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What’s behind South Asia’s low exports?

Hans Timmer's picture
South Asian countries’ exports are only one-third of what they should be, had they mirrored the experience of economies with similar characteristics. Without further integration into global markets, South Asia will not sustain its growth. Photo: Shutterstock 

This blog highlights the findings from the recent South Asia Economic Focus: Exports Wanted

Bela Balassa worked for the World Bank from 1966 till his death in 1991. Luckily, his insights on international integration, revealed comparative advantages, trade diversion, and natural progress toward political integration have outlived him.

And what Bela is best-known for—and rightfully so—is the Balassa-Samuelson effect.

Put simply, this effect explains why a haircut or a restaurant meal is much cheaper in poor countries than in rich countries whereas the price tag for a car or a television is almost the same everywhere.

What’s behind this phenomenon is simple and can be summed up in three parts.

First, international competition equalizes the price of tradable goods like televisions across countries.

Second, the prices of non-tradable goods like haircuts can differ.

And third, the difference in productivity across countries is much more significant in tradable goods than in non-tradable goods. For example, a barber in Dhaka needs roughly the same amount of time as a barber in New York to cut my hair.

But manufacturers or farmers in Nepal need more labor to produce the same output than their counterparts in Germany.

Countries tend to be poor because their level of productivity in tradable goods is low.  

Nepal’s promise and opportunities

Hartwig Schafer's picture
Nepal is in many ways emerging from that disaster as a new country
Photo: World Bank

Nepal is on the brink of a new era. Four years ago this April, the powerful Gorkha earthquake devasted parts of Nepal and shook Kathmandu to the core.

Today, Nepal is in many ways emerging from that disaster as a new country: It is young, with more than 40 percent of Nepalis in the 16-40 age group.  It is ambitious, with plans for new highways, new mass transit infrastructure, new airports, more trade, more energy, and growth.

And it is resilient. Last November, I watched people literally building back their lives from the ruins in Ramechhap, one of the earthquake’s hardest-hit districts. Much has been said about the strength of the Nepali people. I’m humbled to have witnessed it firsthand.

With each visit to Kathmandu, I’m increasingly impressed by the dynamism of the city and the aspirations of Nepal’s young people. They are eager for education, for opportunity. They shouldn’t have to leave Nepal to get it.

As investors gather for the Nepal Investment Summit, this is the perfect time for Nepal to send a message to the world -- that Nepal is back on its feet and looking ahead to a more prosperous future.

With a stable government and an ambitious economic plan, Nepal is, for the first time in decades, in a position to dream big and to carry out a long-term vision that includes more and better services and opportunities for people.

Things are moving in the right direction. Extreme poverty is expected to decline from 15 percent in 2010 to a 10 percent in 2019, based on a poverty line of $1.90 a day. Economic growth in the last three years has been robust

The goal of becoming a middle-income country by 2030 -- in just 11 years – is possible.

What will steer South Asia’s economic promise? Its people

Sanjay Kathuria's picture
 The Promise of Regional Trade in South Asia
Pedestrians cross the road in front of motorcycles, cars, and buses at the crossroads in Kolkata, India. Photo: Radiokafka / Shutterstock

This blog is part of a series that discusses a way forward for South Asian regional integration.

That South Asia is brimming with possibilities for economic growth is well-known. It’s what drove us to write A Glass Half Full: The Promise of Regional Trade in South Asia. Our research shows that if South Asian countries lifted man-made barriers, intraregional trade could triple and unleash greater prosperity for all

What we weren’t prepared for, however, was the overwhelmingly positive response the report received across the region. Government officials, members of the private sector, civil society, and particularly young people we met with were eager to learn more about how their countries could improve trade relations with their neighbors.

South Asia’s economic prospects are promising, but even more inspiring are its people who remain hopeful for change despite political circumstances that make it seem impossible.

In Pakistan, which suffers the biggest welfare loss because of non-cooperation, A Glass Half Full hit home in a variety of ways.

The country can increase its intraregional trade almost 8-fold, from $5.1 billion to $39.7 billion. This resounded with audiences at launch events in Islamabad, Lahore, and Karachi, evoking a sense of loss for the missed opportunity. They asked how Pakistan and other countries could amend their discriminatory policies and enjoy the benefits of free trade.

Politics often trumps economic cooperation in South Asia, but many in Pakistan suggested politics wins because the cost is so low. If intraregional trade were to increase, lobbies would arise to protect those interests.

A week before our report’s launch, Pakistan and India had initiated the Kartarpur border corridor to facilitate visa-free visits for Indian pilgrims to Pakistan’s Sikh holy sites. This had locals brainstorming more initiatives for regional integration. Students lined up after talks to chat, insisting that I come to speak at their universities- their enthusiasm was infectious. 

