The world South Asia will face after this crisis is not going to be the same as in the past. The trend that is accelerating after the financial crisis is that of the “new normal ”: the shift in traditional engines of growth from industrial countries to emerging markets.
The crisis is accelerating this fundamental change in economic order in which developed countries have to save more and spend less, while emerging markets, such as China, India, Indonesia, Brazil, Russia, and South Africa begin to play much bigger roles in driving the global recovery. According to our estimates, by 2020, in just ten years---Asia may see its share of world GDP (in nominal dollars) climb to over one-third, replacing North America and the European Union as the biggest region. Underlying this is an expected sharp rise in shares of China and India, and indeed, that of all emerging markets may climb to nearly one-half of global output.
Twelve years ago, I authored the Bank’s Global Economic Prospects  report covering the East Asian crisis, when the crisis started in developing countries, and talked about the prospects for recovery resting on growth engines in the developed countries. As expected at that time, East Asia rebounded, driving the engine of global manufacturing. This time, the epicenter is in the developed countries, requiring somewhat different responses from the developing world.
In this year's South Asia Economic Update, Moving Up, Looking East , you'll read how South Asia’s strengthening integration may boost trade with East Asia by three fold, and intra-regional trade between South Asian countries could quadruple if they open trade and investment dramatically. Fortunately, the process has already started and this is already very evident on the ground in a number of South Asian nations.
For example, the biggest FDI project in India is an integrated steel plant investment from Korea. More cars were exported in 2009 from India to the rest of the world than from China, thanks to growing auto industry production hubs relocating to India from Korea and Japan. Financial services are being deepened by investments from Singapore, as are electronics with investments from newly industrialized Asian countries (NIC). Energy and food imports from Malaysia and Indonesia are reducing domestic constraints. Increased tourism from East Asia is boosting recovery in the Maldives as well as other countries. Services trade is growing and imports of sophisticated capital goods are helping the productivity climb of large segments of manufacturing, including consumer electronics and capital goods.
Within South Asia too, prospects are rising from growing integration. Trade and investment between Sri Lanka and India is booming. Bhutan’s hydro projects are supplying energy needs in India, and Nepal’s rising remittances has been a crucial source of household incomes.. A new Bangladesh-India agreement could open up transit trade between India’s Northeast, Nepal, Bhutan, Bangladesh, and Myanmar. The region is on the cusp of much more change.
A third level is preserving ties to traditional markets in North America and Europe, which still provide crucial markets for labor-intensive goods and services exports such as IT and BPO, as well as sources of investment and know-how. Other emerging market regions, such as Middle East, Africa and Latin America are also growing partners.
What adjustments could catalyze and maximize these benefits? The report suggests that reducing tariffs to East Asian levels, liberalizing foreign direct investment into services sectors, and reducing behind-the-border administrative and regulatory trade barriers will be important to achieve these gains. Open regionalism will also help enlarge gains for South Asia in a different world.
What do you think? Is the “new normal ” sustainable? What are the challenges and opportunities? What could this mean for you and your country? All are welcome to comment.
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