. Is it possible to appeal to the exporting countries and nations of South Asia to sit down to negotiate a comprehensive agreement to use billions of dollars from offset trade to fund South Asian Development Fund. The World Bank economist could at least start thinking about this. For this reason some of us have put together a wiki (http://sar-offset.wikidot.com/) and if there is some interest from development economist, we are quite willing to continue our effort to organize and add material.

High rates of growth are times when people are inclined to lose sight of the weaknesses in the economy. While the rebound of the Indian economy is impressive, the fact remains that the current government has been slow in launching new reform programs despite a clear majority in the Parliament. On the contrary, fiscal policy is biased in favor of more spending. In a booming economy, the focus ought to be on encouraging people to earn from employment. The more serious danger lurking is the neglect of agriculture. Archaic systems still exist in rural areas. Agriculture will be a bigger impediment as growth accelerates and commodity prices rise rapidly. Next year there is also a high risk of a double dip recession in the USA and Europe. India should be getting ready to expand the domestic market to sustain growth.

Submitted by Kishore Jethanandani on
Two countries where large defense expenditures have helped economic development are Israel and the USA. Both are leading in innovation. Israel has the highest rates of innovation per capita in the world and the USA comes next. This seems like a paradox--defense is by definition considered a waste. The reality is that technology is a big component of successful armies. Israel has been able to build a huge cadre of highly skilled engineers who develop technologies for sophisticated warfare. The same is true for the USA. Technologies developed in the military then find their way into the commercial sector. India, the only stable democracy in South Asia, is surrounded by potential enemies. China has the characteristics of a society predisposed to predatory warfare. With a fast growing economy, it has the resources to fund its military. Its institutions have lagged and its rulers are capable of whipping up nationalistic emotions to divert attention from their stranglehold over society. Pakistan, despite its recent moves towards democracy, remains unstable and could be looking at a coup staged by terrorists. India needs to increase the share of expenditures on technology for sophisticated warfare rather than spend on a standing army.

Submitted by Recovery on
One of the best ways to measure an economic recovery is to look at activity in the moving company industry. Are people selling and moving into bigger houses. Are more people moving into than out of a region. These numbers are often a direct reflection of economic activity and health in a region. The only variables that can throw these figures off are political turmoil and natural disasters.

Submitted by Mrs Girija Ramesh on
A mere graduate entering the Government Sectors during his prime days learns nothing in 20years and is stuck. If the Govt sector does badly due various reasons then the fault lies with the employee.

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