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The optimistic outlook is that India, which accounts for 80 percent of South Asia’s regional economic output, is headed toward double-digit growth rates, and that South Asia will also grow rapidly, primarily due to India.

The pessimistic outlook is that, given the huge challenges in the region, growth cannot be taken for granted.

Which of these two outlooks is likely to prevail? That’s what this story is all about. It is about the future — what is coming, and how to get it right.

There are several strong empirical arguments to justify an optimistic outlook on regional growth. For the first time since independence, democracy is present in all countries in the region.

Young demographics will result in nearly 20 million more people joining the labor force every year for the next two decades, while almost a billion people will join the middle class. The region will also benefit from a new wave of globalization in services, international migration and human mobility. Indeed, the drivers of growth seem to have already moved from the rich world to the poor world, and there is much room for catch-up, given the big gap in average income between South Asia and wealthy countries.

Empirical arguments are equally strong for the pessimistic outlook on growth. The link between demographics and growth is not automatic. Indeed, in the absence of policies that enable people to be healthy, well educated and well trained, a demographic dividend could morph into a demographic disaster.

Neither does globalization automatically engender growth. Countries need physical infrastructure — ports, roads, electricity, water and communications — as well as peace and security to ensure wider access to markets and new opportunities.

Greater market integration must also go along with appropriate structural reforms so that land, labor and capital can move from traditional sectors with low productivity to modern sectors with high productivity. A structural transformation at such a mammoth scale will not be easy.

The truth will probably lie somewhere in between. The optimistic outlook that South Asia will achieve double-digit growth rates may be too optimistic. The pessimistic outlook that growth will be derailed by corruption, dilapidated infrastructure, large informal sector traps and dismal social conditions may be too pessimistic.

What can South Asia do to build a solid bridge to the future? Policy makers should better manage the three key drivers of transformation — growth, inclusiveness and risk. South Asia has the largest concentration of poor people on earth, so the pace of growth must accelerate to create jobs and reduce poverty.

Rapid growth, however, cannot occur without more entrepreneurs. India and other South Asian countries have too few entrepreneurs for their stages of development. South Asia has a disproportionately high rate of self-employment and many small firms, but that has not readily translated into the amount of young entrepreneurial firms that people hoped for, and young entrepreneurial firms create jobs and increase productivity.

Still, there is no question that entrepreneurship is effective in South Asia. Formal sector job growth has been strongest in those regions and industries that have exhibited high rates of entrepreneurship and dynamic economies.

Reducing conflict is also important. It is a prerequisite to political stability, which, in turn, is the prerequisite for implementing pro-growth policies. Even in a best-case scenario, a low-level conflict constrains the policies that governments can implement to promote growth.

Inclusiveness will be key as well, because growth without inclusiveness is difficult to sustain. After decades as a region primarily based on farmers, South Asia is rapidly urbanizing, as millions of people leave their stagnant villages and move to the cities. However, urban infrastructure is also decaying — unable to serve the existing population, let alone withstand increased levels of migration.

Modernization has been only partial, with a large part of the economy operating in rural and informal sectors while a small segment of the population thrives in globally integrated modern sectors. Growth that results in partial modernization will continue to undermine the efforts to alleviate poverty and to share the fruits of prosperity more widely.

Growth is not an end in itself. Policy makers must consider it in the context of inclusion and vulnerability. Increased income disparities should not be viewed as the price to pay for high growth, nor should gender equality, education and health care be considered as second stage reforms.

A development response that aims to promote growth first and then deal with human misery is not sustainable. The region needs policies to raise growth, and it also needs policies to redistribute the gains of that growth more efficiently and effectively.

Time is of the essence. South Asia is quickly reaching its tipping point, and there is only a short window of opportunity. Policy makers need to redouble their efforts to promote rapid, inclusive and stable growth.

 

East Asia Forum

Ejaz Ghani is an economic adviser on South Asia poverty reduction and economic management at the World Bank in Washington.