World Bank South Asia Economic Update 2010

Dipak Dasgupta

Description

'The World Bank South Asia Economic Update 2010: Moving Up, Looking East' is the World Bank's comprehensive annual report on the region's economies. In this first edition, the Bank finds that South Asia's strong rebound since March 2009 is comparable to that in East Asia. Government policy, external support, resumption of private spending and global recovery are driving the rebound. Robust and timely policy interventions were, and continue to be, a key to confidence and recovery. South Asia's particular strengths and forms of global integration-not the lack of it-were the main factors that allowed greater resilience. As a special topic, the report examines and recommends three principal directions to reposition South Asia's trade and investment integration policies and profitably expand their domestic economies in both manufacturing and services.

Informations

• Publié par: world-bank-publications
• Publié le: 10 août 2010
• Nombre de lectures: 51
• EAN13: 9780821384046
• Langue: English
• Poids de l'ouvrage: 4 Mo

Extrait

WORLD BANK SOUTH ASIA ECONOMIC UPDATE  2010

Moving Up, Looking East

WORLD BANK SOUTH ASIA ECONOMIC UPDATE

Moving Up, Looking

Washington, D.C.

2010

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© 2010 The International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: [phone] Internet: www.worldbank.org All rights reserved 1 2 3 4 13 12 11 10 This volume is a product of the staff of the International Bank for Reconstruction and Development / The World Bank. The Þ ndings, interpretations, and conclusions expressed in this volume do not necessarily re ß ect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgement on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries.

Rights and Permissions The material in this publication is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law. The International Bank for Reconstruction and Development / The World Bank encourages dissemination of its work and will normally grant permission to reproduce portions of the work promptly. For permission to photocopy or reprint any part of this work, please send a request with complete information to the Copyright Clearance Center Inc., 222 Rosewood Drive, Danvers, MA 01923, USA; telephone: [phone]; fax: [phone]; Internet: www.copyright.com. All other queries on rights and licenses, including subsidiary rights, should be addressed to the Of Þ ce of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: [phone]; e-mail: [e-mail]. ISBN: 978-0-8213-8388-9 eISBN: 978-0-8213-8404-6 DOI: 10.1596/978-0-8213-8388-9 ISSN: 2079-8903 Cover photos: Dmitry Mordolff/iStock.com; Alex Nikada/iStock.com; Gennadiy Ratushenko/World Bank; Ray Witlin/World Bank. Cover design: Critical Stages

Boxes, Þ gures, and tables Abbreviations Acknowledgments Summary I. South Asia recovering from the global crisis The global Þ nancial crisis impact Resilience and recovery Outlook External risks and uncertainties II. Economic policies supporting recovery Demand management Sustaining faster growth: supply-side measures III. Global rebalancing and integration prospects Global rebalancing and the rise of Asia South Asia looking east Boosting intraregional trade in South Asia Annex Country pages and key indicators Afghanistan Bangladesh Bhutan India Maldives Nepal Pakistan Sri Lanka Appendix Bibliography

MOVING UP, LOOKING EAST

CONTENTS

iv vi vii viii 1 3 5 11 13 17 17 20 28 29 33 39 44 46 46 48 50 53 56 58 61 63 66 73

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BOXES, FIGURES, AND TABLES

Box 2.1  De Þ cits, debts, and impacts on in ß ation and growth 21 Box 2.2   Rising food prices in South Asia 22 Box 2.3   Private participation in infrastructure (PPI) bouncing back 23 Box 3.1   Global rebalancing effects on developing country exports after the crisis 31 Box 3.2   Improved logistics: a critical precondition 38 Box 3.3   Bhutan-India cooperation 40 Box 3.4   IndiaSri Lanka Free Trade Agreement (ISLFTA) 40 Box 3.5   Bangladesh-India cooperation 41 Box 3.6   An energy ring trade for South Asia 41 Figure 1   South Asia: smallest decline in growth from global Þ nancial crisis and recovering ix Figure 2   South Asias rising trade with East Asia, and Indias trade with China and the United States x Figure 3   The growing share of emerging markets xi Figure 1.1A   Large drops in stock markets... 3 Figure 1.1B   ...and loss in foreign reserves 3 Figure 1.2   Spike in spreads in Pakistan and Sri Lanka and interbank call money rates in India 4 Figure 1.3A   Real sector impacts: collapse in tourism... 4 Figure 1.3B   ...and trade 4 Figure 1.4   South Asia: smallest decline in growth from global Þ nancial crisis and recovering 5 Figure 1.5   Resilience of remittances 5 Figure 1.6A   Bangladesh: growth of garments... 6 Figure 1.6B   ...and U.S. import of services 6 Figure 1.7   Foreign direct investment in ß ows relatively resilient in South Asia 7 Figure 1.8   India: recovery of portfolio capital in ß ows and stock markets 8 Figure 1.9A   Postcon ß ict bounce in Sri Lanka... 8 Figure 1.9B   ...and the postelection bounce in India 8 Figure 1.10A   Change in call money rates since October 2008... 9 Figure 1.10B   ...and domestic credit growth 9 Figure 1.11   Fiscal stimulus effects in India 11 Figure 1.12   Growth in industrial production 12 Figure 1.13   Relative optimism in South Asia 12 Figure 1.14A   Sri Lanka rising... 12 Figure 1.14B   ...and Pakistan improving 12 Figure 1.15   Outlook improving for Þ rms in India 13 Figure 1.16   Momentum of remittance growth slowing 14 Figure 2.1   Fiscal balances and debt in South Asia 18 Figure 2.2   Tax revenues 18 Figure 2.3   Revenue ratios lower in South Asia 18 Figure 2.4   Capital expenditures and current expenditures 19 Figure 2.5   Rising food prices and in ß ation 19 Figure 2.6   Core in ß ation is edging up since fourth quarter 2009, along with food and fuel prices, as in India 20 Box Þ gure 1   Reducing Þ scal de Þ cits raises growthup to a threshold level of 1.5 percent 21 Box Þ gure 2   Agricultural growth and output prices 22

WORLD BANK SOUTH ASIA ECONOMIC UPDATE 2010

Box Þ gure 3  Rice yield in India in lagging and leading regions 22 Figure 2.7   Differences in sectoral shares of GDP, South Asia versus East Asia 24 Figure 2.8   Land and human capital endowments that drive comparative advantage 25 Figure 2.9   Growth and trade in countries with and without con ß ict 26 Figure 3.1   The growing role of emerging markets 30 Figure 3.2   Share of Indias bilateral trade with China and the United States 30 Figure 3.3   South Asias rising trade with East Asia 33 Figure 3.4   South Asias composition of exports to East Asia 35 Figure 3.5   Growing trade complementarity with East Asia 36 Table 1.1   South Asia: recent growth, outlook, and macroeconomic indicators 2 Table 1.2   Fiscal stimulus measures in South Asia 10 Table 1.3   Global assumptions and South Asian outlook 16 Table 3.1   South Asia trade expanding fastest with East Asia 33 Table 3.2   South Asia tourism, economic contribution, and role of East Asia 35 Table 3.3   Revealed comparative advantage favorable: 2008 36 Table 3.4   FDI in ß ows from East Asia 37 Table 3A.1   Displacement versus complementarity of South Asian and East Asian exports: regression results 44 Table 3A.2   Tariff barriers in Asia: 2007 45 Table A1. Real GDP growth and sectoral growth 66 Table A2. Real GDP and components of aggregate demand 67 Table A3. South Asia: export growth 67 Table A4. Net remittance in ß ows (US$ billions) 68 Table A5. Country aggregates for poverty measures in South Asia 68 Table A6. South Asia: exchange rates 69 Table A7. South Asia: foreign reserves minus gold 69 Table A8. South Asia: balance of payments 70 Table A9. South Asia: capital account components 70 Table A10. South Asia: Þ nancial market indicators 71 Table A11. South Asia: public Þ nances 72

