Highlights -South Asia Economic Focus (Spring 2019)
The World Bank report on South Asia comes with a caption on “Exports Wanted” clearly underscoring the importance of exports for the overall growth in the region. Though, South Asia has been the fastest growing region since 2017, its growth moderated from 7.2 per cent in 2017 to 6.9 in 2018 in tandem with overall economic deceleration in rest of the world. Growth was largely dependent on growing domestic demand driven by expansion in government consumption, increasing investments and spurt in imports, as key factors.
While the external sector (especially Pakistan and Sri Lanka) is grappling with volatility in interest rates, exchange rates and rising imports, some countries e.g. Bangladesh, India and Nepal had remittances assisting in reducing current account deficit and providing external sector stability. Yet, the global headwinds pointing at increased political turbulence (US, Britain and Euro Zone), continuance of weakening global demand and policy uncertainty internationally as well as domestically could be detrimental for the overall economic growth in South Asia.
The region is also affected by twin deficits (with strong causal links between fiscal deficit and current account deficits), low elasticity of exports and imports (reduction in relative prices/ exchange rate depreciations have limited scope in impacting trade), and under-performance in trade (wide gap between actual and potential level of exports and imports). The report prescribes a thrust to the export sector for South Asian countries through a) reductions in tariff and non-tariff barriers to increase cheaper imports of capital and intermediate goods, for enhancing export potential, b) more flexibility in domestic labor and capital markets to allow for free movement of resources between tradable and non-tradable sector and c) more incentives to enhance skills to compete in international markets.
The questions worth pondering:
- Will further liberalization actually help in in enhancing exports or will it lead to influx of cheaper foreign imports aggravating current account deficits?
- What kind of skills do we invest in? With a skewed exports sector in favour of services, should the region go in for developing manufacturing or continue to promote services?
Link to the report and other material: