What Will South Asia Look Like in 2025?
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South Asia is among the fastest growing regions in the world, but it is also home to the largest concentration of people living in conditions of debilitating poverty, human misery, gender disparities, and conflict. In my book, Reshaping Tomorrow, I ask if South Asia is Ready for the Big Leap.
The optimistic view is that India will achieve double-digit growth rates benefitting the rest of South Asia. The pessimistic view is that growth will be derailed by structural and transformational challenges. Which of these two outlooks will prevail?
The Optimistic Outlook
The optimistic outlook is based on favorable trends, including improved governance, the demographic dividend, the rise of the middle class, and the new faces of globalization.
All countries in the region have an elected government for the first time since independence leading to governance that is more focused on development. Improved governance will enhance the politics of democratic accountability; diminishing the importance of identity politics; and the rates of incumbency – the likelihood of a sitting politician being re-elected – are down.
In South Asia, the demographic dividend means that more than 12 million new workers will join the labor force, every year, for the next two decades. This is more than the entire population of Sweden. The demographic dividend will accelerate growth and increase savings that will allow for greater investments infrastructure and technology and swell the size of the middle class. India’s middle class (daily expenditure of $10-$100 in PPP terms) will increase from 60 million in 2010 to more than one billion people by 2025. Growth, education, home ownership, formal-sector jobs, and better economic security are causes and consequences of an expanding middle class.
The world has already benefited from the trade of goods. New faces of globalization will focus on the trade of services. The world is experiencing a third industrial revolution with the services trade being at the forefront of this revolution.
Services are characterized by growing tradability, increasing technological sophistication, and lower transport costs. Trade of services is the fastest growing component of world trade during the last two decades. Another opportunity is the incentives for labor mobility, as current demographic trends suggest a rapidly ageing population in OECD countries, and a young population in India and South Asia. This generates a opportunities for improved global efficiency. But there is an alternative outlook.
The Pessimistic Outlook
The pessimistic outlook is backed by equally strong arguments. There have been no more than a dozen countries that have managed to sustain an average growth rate of 7% a year for 25 years. Many have reached middle- income status, but very few have moved into high-income status.
Growth could be derailed by spatial transformations, poor infrastructure, lack of entrepreneurship, deep pockets of poverty, large informal sectors, huge social and gender disparities or high levels of conflict in the region. Rapid growth has produced billionaires in India. However, the broad character of the region remains agrarian and rural. Industries and services can still rapidly pull the underemployed workers in agriculture into gainful employment with decent wages.
Entrepreneurship is central to job creation. While the great economic minds throughout history recognized the link between entrepreneurship and job creation, controversies remain. Our understanding of entrepreneurship is still at an early stage. While India has a disproportionately high rate of self-employment and many small firms, this has not readily translated into as many young entrepreneurial firms as hoped. There is huge disparity in entrepreneurship across states in India with formal-sector job growth the strongest in regions and industries that have exhibited high rates of entrepreneurship and dynamic economies.
However, the informal sector remains overwhelmingly large and persistent accounting for over 99% of establishments and 80% of employment in manufacturing. The transformation of the unorganized sector is important to India’s modernization, growth, and attainment of regional economic equality.
Most countries in South Asia are currently immersed in, or are just emerging from, conflicts of varying nature and scope, ranging from the recently ended civil wars in Sri Lanka and Nepal and insurgency in Afghanistan and Pakistan, to low-level localized insurgency in India. The result is human misery, destruction of infrastructure and social cohesion, and death. The effects are huge.
South Asia is home to the largest concentration of poor people in the world. More than one billion people lived on less than $2 a day in 2005. Nearly 250 million children are undernourished. Child mortality and malnutrition levels are among the highest in the world. More than one third of adult women are anemic. One woman dies every five minutes from preventable, pregnancy-related causes. The share of female employment in total employment is among the lowest in the world, and gender disparities are deep and widespread in South Asia.
Let me know whether you support the positive or negative outlook and do share your thoughts in the comments below.
Next week, I will discuss what I believe can and should be done today to reshape tomorrow to realize the optimistic outlook.
Perhaps the way you frame the question and the two outlooks is slightly misleading. The post seems to suggest that what South Asia will "look like" in 2025 and how much economic growth it will experience are identical questions, as though the overall state of a society is captured through GDP. It is possible for the region to "look" bad in spite of high growth (if there is high concentration of wealth, weak educational infrastructure, violence, social disruption, persistent gender imbalances, discrimination, and so on). Your comments towards the end of this post show your concern for all these issues, so maybe the way this debate is set up inhibits your ability to express the breadth of your own nuanced understanding of the issues at stake. Economic growth is certainly important, and a conversation about how much of it there will be is one worth having, but what South Asia will look like in 2025 depends on a lot more.
Very energetic article, I enjoyed it a lot.
hello,
although this report is really fine and gives some knowledge about the present scenario and some future prediction, i would like to support positive aspect. it is because there are many countries seeking for breakthrough so as to do miracle. for example Nepal is now getting peace and after completely getting peace it will turn into the next interest that is ,economic development. similarly, technological advancement, educational level, living standard, child death, child labour and many other problems are also getting down in south asia region. thus i see south asia in the vary top level of development in the coming years.
Unless population is drastically controlled, South Asia will be plagued with poverty, pollution and deforestation. Rich and upper middle class need to be more altruistic and
compassionate about poor.
