South Asia Regional Brief

September 25, 2012

David Waldorf/World Bank

South Asia has experienced a long period of robust economic growth, averaging 6 percent a year over the past 20 years. This strong growth has translated into declining poverty and impressive improvements in human development. Still, the South Asia region is home to many of the developing world’s poor. According to the World Bank’s most recent poverty estimates, about 571 million people in the region survive on less than $1.25 a day, and they make up more than 44 percent of the developing world’s poor.

As referenced in the June 2012 Global Economic Prospects, growth in South Asia slowed to 7.1 percent in 2011 from 8.6 percent in 2010, as the Euro area crisis caused a steep deceleration in exports and a reversal of portfolio inflows. Growth in India was particularly weak due to monetary policy, stalled reforms, and electricity shortages, which, along with fiscal and inflation concerns, cut into investment activity. Relatively resilient remittances and good harvests have supported consumption demand in the region. Sri Lanka’s growth further benefitted from reconstruction spending. Policy uncertainties, fiscal deficits, entrenched inflation, and infrastructure gaps will continue to weigh negatively on investment activity and are expected to limit regional growth to a relatively modest 6.4 percent in 2012, 6.5 percent in 2013, and 6.7 percent in 2014.

South Asia will play an important role in the global development story as it takes its place in the Asian Century. It has the world’s largest working age population, a quarter of the world’s middle-class consumers, the largest number of poor and undernourished in the world, and several fragile states of global geopolitical importance. With inclusive growth, South Asia has the potential to change global poverty.

World Bank Assistance

The World Bank Group is a key development partner in South Asia, with a portfolio of 223 International Development Association (IDA)/ International Bank of Reconstruction and Development (IBRD) projects and total commitments of $36 billion as of September 2012. The Bank’s strategy for South Asia was updated in March 2012. With a lending program of about $8 billion in fiscal year 2012, the strategy comprises of four pillars: 1) creating more and better jobs by mitigating constraints on growth; 2) building skills and improve health and nutrition outcomes, both closely linked to a focus on women; 3) promoting regional cooperation; and 4) strengthening governance. The Bank’s strategy also provides a road map to accelerate growth and foster human development. In fiscal year 2012 the World Bank approved 54 projects in the region.

Food Price Volatility

While South Asia navigated the financial crisis better than most regions, the region suffered the worst in terms of trade deterioration during previous food and fuel crises in 2008. According to the Food Price Watch, maize and soybean prices reached all-time peaks in July 2012. Wheat prices have also soared, while rice prices rose 25 percent to 30 percent in India and Pakistan. A drier monsoon in India, with July rainfall 20 percent below average, is expected to reduce this year’s crop by 2.5 percent — although that crop is still projected to be the second-largest on record. World Bank experts do not currently foresee a repeat of 2008; however, negative factors — such as exporters pursuing panic policies, a severe El Niño, disappointing Southern hemisphere crops, or strong increases in energy prices — could cause significant further grain price hikes such as those experienced four years ago. South Asia is a potential exporter that may gain financially, even though it may also face increasing price pressures from domestic markets.

Global Uncertainty

According to the Global Economic Prospects, South Asia’s growth slowed sharply in the second half of 2011. The Euro area sovereign debt crisis caused a steep deceleration in South Asia’s exports and a withdrawal of portfolio capital. Several rounds of monetary policy tightening in India, energy and infrastructure constraints across the region, together with political and security uncertainties and fiscal and inflation concerns, resulted in a falloff in regional investment and industrial activity. Trade balances and current account positions of South Asian countries came under pressure mainly due to the weaker export demand and adverse terms of trade shock from elevated international crude oil prices, which rose 32 percent in 2011 from the average level in 2010.

With markets in the United States and Europe expected to experience prolonged weakness, South Asia countries have the opportunity to re-think and pursue new sources of growth in both domestic and external markets. This may include focusing on export growth toward faster-growing markets, as well as internal market enhancements through structural and governance reforms. Such actions would help boost export demand, help raise investment, provide better jobs and generate an environment for more inclusive growth.

Inclusive Growth and Creating Quality Jobs

The key asset of South Asia is its people. South Asia has a young population and the lowest female participation rate in the labor force. The demographic dividend will result in more workers entering the labor force in the future and the region will need to add between 1 and 1.2 million additional jobs every month for the next 20 years. Creating jobs for them will contribute to growth, equity and peace in the region. The Bank produced a regional flagship report, More and Better Jobs in South Asia, on how increasing numbers of high-quality jobs can be created in the region where there is a concern that job creation has been mostly in the informal sector characterized by low skills and low earnings. To strengthen our understanding of the policies conducive to inclusive growth, the South Asia region is working on a new flagship report on equity for development in which inequality in income and consumption will be studied alongside inequality of access and opportunities. The Bank has also strengthened its focus on promoting a multisectoral agenda to tackle the severe nutrition problems in the South Asia region, and on mainstreaming gender issues into its operations.

Regional Cooperation

Regional economic cooperation holds the potential for considerable gains in growth and increased security for South Asia region. The strategy for regional cooperation rests on five main pillars:

  • Build on the emerging view in the region that regional cooperation is key to being part of the Asian Century;
  • Support regional networks to promote cooperation by sharing information and build institutional capacity through analysis and dialogue, and capacity building;
  • Focus on trade in goods, services, and electricity, people-to-people contact, and cooperation in water resources management among Bangladesh, Bhutan, India, Pakistan and Nepal;
  • Strengthen regional cooperation in wildlife protection, water resource management, food security, and disaster risk management;
  • Leverage partnerships including DFID, AusAid, South Asia Water Initiative, South Asia Food and Nutrition Security Initiative, and Central Asia Water & Energy Development Program. 

Conflict and Post-Conflict Areas

According to the recent study jointly prepared by the Bank and the government of Afghanistan titled Transition in Afghanistan: Looking Beyond 2014, the full assumption of Afghan responsibility for security by the end of 2014, the drawdown of most international military forces, and the likely reduction in overall assistance will have a profound impact on Afghanistan’s economic and political landscape, extending well beyond 2014. Political uncertainty and insecurity could undermine Afghanistan’s transition and development prospects. The extremely high level of current annual aid (estimated at $15.7 billion in 2010) is roughly the same amount as Afghanistan’s GDP and cannot be sustained. With population growth at 2.8 percent, Afghanistan needs strong economic growth to reduce poverty and improve development outcomes. A growth rate of 6 percent a year would be required to double Afghanistan’s per capita GDP in about 22 years (about a generation).

Achieving Results

World Bank support has helped South Asia achieve the following results, among others:

  • Afghanistan: School enrollment increased from 1 million to 7 million children;
  • Bangladesh: 10 million rural households provided with access to electricity (grid or solar);
  • India: 25 million people benefited from rural water supply and sanitation projects in the past 15 years ;
  • Nepal: 1.2 million people have improved water supply;
  • Pakistan: 1.9 million micro-credit loans made to communities;
  • Sri Lanka: 620 km of roads rehabilitated.