South Asian Economies: The Growing Power

Suraiya Zannath, FCAInstitute of Chartered Accountants of Bangladesh

Economic overview of South Asia

With a sustained an average growth rate of 6.7% over 2000-2012 (World Bank), South Asia is

currently the second fastest growing region in the world. Economists predict that growth will

continue at 6-8% until approximately 2025 (Tan 2010)

Since the early 1990s, trade and investment reforms have been implemented that have increased

the regions level of global integration. Since then, trade and FDIs have grown consistently

In recent years, attention is increasingly being paid to promote greater regionalism – this creates

benefits to harness the spillover benefits of India‘s growth success and promote an economic

union.

Closer affiliation to China via multilateral frameworks such as SAARC and APTA creates further

opportunities for economic benefits through increased trade, FDI, infrastructure building etc

The meltdown of the 2008-9 global financial crisis have been less pronounced in South Asia than

in many other economies (e.g. several of the G8 economies). This is mainly due to its reasonably

balanced growth path relying on the twin growth engines of export and consumption.

Economic overview of South Asia … 2

Most South Asian Countries (SACs) are on track to halve their absolute poverty figures by 2015 as detailed in the MDG

Absolute poverty figures in SACs have fallen from 43% in 1990 to 32% in 2013. (SAARC Report 2013)

If SAC sustain their current levels of high growth and channel them towards improving human development in the context of more inclusive economic policy, poverty levels could continue to fall significantly over the next decade

At the inaugural World Conference in Recreating South Asia: Democracy,

Social Justice and Sustainable Development in 2011, the UNDP opined that currently, South Asia is uniquely positioned to create a ―growth miracle‖ and thereby eliminate regional hunger by 2030.

Goldman Sachs in their quest for next 11 emerging economics included Bangladesh and Pakistan on the List. Goldman Sachs has included India in the BRIC list.

Why this optimism?

This optimism is probably based on the rapid growth rates of last decade:

Average Economic Growth Between 1960-1980: 3.7% per annum

Between 1980-2000: 5.7% per annum

During 2000-2012: 6.7 % per annum

In addition to factor accumulation and increasing productivity,

pro-growth policies were the major factors behind the growth story

since 1980s.

Why this optimism?... 2

Key Elements Policy Package (before 1980)

Key Elements Policy Package (after 1980)

Command economy – limited private sector role

Inward oriented import

substitution strategies

Restrictive labour laws

protecting workers

Self-sufficiency

Labour intensive and low

technology production

Replaced public sector with

private sector as growth

engine

Outward oriented export promoting strategies

Improved economic

Management

Opened up markets and

increased competition

Increased automation and upscalingin technology

Key Drivers for SA Growth

The key drivers for SAC growth are:

The Demographic Dividend

Infrastructure

Inclusive Growth

Institutions

Market Integration

Rise of the middle class

Human mobility and high remittances

Service sector development

Regional Integration

The Demographic Dividend

Over time, a demographic transition has been created in South Asia through a fall in child mortality rates, followed by a fall in fertility rates. Its working age population is swelling relative to the rest of the population. This is shown in the following slide.

―demographic dividend‖ = the potential for faster growth generated by this labourforce expansion

The SACs are at various stages of transition…

In order to reap the benefits of this dividend, policy measures must be taken to:

Absorb labour into productive employment

Improve education and training opportunities

Maintain a stable macro economic and trade environment

South Asia: Dependency Ratio

(no of dependent to 100 working-age population)

Source: World Bank

48

50

52

54

56

58

60

62

64

66

02 03 04 05 06 07 08 09 10 11 12 13

Infrastructure

SA achieved impressive growth despite poor infrastructure. However future growth cannot be sustained with such infrastructure.

SA suffers from the following infrastructure deficits:

Natural Resources:

Unlike other regions, such as Africa, West Asia or Latin America, South Asia is not well endowed with critical natural resources such as land, water, minerals and hydrocarbons.

For instance, presently the per capita arable land in South Asia is 0.16 hectares,

much lower than the world‘s average of 0.24 hectares.

Similarly, the South Asian region accounts for just 2 percent of the world‘s forest cover, which is essential to maintain ecological balance and biodiversity, despite

having 3.8 percent of the world‘s total surface area.

Presently 782,000 sq. km. of forest area in this region account for only 15 percent of its total land area, as compared to 29 percent of land area covered by forests in the world.

Further, the rate of forest depletion in South Asia has been the highest in the world.