MOVING UP, LOOKING EAST

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ABBREVIATIONS

ACFTA ASEAN-China Free Trade Association ADB Asian Development Bank ASEAN Association of South East Asian Nations ASEAN-3 Association of South East Asian Nations Plus Three: China, Republic of Korea, and Japan ASEAN-6 Association of South East Asian Nations Plus Six: Australia, China, Republic of Korea, India, Japan, and New Zealand BB Bangladesh Bank BIMSTEC Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation BOI Board of Investment BPO business process outsourcing bps basis points call rate interbank call money rate CBSL Central Bank of Sri Lanka CECA Comprehensive Economic Cooperation Agreement between India and Singapore CGE computable general equilibrium CRR cash reserve ratio EA East Asia EAP East Asia and Paci Þ c region EU European Union EU-25 European Union 25 Expanded Countries FDI foreign direct investment FTA free trade agreement or association FY Þ scal year G-7 Group of Seven industrialized countries G-20 Group of Twenty countries GATS General Agreement on Trade in Services GDP gross domestic product GM genetically modi Þ ed GVC gross value chain

HIPC HS IMF IT kg kharif   kWh LPI MFN MLA Mmt MNA MW NAFTA PPI PPP RBI RCA REER ROW RREPO RTA SA SAAR SAFTA SAPTA SBP SITC SLR TFP TWh VAT VOA

Highly Indebted Poor Country harmonized system International Monetary Fund information technology kilogram main monsoon season crop kilowatt hours Logistics Performance Index most favored nation mandated lead arranger million metric tons Middle East and North Africa region megawatts North American Free Trade Agreement Private Participation in Infrastructure Private Participation Project Reserve Bank of India revealed comparative advantage real effective exchange rate rest of the world reverse repurchase rates regional trade agreement South Asia seasonally adjusted annual rate South Asian Free Trade Agreement South Asian Preferential Trade Agreement State Bank of Pakistan standard industrial trade classi Þ cation statutory liquidity ratio total factor productivity terawatt hours value-added tax vote on accounts

WORLD BANK SOUTH ASIA ECONOMIC UPDATE 2010

ACKNOWLEDGMENTS

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The South Asia Economic Update 2010 was prepared by Dipak Dasgupta ([e-mail]), principal author, Julien Gourdon, Rabin Hattari, Saurabh Mishra, Nihal Pitigala, and Marinella Yadao, under the guidance of Eliana Cardoso, Andrew D. Steer, Ernesto May, and Miria Pigato. The peer reviewers were Milan Brahmbhatt and Bernard Hoekman. Background papers were contributed by Prabir De, Ashok Dhareshwar, Kim Murrell, and Nihal Pitigala. Inputs were provided by country economists and analysts across the World Bank of Þ ces in South Asia and included: Claus Pram Astrup, Roshan Bajracharya, Ananya Basu, Ulrich Bartsch, Deepak Bhattasali, Annette De Kleine, Diepak Elmer, Daminda Fonseka, Zahid Hussain, Satu Kahkonen, Sanjay Kathuria, Lalita Moorty, John Newman, Ceren Ozer, Saadia Refaqat, Nadeem Rizwan, Francis Rowe, Kaushik Sarkar, Prajwal Shahi, Monika Sharma, Hisanobu Shishido, Thirumalai G. Srinivasan, Muhammad Waheed, Kirthisri Wijeweera, and Sanjana Zaman. The Update bene Þ ted from valuable suggestions from Dan Biller, Jean-Pierre Chauffour, Simeon Ehui, Ejaz Ghani, Mona Haddad, Pablo Gottret, Nicholas Krafft, Michael Pomerleano, Giovanna Prennushi, Michal Rutkowski, and Roberto Zagha. The Update gained from guidance on design and publication from Denise Bergeron, Patricia M. Katayama, and Dina Towbin in the World Bank Of Þ ce of the Publisher, and on external communications from Sudip Mozumder, Karina Manassek, Suresh Ramalingam, Chulie de Silva, and the South Asia External Affairs team.