Applauding the women leaders in South Asia

Hartwig Schafer's picture

I just ended my first round of country visits as the World Bank’s Vice President for the South Asia Region.  Over and above all, I have been immensely impressed by the resilience, determination, commitment and innovation of the women leaders that I had the privilege to meet during my visits.

These women are succeeding in a region where it is hard for women to realize their career dreams. In South Asia, only 28 percent of women ages 15+ are employed, compared to 48 percent worldwide.

What better opportunity than International Women’s Day to give a huge shout-out and applaud those women who are role models, entrepreneurs, and leaders in the eight countries of South Asia.

Neha Sharma, the district magistrate in Baghai village and Hart Schafer in India
Baghai village in Firozabad district, Uttar Pradesh, India. Photo: World Bank

In India, more exports can create better jobs and higher wages

Hartwig Schafer's picture
Exports to Jobs: Boosting the Gains from Trade in South Asia


South Asia has grown strongly to reduce poverty and create jobs, but the region remains a development paradox. Despite strong growth, job creation remains weak and is often of poor quality.

This is especially true for India, which grew at a rate of 7.2 percent in 2017 and which managed to reduce the number of poor people considerably.

But the growth of new job opportunities is below what many had hoped for; most Indians still lack a regular job in the formal economy, and huge differences in pay exist among workers. Strong population growth also puts pressure on labor markets, with millions of Indians entering the job market every year.

Employment creation is failing to keep up with labor force growth. And those who work often do so only in the informal sector, which is larger than in any other region in the world. Some groups, like women or workers in rural areas, are at particularly high risk of having to work in the informal economy, where wages are often lower.

Meanwhile, trade in goods as a share of the economy is much lower than in other regions. The trends in India and much of South Asia differ from other regions, where trade, growth, and jobs are directly connected and go hand in hand.

This South Asian paradox raises the question of how governments can boost job growth, and how to raise the quality of new jobs so that economic development brings more shared prosperity.

A new report by the World Bank and the International Labour Organization (ILO) finds that increasing exports through globalization has the potential to contribute to a broader strategy for promoting growth, job creation and shared prosperity.

Expand exports to resolve the South Asian paradox

Hartwig Schafer's picture
South Asia has grown strongly to reduce poverty and create jobs, but the region remains a development paradox


South Asia has grown strongly to reduce poverty and create jobs, but the region remains a development paradox: Despite strong growth job creation remains weak and is often of poor quality.

Sri Lanka grew at an average rate of 5.8 percent from 2010-2017 but the growth of new job opportunities is below what many had hoped for. Most Sri Lankans still lack a regular job in the formal economy, and huge differences in pay among workers exist.

Meanwhile, trade in goods as a share of the economy is much lower than in other regions. The trends in Sri Lanka and much of South Asia differ from other regions, where trade, growth and jobs are directly connected and go hand in hand. This South Asian paradox raises the question of how governments can boost job growth, and how to raise the quality of new jobs so that economic development brings more shared prosperity.

A new report by the World Bank and the International Labour Organization (ILO) finds that increasing exports has the potential to contribute to a broader strategy for promoting growth, job creation and shared prosperity.

Titled “Exports to Jobs: Realizing the Gains from Trade,” the report shows how higher exports can translate into benefits for workers across the country, and it therefore recommends policies to expand exports together with policies that help sharing these benefits more widely, for example through measures that help workers get the skills needed to compete for new formal-sector jobs.

How South Asia can become a free trade area

Sanjay Kathuria's picture
Women knit handicrafts for export at Everest Fashion Fair Craft in Lalitpur, Nepal
Women knit handicrafts for export at Everest Fashion Fair Craft in Lalitpur, Nepal. Photo: Peter Kapuscinski / World Bank

The South Asian Free Trade Area (SAFTA) agreement has been in effect since 2006—with little success.

This is in sharp contrast to the ASEAN free trade area (AFTA), which started in 1992 with six six countries and later added more members, completing the ASEAN ten by 1999.

Between 1992 and 2017, intraregional imports as a share of global imports in ASEAN increased from 17 to 24 percent, and exports from 21 to 27 percent.

In South Asia, these shares were largely stagnant since SAFTA came into effect, at 3 percent for intraregional imports and 6-7 percent for intraregional exports.

In fact, intraregional trade in South Asia has been the lowest among world regions for quite some time, hovering around 5 percent of its overall trade with the world.

What’s keeping India in the dark?

Fan Zhang's picture
To boost and sustain its energy supply, India needs urgent investments and reforms to fix the inefficiencies that plague its entire electricity supply chain.
To boost and sustain its energy supply, India needs urgent investments and reforms to fix the inefficiencies that plague its entire electricity supply chain. Credit: World Bank

Statistics show that what is commonly perceived as an energy gap in India is actually an efficiency gap.