Infrastructure …2

Water

With respect to fresh water, although three large watersheds (the Brahmaputra, the Ganges

and the Indus) serve the region, the per capita availability of fresh water is much lower

compared to other watersheds in the world.

The per capita fresh water availability is estimated to be only 2,854 cubic meters (m³), as

compared to the world average which exceeds 8,000 m³.

With increasing urbanization, the most critical challenge for the region will be that of water.

Further, if no significant changes in the environmental protection policies are made in the next

10-15 years, the devastating consequences of environmental degradation will pose the most

serious challenge to the economy of the region.

Infrastructure ….3

Energy

With respect to energy, which is so essential for industrialization and economic growth, South

Asia fares poorly.

The estimated reserves position, particularly that of oil and gas in the region, is not very

encouraging. For instance, crude oil reserves are estimated to be just six billion barrels of the

world‘s 1,009 billion barrels (0.6 percent). In per capita terms this comes to 4.6 barrels

compared to 169 barrels per capita in the world.

The region has only 85 trillion cubic feet of natural gas reserves out of the world‘s 5,016

trillion cubic feet of total gas reserves (1.69 percent).

The coal reserves in the region, amounting to 195 billion metric tons out of the world‘s

1,427 billion metric tons (13 percent), give its people 147 metric tons per capita in contrast

to the world average of 235 metric tons.

Infrastructure ….4

Road and Rail Network

A report of the World Bank, Transport Challenges in the South Asia Region identifies

transport infrastructure gap as one of the main constraints to economic growth and

to attract foreign investments.

Investment climate surveys have pinpointed transport as a particular problem for

regional and international trade in South Asia.

Bottlenecks are encountered in all modes of transport infrastructure and services:

poor condition of roads,

lack of intraregional connectivity between the national road networks,

unreliable and overall costly road transport services,

unrealized high potential for rail and inland water freight transport which has led to the

excessive use of road transport,

inadequate road and rail connectivity of ports with the hinterland,

and others.

Infrastructure ….5

A new report of the World Bank―Reducing Poverty by Closing South Asia‘s

Infrastructure Gap‖, reveals that the region‘s growing demands for infrastructure has

enlarged an existing infrastructure gap.

This gap is defined as the difference between South Asia‘s development goals and its

actual capability to obtain those goals. According to the report, addressing it will

require investing as much as $2.5 trillion over the next ten years:

one third to be spent on transport,

one third on electricity,

and the remainder on water supply and sanitation, solid waste

management, telecommunications, and irrigation.

Although much of infrastructure investment will be financed at the

national level Regional cooperation in the following four areas must

also be pursued: energy; transport; telecom and internet.

Inclusive Growth

Important indicators of inclusive growth are reduced poverty

and lesser economic inequality

Although all SA countries experienced decline in poverty, there has been

a rise in income inequality.

For most SA countries, growth in inequality across leading and lagging region is ris

ing faster than growth in inequality across individuals.

Regional income inequality will be complicated further due to the fact that in

future income will be concentrated in leading regions and

poverty in lagging regions.

Inclusive Growth ….2

What can be done to convert high growth into inclusive growth?

Supporting factors that contribute to high and inclusive growth:

Labour mobility

Better job creation

Technology

Skills and education

Migration: movements of surplus labour:

from rural to urban

From lagging to leading sectors

from lagging to leading regions.

Promotes higher productivity, wages and inclusive growth.

Inclusive Growth …3

Labour Mobility is low within SA. Factors inhibiting

labour mobility needs to be removed.They include:

poor infrastructure (e.g. roads)

poor education; and

location specific safety net programmes.

Job Creation: Labour supply growth in SA is 2.3% per annum

higher than global average of 1.8%.

- Faster job creator in the world after East Asia.

- Employment growth in India was 2.8% (2000-05)

while in China it was 1%.

- More informal (bad job) in SA compared to formal (good) job

Inclusive Growth …4

What will generate ‘good’ jobs?

A rapid economic growth is essential

A re-balancing of growth composition mainly in favour

of service sector and to a lesser extent manufacturing

(formal). [This is explained in a subsequent slide]

Reforms of restrictive labour laws to remove barriers

Better training and education to produce skilled

workers.