The authors are grateful to participants from countries in the region who attended a workshop held in Colombo, Sri Lanka, in February 2010, where Shankar Acharya, Imtiaz Ahmed, Shahid Chaudhry, Harsha De Silva, Naoko Ishii, Saman Kelegama, Prakash Lohani, Jahid Mohseni, Mahmood Razee, and Tsenchok Thinlay provided valuable insights and guidance.

MOVING UP, LOOKING EAST

viii SUMMARY

SUMMARY

South Asias rebound since March 2009 has been strong and is comparable to that in East Asia. South Asia is poised to grow by about 7 percent in 2010 and nearly 8 percent in 2011, thanks to the strong recovery in India, good performances in Bangladesh, postcon ß ict bounce in Sri Lanka, recovery in Pakistan, and turnarounds in other countries, including Afghanistan, Maldives, and Nepal. The regions prospective growth is close to precrisis peak levels and faster than the high rates of the early part of the decade (6.5 percent annually from 2000 to 2007). The recovery is being led by rising domestic con Þ dence and is balanced in terms of domestic versus external demand, consumption versus investment, and private demand versus reliance on stimulus.

Government policy, external support, resumption of private spending, and global recovery are driving the rebound. Strong government Þ scal and monetary stimulus packages and, in some cases, external assistance are helping stimulate recovery. Improved optimism is helping the recovery in private spending in India, Bangladesh, Bhutan, and Sri Lanka. World trade and demand recovery are also supporting the rebound in exports and tourism, as are capital in ß ows. Not everyone is doing equally well, with slower recovery in countries with weaker fundamentals, those with unresolved con ß ict or postcon ß ict issues, and those that were heavily exposed to the global downturn (Maldives, Nepal, and Pakistan). Some signi Þ cant risks are ahead in the global environmentslowing worker remittances and exports in a still hesitant and uncertain global recovery (which recent events in Europe have highlighted), volatile commodity prices, and continuing volatility in global capital ß ows.

Strong, timely policy interventions were and are key to con Þ dence and recovery. Monetary policy was eased and interest rates sharply lowered during the crisis, cushioning private demand. Fiscal stimulus amounted to more than 3 percent of GDP in India and helped revive con Þ dence and optimism, assisted by preelection spending and civil service salary raises. Bangladesh was similarly placed to take Þ scal action. Other countries had more limited room, and they tightened policies initially to shore up macrostability, before easing policies to strengthen their recoveries (Pakistan and Sri Lanka).

South Asias particular strengths and forms of global integrationnot the lack of themwere key reasons that allowed greater resilience. The view that South Asia is relatively less integrated with the outside world, and that this helped protect it from the global recession, is outdated. Over the past 15 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:

   

 Financial systems proved relatively robust, with limited Þ nancial integration and exposures to overseas subprime markets, while long-standing capital account restrictions lessened, but not altogether avoided, vulnerability to sudden capital out ß ows

 Remittance in ß ows proved surprisingly resilient, as opposed to trends elsewhere, as workers from South Asia kept remitting earnings and savings from abroad even as they faced job losses and downturns in main migration centers

 Exports proved relatively resilient, especially given the types of specialization such as in the IT services sector (India), and in the garment and textile sectors (Bangladesh and Sri Lanka) where the region maintained competitiveness

 Foreign direct investment (FDI) ß ows proved more buoyant and resilient than in other parts of the world

As a result, South Asia weathered the global shocks much better than expected. The slowdown in regional GDP growth of nearly 3 percentage pointsfrom a peak of 8.9 percent in 2007 to 6.3 percent in 2009was the least pronounced of that for all developing regions. The effects were nevertheless signi Þ cantlarge negative output shocks, job losses, wealth and con Þ dence losses, stock market declines, indirect contagion effects propagated by domestic Þ nancial markets, losses in exports and tourism,