I am speaking of India. While I would like to support the positive perspective, sad to say, I am being persuaded that the negative outlook will continue to dominate until 2025. The main reason is the failure of institutions evidenced by the absolute cynicism of political class, the rise of corruption in the judiciary, and the complete antipathy of bureaucrats to business.
Indian national politics becoming hereditary, with power passing to a few hundred families. In fact today every member of parliament under 30 has inherited his or her seat, as have 47% of all MPs under the age of 50. The practice of nepotism in politics is taken for granted and it is getting worse. And for the first time a Chief Justice of the Supreme Court is being investigated for disproportionate assets of family members.
This political class aided by a compliant judiciary now stymies reforms that reduce rents and patronage, while increasing competition – for example, the bill on foreign entry into higher education, attempts to auction resources transparently, or attempts to transform public sector enterprises into more autonomous corporations. On the other hand, rent, patronage, or entitlement enhancing measures continue to sail through and become the law of the land.
The paralysis in growth enhancing reforms means that the expansion in subsidies and entitlements (in large measure to attract votes) are becoming less affordable. With growth slowing, government tax revenues stagnant as a fraction of GDP, and spending high, fiscal deficits remain high. At the same time, private consumption, especially in rural areas, is growing strongly on the back of rising incomes, strong credit growth, and continuing government transfers and subsidies. The result is that the gap between spending and saving is making India dependent on short term foreign inflows to a dangerously high extent, at a time that the international investor is increasingly skeptical about India's growth prospects (leading to your paper).
The depreciating rupee is the first warning sign of an unstable macroeconomy, rising long term interest rates could be the second. Dangerously volatile oil prices could lead to a blowout in India's fiscal and current account deficits, while at the same time depressing exchange rates and elevating interest rates.
Four important areas need work. First a number of areas such as higher education, where the License Permit Raj continues and significant rent-seeking persists should be deregulated. Second, the public sector has to clamber down from the commanding heights, and give up its virtual monopoly in some areas such as in coal. Third, the political class and the bureaucracy needs to recognize the importance of national resources such as land, spectrum, and commodities, and define the rules for their allocation. And fourth, the political leaders have to change the public mindset, weaning them off government subsidies and allocations, and give space to business.
Unlike China and East Asia, where small to medium businesses are generally left to their own devices, the heavy hand of government regulation stifles normal business activities. I will give you a small example. If you and the tax authorities are in dispute about service tax, the government official can claim an outrageous figure, based on imaginary sales, and the business man has no recourse, except to sit down and negotiate with the official for a bribe. Any attempt to confront the official honestly can lead to (a) a demand that the entire disputed amount be put in a deposit with the tax authorities; and (b) attract a 100% penalty for delay in payment. We are not talking trivial amounts here. For service companies, the tax is 14%. If the official claims (for what ever reason) that the quarter's sales were three times the reported amount, the business man has to hand over the entire quarter's sales and then some to the tax authorities, before even beginning to discuss why the estimates are so divergent.
You have proposed a short time frame of less than 13 years. Will all this be possible in that time frame with an inherited political class of leaders and crumbling institutions?
I really liked the approach taken by your write-up in that it has shown both the optimistic as well as pessimistic outlooks. Points made in both segments are interesting and worth reflecting. Nonetheless, in the optimistic segment, stating that all countries in the region have elected governments and that there is diminishing importance of identity politics, could become a misnomer. Many studies, relying on behavioral analysis of the political players along with the practices of elections in most (if not all) of these countries in the region, have amply questioned the substantive value and/or role of “election-for-the sake-of-election” in contributing to growth and development. Similarly, and at least in the real political arena, identity-based platforms are increasing their coverage, not decreasing, which eventually will lead to not only more difficulties in building consensus for development but also in meeting the objective of integration, an overly present item in the development discourse.
“What will South Asia look like in 2025” will much depend on how the region will fare in creating a real platform for substantive discussions (amongst all stakeholders) to achieving regionally defined goals. Actually, one such platform has been there for decades (in the form of SAARC) but its use has not been less than optimal (deliberately) in facilitating the implementation of any real and substantive agenda. The write-up should have touched upon this entity as well, since it was actually formed to facilitate cooperation in the region, with avowed objectives of (i) promoting the welfare of the people; (ii) accelerating economic growth, social progress, and cultural development; (iii) strengthening collective self-reliance; and (iv) contributing to mutual trust and understanding.
While SAARC has encountered many difficulties during its relatively slow evolutionary process, the comity of members can still take pride in having been able to make some improvement in the pattern of their collaboration, and in vying for implementing a regional integration strategy to deal with a variety of issues of common interests including, among other, the problems of poverty, food security, environment, and trade. It may also be useful to flag that it was also through this entity that it was possible to start a system with the formation of a preferential regime which gradually morphed into a free-trade regime, alongside the WTO framework. Certainly the size of benefits is yet to be certified ex-post by experts, but the achievements cannot be undermined ab initio. I therefore, hope that you will be able to devote some space to also discuss the usefulness of SAARC-type entities in reshaping South Asian future in your next write-up.
It is time to update your article. I looking at my comments from 5 years ago, and while there has been a change in government and some significant measures like the passage of GST and some attempts at administrative reform, job creation is still no where near the 12 million jobs a year mentioned in the optimistic scenario of your post. This is a ticking time bomb, as the benefits of growth are now shared by a few at the very top of the economic pyramid. 2025 is now 8 years away, and I think it is time to draw up a more realistic scenario, based on what has transpired upto the half-way mark of the selected time frame.
Agreed