Inclusive Growth …5

Technology: SA has been weak both in domestic innovations

(except India) as well as tapping global knowledge –Large technology gap

Main priorities for reducing technology gap are summarized below:

Tapping into global knowledge

Creating new knowledge through investment in R&D

Disseminating existing knowledge

Networking and collaboration among SA countries

Inclusive Growth ….6

Skills Development

Education stock is still low in SA.There is both a ‗quantity‘ and ‗quality‘ challenge

Evidence suggests that in-service training is also low

In most SA countries, training and education are not responsive to

market needs.

Vocational training facilities needs to be improved such that they could deliver skill tr

aining demanded by labour market and employer

Institutions

Although institutions have improved in SA due to first generation policy

reforms, they are still weak in 5 areas:

Business Environment;

Labour Laws

Judicial System

Conflict Management

And Corruption…

Business Environment : SA has the second worst BE (after Africa) -performs poorly in most indicators and corruption.

Poor Governance

Need to improved regulatory framework and reduce corruption through

‗one stop‘ services

creating competing authorities

improving access to land titles

more effective rights to information

and improving law and order condition.

Institutions …2

Labour Law: Although there are variations across SA, rigid Labour

Law in SA protect workers interests at the expense of economic interest of

employers. In Bangladesh, the labour laws being formulated does not allow

―outsourcing of ―permanent jobs‖ unlike other countries where this is a standard

practice.

Judicial system: In general, the judicial system in South Asia has been modelled in

the UK system. The judiciary generally suffers from outdated laws, delays in

resolving cases, weak and politicized judiciary and corruption.

Conflict Management: A clash between two opposing groups, and can be

external or internal to the country. In India, Nepal, Bangladesh, Sri Lanka and

Pakistan, conflict is concentrated in the lagging regions whereas in Afghanistan, it is

spread across the country.

Institutions …3

Corruption: Transparency International, in its report ―Fighting corruption in South Asia: Building Accountability‖ has termed South Asia as the worst region in the world. South Asia‘s corruption epidemic is caused by opaque public institutions, lack of protection for anti-corruption actors and widespread government interference in the work of anti-corruption watchdogs. These are the findings of a Transparency International report analysing 70 key institutions‘ vulnerability to corruption in six south Asian countries – Bangladesh, India,

Maldives, Nepal, Pakistan and Sri Lanka.

In all six countries, corruption fighters in government and ordinary people alike who want to report, expose, investigate or prosecute corruption face legal barriers, political opposition and harassment that allow bribery, secret dealings and the abuse of power to go unchecked, the report warned.

All six score under 40 out of 100 on the Corruption Perceptions Index, a sign of rampant public sector corruption.

This corruption threatens to jeopardize fragile political and economic advances made in the region. Corruption in public bodies that should provide basic services to the poor means that economic growth is only enjoyed by the few.

While all six countries have public bodies charged with stopping corruption, their hands are tied by political control over staff appointments and budgets. Transparency International‘s report documented examples of cases against political supporters that were supressed and cases against political opponents that were taken up. Furthermore, staff members who failed to yield to political pressure are often shown the door or moved to new positions.

Governments are able to influence what cases come under scrutiny by placing allies in key positions, the report warned. This effectively makes political power a ticket to impunity for corruption. In Bangladesh, for example, only 10% of corruption cases lead to conviction.

People who blow the whistle on corruption are exposed to dangerous risks because laws to protect them are either too weak (India), or unknown and not publicized (Bangladesh). Nepal, Maldives, Pakistan, Sri Lanka don‘t have any whistleblowing legislation.

Market Integration

Market Integration (domestic markets to global and regional economy)allows economic agent

s interactions across local, regional and

international

Benefits of this interaction are increased flows of capital, goods,

labour, ideas and technology.

Firms benefits from two types of externalities:

Marshallian: labour pooling, technological spillovers

Non-pecuniary: backward and forward linkages

Divisions created by

Conflicts

transport costs

trade barriers

hinders market integration.

Market Integration ….2

SA‘s rapid growth benefited from rapid expansion in trade and

globalization. One of the fastest growths in trade with a CAGR of 19% over 2000-2011

However, SA’s global integration(trade/GDP ratio) was 49% lowest

among developing countries.

It has most restrictive tariff policies compared to other regions.

Market integration within SA is the lowest in theWorld (measured by

intra-regional trade): 2% of GDP for SA compared to 40% for East Asia

It has therefore ample opportunities to benefit from trade.

Market Integration …3

Robust growth in South Asia has been accompanied by increased trade participation

and financial openness

On average, net exports account for approximately 10% of growth for

SACs , with consumption (70%) and investment (20%) making up the remainder.

