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.