WORLD BANK SOUTH ASIA ECONOMIC UPDATE 2010

SUMMARY ix

Figure 1   South Asia: smallest decline in growth from global Þ nancial crisis and recovering GDP growth (annual percentage change) 14 and pressures on already weak Þ scal, balance-of-payments, 11.4 1 1 2 0 reserves, and exchange ratesbut these effects were 8.9 8.4 8 6 6.3 7.4 7.1 5.5 5.9 7.1 6.5 eventually contained. 4 1  4.3  4.7 4 . 3.0  3.8 Managing the immediate recoverycreate Þ scal space, contain 2 1.6   0 in ß ation, and boost agriculture. As South Asias recovery −2 2007 −2.4 gathers momentum, an immediate challenge is to create −4 2009 (estimate) −6 −5.3 Þ scal space and contain rising in ß ationary pressures, while 2010–11 (forecast) ensuring that the exit from Þ scal and monetary stimulus is i −8 n SAR EAP LAC MENA ECA SSA tune with the recovery of private demand. South Asia st nds a Sources : Staff estimates; Global Economic Prospects 2010 , World Bank. Note : SAR (South Asia), EAP (East Asia and Pacifi c), LAC (Latin America and the Caribbean), out compared to all other developing regions in terms of MENA (Middle East and North Africa), ECA (Europe and Central Asia), SSA (Sub-Saharan Africa). high levels of public debt and de Þ cits (similar to levels in highly indebted developed countries). Greater Þ scal space is needed to deal with unexpected future shocks, not crowd out the private sector, and permit governments to Þ nance crucial public investment. Managing in ß ationary pressures will also bene Þ t from gradually tighter Þ scal and monetary demand management to contain core nonfood in ß ation which has risen to a relatively high level of 710 percent, surpassing the precrisis average of 46 percent. Food prices have been rising especially sharply in recent months, because of poor weather in India compounded by delayed adjustment to higher global prices; they should moderate in the near-term, but a renewed focus on agriculture is also vital, especially given the persistently high rural populations and poverty.

Sustaining inclusive and faster growthnew drivers of growth. The challenge now is to also make this regional recovery more durable, inclusive, and sustained, looking not just to cement its past successes, but to future drivers. The world that the region is facing after this crisis is differentwith slowing growth in high-income countries and faster growth in emerging markets offering both opportunities and challenges. The model that has served the region well in the past, the growth of increasingly sophisticated service sectors, should continue to serve it well. But it will be useful to add to that in order to create more jobs and help realize the demographic potential of the region.

One of the key new drivers is likely to be the rise of a globally competitive manufacturing sector. South Asia in recent years has attracted greater investor attention, because of faster growth, its large size of domestic markets, and as an increasingly attractive location for labor-intensive manufactures given low-wage costs. And paradoxically, its growing prowess in exports of sophisticated services as it became more open and integrated with global markets is also enhancing its possibilities in industrial and other sectors. Such services will serve as critical inputs to the growth of manufacturing. This set of endowments and interest of investors can now be turned to decisive advantage by stepping up policy support to manufacturing, with a focus on new entry and growth of the missing-middle of more dynamic mid-sized Þ rms and more sophisticated manufactures. Policies that might support such goals are: greater export-orientation and trade links, reduced behind-the-border costs, better infrastructure, and a differentiated strategy of industrial supportsuch as industrial clusters and export-processing zones in late or new industrializing areas, and accelerated skills-training, infrastructure, and a deregulated business environment (land, labor) in already established areas.

The process has already started. Rapid spread of mobile telephony and Þ nancial services is boosting domestic markets and productivity growth. Private sector investment is also addressing critical bottlenecks. In the Þ rst three quarters of 2009, South Asia remarkably attracted some 40 percent of total investment commitments in private participation in infrastructure projects in the developing world worth some record US$26 billion, much of it going into the crucial energy and transport sectors, mainly in

MOVING UP, LOOKING EAST