By Gyan Pathak
Amid a changing global economic landscape, South Asia will need to leverage on all sectors of the economy in a balanced way, supporting improvements in agricultural productivity and a sustainable expansion of manufacturing, while promoting higher-skill services, and supporting over 150 million people in the region by a successful high-quality and job-rich growth strategy.
This is the sum total of an IMF departmental paper titled ‘Is South Asia Ready for takeoff? : A Sustainable and Inclusive Growth Agenda’. It lauded the durable reforms in the region since the mid-1980s coupled with ‘prudent macroeconomic management’ that pushed up the real GDP growth steadily from an average of about 3 percent in the 1970s to 7 percent over the last decade, but also warned about the complexities of the economies and the challenges ahead.
The region is poised to witness further improvements in living standards under the current baseline of strong and steady growth performance which is at slower pace than in the previous 20 years. Even then per capita income could reach over 30 per cent of the US level in Bhutan, India, the Maldives, and Sri Lanka by 2040. However, such achievement relies on sustaining ongoing reform efforts and a steady improvement in productivity. In particular, under a downside scenario in which South Asia is unable to tap on its demographic dividend to support growth, the improvement in the region’s living standards would be slower, with the average per capita income in the region vis-à-vis the US level lower by about 4 percentage points compared to the baseline.
Over 150 million people in the region are expected to enter the labour market by 2030 —equivalent in size to the population of Russia or Mexico. This young and large workforce can be South Asia’s strength only if supported by high-quality and job-rich growth strategy. To build on the strong performance to date and allow for growth to take off in earnest, the countries in the region will need to step up their policy and reform agenda.
In an evolving global economic landscape, South Asia’s growth strategy needs to follow a balanced multipronged approach—complementing a modernization of agriculture with a greater role in services and a strategic but sustainable expansion in manufacturing. Prudent policies and governance reforms are key prerequisites to avoiding the macroeconomic imbalances and environmental excesses experienced by other countries during their growth takeoffs. Investing in people—by upgrading human capital while empowering women and youth—can make growth more job-rich, inclusive, and sustainable.
South Asian economies can further open up to trade and foreign direct investment (FDI), improve governance and infrastructure, and foster financial development to enable more efficient allocation of resources to the private sector and reduce the still significant state footprint in the economy. The region will also need to prepare its workforce for the challenges of the twenty-first century to be able to fully reap the benefits of its demographic dividend. Investing in human capital and addressing the large informal sector—taking significant steps to strengthen women’s economic empowerment and labor force participation and support the youth—would bring sizable economic gains to the region.
Sustained structural reform efforts, including successfully harnessing its young and large workforce alongside substantial trade and FDI liberalization, could bring India’s real GDP per capita to nearly 50 per cent of the United States by 2040, with important spillovers to the region. Under a full liberalization scenario, South Asia could contribute about a third of global growth by 2040, with real GDP growth surpassing 6.5 percent, compared to nearly 6 percent under the current baseline and 5 percent in a downside scenario where the benefits of the demographic dividend cannot be secured.
The region’s robust economic performance and recent elections in most South Asian economies offer a propitious window of opportunity to accelerate this reform agenda. Clear communication on the benefits of the reforms and prioritization based on their expected macrostructural impact are key to building reform momentum. Stronger social safety nets are especially important to supporting the most difficult structural reforms, notably to labour markets, minimizing their distributional impact on the most vulnerable segments of the population, and promoting strong and inclusive growth. To ensure the region’s growth path remains as strong as sustainable, new policies and initiatives need to remain mindful of fiscal, financial, and environmental risks.
Sustainable economic growth and development is particularly challenging in the region because of vastly diverse sizes and complexities of the countries. India has the complexity of a continent and a population of 1.35 billion people; Maldives is an archipelago of 1,200 islands with less than half million people; Bhutan and Nepal are landlocked nations of 0.7 million and 29.4 million, respectively; Sri Lanka is an island nation of 21 million people; Bangladesh is the largest delta with over 700 rivers and 165 million people. South Asia, aside from being the most densely populated region in Asia, is also the youngest, with a median age of less than 27 years.
Moreover, the fast shifting global landscape may compel the counties to rethink their approaches amidst the advanced economies facing weak growth. As a result, South Asia will need to further diversify its trading partners and support domestic demand. Increasing automation while offering important opportunities also brings underlying risks in terms of labour force dislocation, making lower skilled jobs obsolete and depressing compensation of employees. South Asia’s low-cost labour supply and relatively high cost of capital makes the move to highly automated capital-intensive processes less pressing and an approach solely focused on manufacturing is likely not to be enough to lift incomes in the region over the long term. A successful growth strategy would need to leverage on all sectors of the economy in a balanced way. (IPA Service)