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South Asia Could Potentially Benefit from Globalization Backlash

WASHINGTON – Possible protectionism in advanced economies should not deter export-oriented growth in South Asia, a region that could even benefit from the backlash against globalization, a new World Bank report said. The report also confirms that South Asia remains the fastest-growing region in the world, gradually widening its lead relative to East Asia. Regional GDP growth is expected to rise from 6.7 percent in 2016 to 6.8 percent in 2017, and 7.1 percent in 2018.

The just released edition of the twice-a-year South Asia Economic Focus explores whether South Asian countries should worry about mounting protectionist pressures. This report, Globalization Backlash, claims that global integration has been good for economic development and poverty reduction, but finds that the region would be resilient to higher trade barriers in advanced economies. It would even stand to gain if selective protectionism resulted in trade diversion away from established suppliers. South Asian economies also stand to gain from the observed recovery in advanced economies, which are their largest export markets.

"Simulations on the impact of hypothetical new trade barriers show that South Asia is not only resilient to a potential rise in protectionism but could possibly even gain from it in some circumstances,”
said Annette Dixon, the World Bank South Asia Region Vice President. “Advanced economies are recovering and could see faster growth that will likely increase demand for South Asian products. The region should seize this opportunity to diversify its exports and enhance its supply response. This could create a substantial number of jobs for new entrants to the labor force.”

Given its weight in the region, India sets the pace for South Asia as a whole. Its GDP growth is expected to accelerate to 7.2 percent in 2018, after expanding by a slightly lower than expected 6.8 percent in 2016, with a temporary disruption from the withdrawal of large denomination bank notes. Based on tangible improvements in security, Pakistan continues its upward trend and growth is expected to accelerate to over 5 percent this year.  Nepal and Maldives are bouncing back from economic shocks. In Bangladesh industrial production reached a record-high recently and growth remains strong.

Analysis of different hypothetical trade scenarios finds that South Asia stands to benefit from the stall of large regional trade agreements such as the Trans-Pacific Partnership (TPP). It would also gain in the hypothetical scenario of greater protectionism against major exporting countries such as China and Mexico. The research finds that South Asian growth is highly responsive to higher growth in advanced economies, which could offset potential losses from changes in trade policy.

“To make the most of this export opportunity, countries in the region should continue to focus on policies that promote economic growth,” said World Bank South Asia Region Chief Economist Martin Rama. “A survey of South Asian experts conducted for this report reveals a strong consensus on the need to promote human capital accumulation, investments in infrastructure, and a more business-friendly environment.”

Factsheet: Many South Asian Countries Have Potential to Accelerate Growth

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Note: est = estimated, f = forecast *Bangladesh 2016 Rate Actual

Afghanistan’s economic recovery has been slow, as insecurity continues to curtail private investment and consumer demand. Growth is projected to accelerate slightly from 1.2 percent in 2016 to 2.4 percent in 2017. However, with population growth of nearly 3 percent, such level of economic growth implies a decline in per capita income. Sustained economy growth in the long run in Afghanistan requires a structural transformation of the economy that could be realized through greater human capital investments, improved agriculture productivity and development of the country’s extractives resources.

The economy in Bangladesh has weathered global uncertainties well aided by strengthening investment and a recovery of exports. Growth will be sustained at 6.8 percent in 2017, compared with the officially reported 7.1 percent in 2016 and with a decelerating inflation rate and a budget deficit that has narrowed. Infrastructure gaps and inadequate energy supply, combined with the high cost of doing business, remain the main obstacles to the realization of Bangladesh’s growth potential.

Economic activity in Bhutan has kept growth strong with the economy expected to grow at 6.8 percent once again in 2017. Hydropower projects, supportive fiscal and monetary policy coupled with low inflation, a stable exchange rate and accumulating international reserves have contributed to growth and poverty reduction. However, risks are emerging including possible delays in hydropower constructions and growth deceleration in India. With continued stable growth, poverty is expected to be reduced in a steady manner.

India’s economic momentum is expected to pick up speed from 6.8 percent in 2016 to 7.2 percent by 2018 after a modest setback due to weaker than expected investments and the effects of the withdrawal of large denomination bank notes. Timely and smooth implementation of the GST could prove to a significant benefit to economic activity However, India faces the challenge of further accelerating the responsiveness of poverty reduction to growth.

In Maldives, GDP growth rebounded to an estimated 4.1 percent in 2016 and is expected to grow at 4.5 percent in 2017 through substantial investments and construction activity. It is important that Maldives preserves its tax base and efficient tax system, as it prepares to develop Special Economic Zones offering tax concessions. There are opportunities for the country to promote economic activities in line with the aspirations of Maldivian youth and provide employment, improve the quality of public services such as health and education, and make the country more resilient to climate change.

Nepal is seeing a broad economic recovery after a number of setbacks including the earthquakes of 2015. Its economic activity is recovering with growth expected to rebound to 6.0 percent in 2017 on the back of increased agriculture output, increased availability of electricity, and greater investment as the earthquake reconstruction gathers speed, compared 0.6 percent growth in 2016.

In Pakistan, economic activity expanded by 4.7 percent in 2016 and is expected to continue to grow at 5.2 percent in 2017 with growth prospects continuing to improve and inflation remaining contained. The China Pakistan Economic Corridor (CPEC) projects have supported construction activity, which is expected to stimulate industrial sector growth. These projects should help accelerating growth in the domestic construction industry and increase electricity generation. Sustainable and inclusive growth and poverty reduction, will require greater private sector investment and the longer term development of infrastructure.

Sri Lanka’s economic growth is projected to grow at 4.7 percent in 2017, up from 4.4 percent 2016 which reflecting significant contributions from construction, trade, and financial services as well the as negative impacts of floods and droughts. Recent policy measures supporting fiscal consolidation and monetary tightening has contributed to an improved outlook. It is critical for Sri Lanka to expedite structural reforms to promote competitiveness and governance, and continue on fiscal consolidation in order to ensure sustained growth and development.