Making the Big Leap
May 2012: 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, gender disparities, and conflict. In the recent book, Reshaping Tomorrow: Is South Asia Ready for the Big Leap? Editor and Economic Advisor Ejaz Ghani provides perspectives for the region’s future. The book provides an optimistic outlook as well as a pessimistic outlook with urgent recommendations for policymakers to take action today in order to reshape tomorrow.
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?
On May 8, 2012, South Asia’s Chief Economist, Kalpana Kochhar hosted a discussion with a panel of experts to discuss challenges and opportunities for the region’s future.
South Asia faces many challenges in realizing its development aspirations. Ghani notes that there have been no more than a dozen countries that have managed to sustain an average growth rate of over 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 lop sided 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.
The panelists agreed that predicting future growth is an impossible task; Dr. Aiyar, Editor of the Economic Times, called India’s previous 9.5% growth a “flash in the pan.” Dr. John Williamson, Senior Fellow at the Peterson Institute of Economics echoed Ghani’s point that few countries have been able to sustain double digit growth over long periods of time and that countries should look at past performance to predict future growth.
Arvind Virmani, Executive Director at the International Monetary Fund noted that with continued growth at current levels, India’s economy is expected to be about 40% of China's size both overall and at an individual level in 2025. He also added that the fundamental challenge in development in South Asia is the lack of a scientific approach to tackling problems, citing for instance, that the region should overcome the notion that subsidies translates into lower prices for industries and consumers.
Aiyar said that the biggest constraint to development is the lack of social and political harmony and used land use as an example. The high cost of land is a constraint to growth but is driven by policy and creates and perpetuates corruption. Additionally, Dr. Homi Kharas, Senior Fellow at the Brookings Institute noted the lack of professional planning and service delivery in cities reduces the quality of urban growth as more people move into cities.
In Reshaping Tomorrow, Ghani’s 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.
Kochhar noted that there’s a lot of room for optimism in South Asia. In politics, there has been a shift towards elections based on issues rather than personalities. Aiyar said that past performance is no guarantee of the future but that there is a spirit of moderation in the region that will be beneficial to development. For instance, periods of disruption between India and Pakistan after disruption has decreased and the line of control has held, creating opportunities for greater cooperation and trade.
Kharas said that South Asia in 2025 will look like East Asia today as urban sectors continue to see growth. In India, the lagging states are catching up to the advanced states with the private sector increasingly able to fill gaps in public services. People become more productive as they move out of poverty, India’s growth has created a middle class with more discretionary income which they increasingly spend on goods and services creating a virtuous cycle and increasing demand for domestic industries. The country’s advantage in lower cost service industries can quickly boost the knowledge and skill set of its people.
The panelists all cited China as a driver of growth and said that South Asia should capitalize on living in a booming neighborhood. At a crossroads between fast growing Central Asia and East Asia, there is great opportunity to engage neighboring countries whether to attract foreign direct investment or purchase more affordable capital goods such as train sets for infrastructure development. China can serve as a driver of growth as well as a competitor for countries in South Asia.
Aiyar concluded that while South Asia can learn from East Asia in scaling up manufacturing and urbanization, South Asia, especially India can teach East Asia how to effectively export services, creating a mutually beneficial relationship.