TRADE

Significant growth in Trade over the years (CAGR of 19% between 2000-11)

SACs have been expanding their base of trading partners in recent years; developing

markets in Asia, Africa and the Middle East are becoming increasingly important

Intra regional trade is also improving (CAGR of 19% between 2000-11)

Following slide shows the trends over the years

66.2 104.4 142.8

324.1

719.9

951.1

0

100

200

300

400

500

600

700

800

900

1000

1990 1995 2000 2005 2010 2011

Total World Trade (billion USD)

Source: Asia Regional Integration Centre

1.8 4.4 6.2

17.3

33.240.5

0

5

10

15

20

25

30

35

40

45

1990 1995 2000 2005 2010 2011

Total Trade with South Asia ( Billion USD)

Market Integration …4

Financial Flows

Capital inflows to South Asia have been on the rise in the last decade, notably in India and

Pakistan. The bulk of such flows are directed towards the services sector (e.g. stock market).

Deeper regional integration could encourage further FDI inflows, by increasing the

attractiveness of smaller FDIs as investment destinations (The ASEAN Investment Area

provides important lessons in this respect)

The following slide shows the FDI inflows and outflows. At the moment, South Asian

countries are small players in the global arena but with increased growth, this figure will

change rapidly.

Remittances constitute a large proportion of capital flows to SACs. These are usually less

volatile than other forms of inflows, a fact that has helped to prevent an economic meltdown

in SA countries in the wake of the global financial crisis

42.4 31.7 38.9

519.2

616.7684.4

0

100

200

300

400

500

600

700

800

2009 2010 2011

FDI inflows (billion USD)

South Asia Developing Economies

16.4 13.6 15.2

268.5

400.1 383.8

0

50

100

150

200

250

300

350

400

450

2009 2010 2011

FDI Outflows (billion USD)

South Asia Developing Economies

Source: UNCTAD World Investment Report 2012

Market Integration …5

Within individual country, signs of poor market integration is evident from

rising regional disparities.

Rising regional disparity is a cause for concern and may lead to

tensions, conflicts hampering growth.

Literature on economic geography suggests that increases in

regional disparity may be natural characteristic of growth process.

Best approach to address it is to enhance market integration by

reducing trade barriers through improved policies

improved connectivity

Rise of the Middle Class

South Asia‘s middle class has grown from approximately 24 million in 2000 to 72 million in

2010 (12% annual growth rate). This change is mainly due to middle class growth in India

The middle class now represents about 5% of the regional population, but rapid growth and

falling absolute poverty mean that the share could grow to 55% by 2025.

As detailed in Banerjee and Duflo (2007), a larger middle class has positive feedback effects on

growth, facilitating improvements in:

Democracy

Entrepreneurship

Human capital and savings

Consumption patterns

A larger middle-class encourages product differentiation, and may consequently generate a

virtuous growth cycle upon reaching a threshold level.

Human Mobility and High Remittances

Large number of workers from South Asia are working abroad as indicated by the following stock of migrant workers between the period 2000-10: Bangladesh: 5 million

India: 6 million

Nepal: 1.6 million

Sri Lanka: 2.4 million

Remittances are an important source of financial flows to SACs. In 2010, it amounted to 72.51 billion USD up from 16.13 billion USD in 2000 [CAGR of 15%]. The true figure is likely to be higher, given large unrecorded flows

Most OECD countries are facing a shrinking labour force and an ageing population. South Asia and Sub Saharan Africa are the only regions experiencing a swell in their working–age populations. This creates important opportunities for labour movements.

SACs have large groups of educated workers for this purpose, so they should be the key supplier.

Service Sector Development

South Asia is undergoing a structural transformation of its regional economy, moving from dependence on agriculture to an increased focus on services

Service sector grew by 4.5% in the 1970s to a little over 6.0% in the 1980s, more than 6.5% in the 1990s and further to 8.3% in 2000-2007.

It has consistently outpaced GDP in most SA countries (Chart in following slide)

An empirical study (Ghani 2010) suggests that service sector development is more highly correlated with poverty reduction than growth in either manufacturing or agriculture.

