Economic Growth in South Asia

The World Bank on
South Asia's growth By Imtiaz Alam

The writer is editor current affairs, The News, and editor South Asian Journal

South Asia has experienced impressive economic growth during the last decade, says a latest World Bank report. The growth has resulted in poverty reduction and this has come about, the report says, because of economic reforms carried out in the last decade. This has happened despite conflicts, rampant corruption, inefficiencies, the presence of unskilled labour, bureaucratic bottlenecks and higher fiscal deficit in some of the countries. Inspired by around six per cent growth rate in the last three years, the economic managers in most countries of South Asia boast of having East Asian growth rates of between seven and ten per cent. However, the authors of the report, Shantayanan Devarajan and Ijaz Nabi, are quite sceptical not only about further increase in growth rates, but also maintaining the current rates, unless the countries of the region address major shortcomings and implement appropriate policy responses to the challenges faced by them to join the ranks of highly growing East Asian economies.

According to it: "South Asia's economic growth in the last five years has been impressive. Bangladesh, Bhutan, India, Maldives and Pakistan have all grown on an average of over five per cent per year, Sri Lanka at 4.7 per cent and Nepal at 2.5 per cent. In 2003-4, shortly before the tsunami hit the region, all countries other than Nepal averaged above five per cent GDP growth. India, Maldives and Pakistan performed especially well, averaging GDP growth of nearly seven per cent". The economic growth of the last decade, the report reveals, has contributed to marked reduction in poverty. In Bangladesh, India and Nepal, poverty fell by nine, 10 and 11 per cent, respectively, in Sri Lanka it fell by six per cent. Only in Pakistan did poverty increase by eight per cent. South Asia could bring down poverty to less than 10 per cent in the next 10 years, if it succeeded in accelerating its annual growth rate to 10 per cent.

The bank says further that "if the required changes are made and the higher growth rates are sustained for a decade, South Asia will see a substantial reduction in poverty, from the current range of 23 per cent (India, Sri Lanka) to 50 per cent (Bangladesh) to a much lower range of 4 to 13 per cent. Poverty in Pakistan is likely to fall dramatically from the current 35.2 per cent to 12.4 per cent because of the high elasticity of poverty reduction with respect to income. However, the economists differ that higher growth rates do not necessarily translate into poverty reduction and macro-economic reforms have in fact increased the gulf between the rich and the poor in all countries of the region. South Asia still has nearly 400 million poor people in a population of 1.37 billion. Poverty is not just endemic, but increasingly concentrated, in particular, in lagging regions. Not only are these regions poorer, but their growth rates are substantially slower than the better-off regions".

South Asia's growth is being seen as exceptional, by the World Bank, despite many stumbling factors such as conflicts, corruption, high fiscal deficits and dependence on an enclave natural resource. Transparency International has termed Bangladesh to be the most corrupt country in the world, yet its annual GDP growth rate was 5 per cent. Sri Lanka and Nepal have suffered severe civil conflict, but have registered per-capita consumption growth rates of three and four per cent a year, respectively. Fiscal deficits in Sri Lanka and India have been over nine per cent of GDP for decades. The Maldives has averaged nine per cent growth rate over the last two decades with per-capita GDP tripling to $2,300. The Bank attributes these achievements to "significant and sustained policy reforms that governments undertook in the last two decades" and low inflation in every South Asian country that remained below the world or developing-countries' average.

Openness and a relatively free press have in fact helped build a broader consensus on the ongoing reforms. External financing also played a pivotal role in some countries. Increasing remittances from non-resident nationals are another crucial source of external finance that mitigates balance of payment crisis and current account deficit besides stimulating demand-driven economic growth. Remittances in South Asian countries climaxed to $22 billion in 2004-5.

The most glaring aspect of poverty is that it is increasingly concentrated in the regions that have been left behind in the course of unequal development and growth. The phrase "two India(s)" exemplifies this difference in regional development outcomes. In 2002-2003, all-India per capita GDP was $480; the poorest seven states (accounting for 55 per cent of the population) had a per-capita GDP that was two-thirds the national average, while in the richest seven states (33 per cent of the population) per-capita GDP was nearly double that of the poorest seven states.

In the two largest and poorest northern Indian states (Bihar and Uttar Pradesh, 25 per cent of total population) per-capita GDP was less than half the national average and only a third of that the richest seven states. The four southern states, Andhra Pradesh, Karnataka, Kerala and Tamil Nadu (21 per cent of the total population), at an average, enjoyed more than twice the GDP per capita of the quarter of the population concentrated in the two poorest northern states. With average GDP growth rate of five per cent, the southern states are galloping ahead of the poorest but populous northern states with growth rate of only two per cent.

Consequently, the poverty gap between the poorest northern states and the better off southern states has doubled: there are 35 per cent poor in the north and 18 per cent in the south. The same is true about Pakistan, Sri Lanka and Nepal. This growing inequality is often reflective of the domination of one ethnic/caste group or the other who then perpetuates the system of its dominance by various discriminatory means. Many of India's lagging states, such as Bihar, those in Pakistan such as Balochistan and NWFP, and the northern and north-eastern regions of Sri Lanka explain this unequal development.

South Asia achieved relatively high growth in the past decade despite numerous obstacles, such as conflict in Sri Lanka and Nepal, corruption in Bangladesh and many Indian states, political uncertainty and terrorism in Pakistan and Bangladesh, and high fiscal deficits in India and Sri Lanka. While these constraints may not have obstructed growth for some time, due to certain exogenous factors, they certainly will not help accelerate or sustain current growth rates. A lot remains to be done to achieve and sustain high growth rates.

The report recommends: "First, economic growth in the past decade has resulted in growing income inequality which may act as a constraint to higher growth. Second, while conflict, corruption and high fiscal deficits may not have constrained growth in the past, their persistence may become binding in the future. Third, a comparison with East Asia a region that has sustained 7-10 per cent growth rates shows that South Asia's export-orientation, inflows of foreign direct investment, workers' skill levels, infrastructure and ease of doing business are also substantially less advanced than East Asia's.

"South Asia's savings, investment and productivity are also lower. These challenges suggest a set of policy choices for South Asian countries aimed at increasing investment and productivity, and the quality of labour, while addressing the problem of lagging regions and poor service delivery. Finally, the least integrated region in the world, South Asia can benefit from regional cooperation in trade, water and energy, among other things. While the policy agenda appears daunting, the dynamism and openness that characterises South Asia today makes us optimistic that some, if not all, of these challenges can be met and the region will be substantially free of poverty in a few decades".
Email: imtiazalampak@yahoo.com