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South Asia Rebounds Strongly Following Global Financial Crisis-and Can Sustain Faster and More Inclusive Growth-Says World Bank Regional Economic Update

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➢ Integration, not the lack of it, and prompt policy responses are driving rebound of growth to 7% in 2010 and 8% in 2011. The drop in growth during the crisis was the smallest among all regions.

➢ Region will benefit from new engines of growth and adapting to a “new normal” as emerging markets and Asia drive global growth. Trade with East Asia and China could potentially triple to reach $450 billion per year.


Colombo, 7 June, 2010 –South Asia is poised to grow by about 7 percent in 2010 and nearly 8 percent in 2011, making it the second-fastest growing region after East Asia & Pacific, says the South Asia Economic Update 2010, Moving Up, Looking East, the World Bank’s first yearly assessment of the economies of the region.

Contrary to current beliefs, South Asia’s particular strengths and forms of global integration—not the lack of it—was a key factor behind its resilience following the financial crisis of 2008. With emerging markets playing an increasing role in driving growth, integration should be a key component of a sustained and inclusive growth strategy going forward, the report says.

Over the past fifteen years the region has become much more open—and it appears that the form of openness it has chosen has provided resilience in the face of recent shocks,” said Andrew Steer, World Bank Acting Chief Economist for the South Asia Region. “Financial systems proved to be robust with limited exposures to overseas subprime markets. Remittances, exports of goods and services such as in the IT and garment sectors, and foreign direct investments kept up during the crisis. At the same time, policy response in most countries played a key role in boosting confidence and accelerating recovery.”

The report says that remittances have become the biggest source of foreign earnings in the region representing a (simple unweighted) average of 10 percent of GDP, a figure that is 5 times larger than net foreign direct investment flows.

THE “NEW NORMAL” LOOKING EAST

According to Ernesto May, Sector Director for Economic Policy for the South Asia Region, the region is facing a very different global economy over the medium term. “There is significant consensus now that what will emerge from this crisis will not be simply a return to pre-crisis conditions, but a “new normal.” Developed countries are starting to save more and spend less, are burdened with large fiscal and financial adjustment after, and are likely to grow at a much slower pace, especially in Europe and North America, whereas Asia and emerging markets will become much bigger drivers of global growth.”

While high-income markets will continue to be important for South Asia, even if at a slower pace than in the past, other emerging markets and regions are also fast-growing and increasingly important partners. In looking for future drivers, the Update focuses on trade and investment integration opportunities and recommends three principal directions for the countries in the region:

• Intensify their Look East strategies to integrate faster with East Asia. Currently trade between the two regions amounts to $126 billion annually and could reach $450 billion per year.
• Integrate more closely with each other within the South Asia region, to generate up to $50 billion per year more to the current $20 billion
• Preserve links to high-income markets in Europe and North America, and others, as these will continue to be important for labor-intensive exports, services, and as sources of capital and know-how.

Given complementary economic structures, trade and investment integration will help boost domestic manufacturing and services with gains for growth and welfare,” said Miria Pigato, Sector Manager for Economic Policy South Asia. “South Asia is well on its way to integrating rapidly with East Asia, which is already the largest partner for merchandise trade with the region. While trade with East Asia (excluding China) is the biggest part of this trade, China’s share is also growing, and together, trade with East Asia could triple to $450 billion annually. Within the South Asia region itself, annual trade could potentially be increased by some US$50 billion.”

BOUNCING BACK FROM CRISIS, and MANAGING THE RECOVERY

The Regional Economic Update expects growth in the region to reach close to pre-crisis peak levels and faster than its high rates of 6.5 percent annually from 2000 to 2007,” said Dipak Dasgupta, lead economist and principal author of the report. “Rising domestic confidence combined with government fiscal and monetary stimulus packages and, in some cases, external assistance is helping stimulate recovery. Improved optimism is helping drive the recovery in private spending in India, Bangladesh, Bhutan and Sri Lanka.” India’s growth is expected to rise to 9 percent in 2011, Bangladesh to 6.4 percent, Bhutan to 7 percent, and Sri Lanka to above 6 percent.

However, in countries with weaker fundamentals, unresolved conflict or post-conflict issues, and those that were heavily exposed to the global downturn, such as Maldives, Nepal and Pakistan, slower recovery is taking place (about 4 percent in 2011 for all three countries). Afghanistan is recovering from a drought and is expected to show stronger growth of 7 percent based on expanding external assistance.

There remain some significant risks in the global environment—slowing worker remittances and exports in a still hesitant and uncertain global recovery, as recent events in Europe show, with volatile commodity prices, and continuing volatility in global capital flows.

To ensure a sustained, durable and faster growth, countries need to create more fiscal space and contain rising inflation, while ensuring that the exit from fiscal and monetary stimulus is gradual and in tune with the recovery of private demand,” said May. “Boosting agriculture will also be vital to keep food prices moderate.”

CHALLENGES AND OPPORTUNITIES AHEAD

The South Asia region faces unique challenges such as those stemming from conflict and insecurity which will need to be addressed if the region is to fulfill its full potential. For some countries in the region, and some regions in all countries, economic growth and development has been hobbled in the past decade by rising conflict and insecurity.

"As peace returns, the post-conflict peace dividends can be large but are not automatic; policy settings need to be supportive—potentially raising growth by 2-3 percentage points annually in the countries and more in the sub-regions severely affected,” said Steer. The post-conflict bounce in growth and optimism in Sri Lanka is an example, and could be possible in Nepal, if policies sustain the dividend. In conflict affected areas, winning the peace and ensuring security will require strengthening the role of the state to deliver better services, the creation of jobs, and good governance. More trade among neighbors might help.

However the region also has unique opportunities. One of the key prospects for the region could be the rise of a globally competitive manufacturing sector that will also benefit from a Look East trade intensification strategy to help integration with global production networks and reduce large behind-the-border costs such as logistics. South Asia is attracting greater investor attention; and paradoxically, its growing prowess in exports of sophisticated exports is also enhancing its potential in more sophisticated manufacturing.

This process has already started, says the Update, with fast-growing private infrastructure investments (PPI) that are supporting rapidly growing manufacturing, in new sectors such as automobiles, electronics, machinery, steel, and capital goods. “South Asian countries could do well to seize these advantages decisively with industrial clusters and export processing zones in late or newly industrializing areas, and accelerated skills training, infrastructure and a deregulated business environment in already established areas,” said Dasgupta.




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