Enormous potential for growth through services exists for SACs because:

Services account for over 70% of global GDP

The cost differential across countries is large

SACs have strong base for service sector development, including:

English language proficiency (a legacy of their colonial past)

Strong tradition of higher education (especially in India)

A technology savvy diaspora

Recent embrace of modern telecommunications infrastructure

Currently service sector accounts for more than half of regions‘ GDP. Country wise figures are shown in the following slide

Service Sector % of GDP

Country 2009 2010 2011 2012 2013

Afghanistan 47 51 52 54 55

Bangladesh 53 53 54 54 54

Bhutan 38 38 41 40 40

India 55 55 55 56 57

Sri Lanka 58 58 58 57 57

Maldives 81 80 77 73

Nepal 50 48 46 48 49

Pakistan 56 55 53 54 53

Source: World Bank

Compound annual growth rate of services output and

overall Gross Domestic Product (1995-2009)

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

Bangladesh India Pakistan Sri Lanka

GDP

Services

Source: ADBI Institute

Service Sector Development …2

Traditional personal services (esp migration and remittances, tourism and transport) are also growing, though at a lower rate

The fastest growing services in SAC are modern impersonal services (esp business service, communication, banking and insurance). This went up by more than 3 times during the period 1996-2006.

The development of the service sector has increased trade in services: South Asia‘s trade in services during 2005-2009 grew more than 12% but well below the world average of around 30%.

Trade in service sector has however surpassed merchandise trade growth. Share of export of services grew from 15.23% in 1995 to 28.39% in 2009 (Source UNCTAD stats)

In India and Bangladesh, computer, communications and other services dominate commercial services exports. Nepal, Pakistan and Sri Lanka have high levels of transport and travel services. Maldives‘ service exports are dominated by travel services.

Increased regionalism and inter-state cooperation is desirable in order to further the development of these industries, given the benefits of agglomeration afforded by the services sector

Regional Cooperation

Regional Cooperation initiatives may unlock the growth benefits of SA‘s geogra

phy and people with improved management of regional

public goods.

Regional Cooperation can be instrumental in improving-

Water management

Disaster management

Climate and Environment Management

Energy Security

Security and ArmsTrade

Regional Cooperation..2

Jeffrey Sachs believes that ―SAARC is critical because regional integration is going to be t

he only way to find solutions to these problems. Regional

Cooperation is the only solution for conflicts, for the environmental challenges, for econ

omic development through increased trade‖

A dysfunctional SAARC ……..

Challenges for Balanced and Inclusive Growth

The export led growth model followed by several South Asian countries is under reconsideration, as the regions‘ economies are starting to realize the limits of external dependency on exports and the need to rebalance growth by increasing internal demand.

More balanced growth will help to solve the problem of global imbalances and decrease the regions‘ dependency on final goods demand from the United States and Europe

Food Security:With 1.7 bn people, South Asia has more inhabitants than Europe, North and South America put together. In a few years time South Asia is expected to overtake East Asia and then will be the most populous region of the world. Unfortunately, it is also the poorest region. More people are going hungry than in Africa. Feeding better a rising population will be one of the most pressing needs of the years ahead (Zingel 1999, 2006). There is substantial inequality within the region, especially in food supply. If South Asian cooperation is to become meaningful, more collaboration will be needed in ensuring food security.

Housing: More than a billion people around the globe, and over 14 percent of South Asians, live in inadequate housing. The challenge is that South Asia is home to about half of the world‘s poor, who require more complex housing solutions as existing market terms are not directly affordable to them.

Challenges for Balanced and Inclusive Growth …2

Healthcare: A 2010 report of Centre for Strategic and International Studies on the state of

Healthcare in South Asia mentions that it as a region of strategic importance and faces public health

challenges on a demographic and geographic scale unmatched in the world.

India, Pakistan, Bangladesh, Nepal, and Sri Lanka are home to nearly one-fifth of the world‘s

population. Even more dramatic, however, these countries are home to two-thirds of the world‘s

population living on less than $1 a day.

South Asia‘s low life expectancy and high rates of malnutrition, infant mortality, and incidence of TB

and HIV/AIDS are second only to those of sub-Saharan Africa.

The region faces not only these and related health problems—poor sanitation, poor maternal

health, poor access to healthcare services, and widespread malaria—but also an emerging chronic

disease epidemic.

Despite the magnitude of these interrelated challenges, these five countries on average spend less

than 3.2 percent of their gross domestic products on health, compared to a global average of 8.2

percent.

Uneven growth and persistently high levels of absolute and relative poverty. There is a crying need

to bring down the large disparity in income levels.

Major investments are needed in infrastructure to improve the quality of life in SA.