To boost and sustain its energy supply, India needs urgent investments and reforms to fix the inefficiencies that plague its entire electricity supply chain. 

But first, the good news. In 2018, every village in India got connected to the grid.  That same year, power shortages declined dramatically to 0.9 percent from 8.5 percent in 2012.  

As for clean power, India has become one of the world’s leading countries in renewable energy and aims to add 227 gigawatts of green electricity by 2022.

True, India today generates more power than ever. Yet, 178 million Indians still lived without access to grid-connected electricity in 2017.

On top of that, air pollution from coal-powered plants contributed to 82,900 deaths across India in 2015.

Given its rapidly growing economy, demand for power in India is expected to triple by 2040.

The country faces a monumental task to meet this demand while protecting its natural environment and the health of its people.

As I write in my new report, ‘In the Dark’, power distortions cost India much more than previously estimated: $86 billion in 2016—that is 4 percent of the country’s economy.

How to diversify Bhutan’s economy?

Yoichiro Ishihara's picture
Bhutan has made tremdendous progress in reducing poverty. But it needs to do a better job at diversifying its economy by improving its physical and human capital by using resource rents from hydropower.
Bhutan has made tremendous progress in reducing poverty. But it needs to do a better job at diversifying its economy by improving its physical and human capital by using resource rents from hydropower.

Will diversifying its economy help Bhutan address its youth unemployment, let alone its macroeconomic volatility and vulnerability?

With the right approach, yes.

And to that end, the latest World Bank Bhutan Development Report: A Path to Inclusive and Sustainable Development proposes solutions relevant to Bhutan’s context.

For more than ten years, developing the private sector through greater economic diversification has been Bhutan’s top policy as described in the 10th and 11th five-year plans.

Yet, youth unemployment, especially for educated Bhutanese, has remained high: 67 percent of bachelor’s degrees holders were jobless in 2016.

Diversifying the economy is touted as a standard prescription to cure such development ailments as joblessness, low productivity, and macroeconomic volatility.

However, international experience shows that this prescription does not always work.

Case in point: A World Bank’s analysis Diversified Development concludes that in resource-rich countries, investing in physical capital, human capital and economic institution are the best ways to sustain growth in the private sector.

Further to that, the development of specific sectors, which is often a common ingredient of diversification strategies in certain countries, is neither necessary nor sufficient for private-sector-led growth.

The main driver of Bhutan’s high growth and poverty reduction, hydropower has led the country’s development and will remain the backbone of its economy.

However, Bhutan needs to do a better job at diversifying its economy by improving its physical and human capital by using resource rents from hydropower.

Bhutan ranks 149 out of 160 countries on the 2018 Logistics Performance Index and 121 out of 176 countries on the 2017 ICT index.

Bhutan falls in the bottom half of the Human Capital Project rankings on critical indicators such as expected years of schooling.

South Asia: A bright spot in darkening economic skies?

Hartwig Schafer's picture
South Asia is set to remain relatively insulated from some of the rising uncertainties that are looming large on the global economic horizon. The region will retain its top spot as the world’s fastest-growing region. The Siddhirganj Power Project in Bangladesh. Credit: Ismail Ferdous/World Bank

If, like me, you’re a firm believer in New Year’s resolutions, early January ushers in the prospect of renewed energy and exciting opportunities. And as tradition has it, it’s also a time to enter the prediction game.
 
Sadly, when it comes to the global economy, this year’s outlook is taking a somber turn.
 
In the aptly titled Darkening Skies, the World Bank’s new edition of its twice-a-year Global Economic Prospects report shows that risks are looming large on the economic horizon.
 
To sum up:  In emerging market and developing economies, the lingering effects of recent financial market stress on several large economies, a further deceleration in commodity exporters are likely to stall growth at a weaker-than-expected 4.2 percent this year.
 
On a positive note, South Asia is set to remain relatively insulated from some of these rising global uncertainties and will retain its top spot as the world’s fastest-growing region.
 
Bucking the global decelerating trend, growth in South Asia is expected to accelerate to 7.1 percent in 2019 from 6.9 percent in the year just ended, bolstered in part by stronger investments and robust consumption.  

Among the region’s largest economies, India is forecast to grow at 7.5 percent in fiscal year 2019-20 while Bangladesh is expected to moderate to 7 percent in fiscal year 2018-19. Sri Lanka is seen speeding up slightly to 4 percent in 2019.
 
Notably, and despite increasing conflicts and growing fragility, Afghanistan is expected to increase its growth to  2.7 percent rate this year.

In this otherwise positive outlook, Pakistan’s growth is projected to slow to 3.7 percent in fiscal year 2018-19 as the country is tightening its financial conditions to help counter rising inflation and external vulnerabilities.

However, activity is projected to rebound and average 4.6 percent over the medium term.

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