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South Asia can sustain faster with ‘new normal’ says WB

June 8, 2010 (Asia)

South Asia is poised to grow by about 7 percent in 2010 and nearly 8 percent in 2011, making it the second-fastest growing region after East Asia & Pacific, says the South Asia Economic Update 2010, Moving Up, Looking East, the World Bank’s first yearly assessment of the economies of the region.

• Integration, not the lack of it, and prompt policy responses are driving rebound of growth to 7% in 2010 and 8% in 2011. The drop in growth during the crisis was the smallest among all regions.
• Region will benefit from new engines of growth and adapting to a “new normal” as emerging markets and Asia drive global growth. Trade with East Asia and China could potentially triple to reach $450 billion per year.

Contrary to current beliefs, South Asia’s particular strengths and forms of global integration not the lack of it was a key factor behind its resilience following the financial crisis of 2008. With emerging markets playing an increasing role in driving growth, integration should be a key component of a sustained and inclusive growth strategy going forward, the report says.

“Over the past fifteen 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,” said Andrew Steer, World Bank Acting Chief Economist for the South Asia Region. “Financial systems proved to be robust with limited exposures to overseas subprime markets. Remittances, exports of goods and services such as in the IT and garment sectors, and foreign direct investments kept up during the crisis. At the same time, policy response in most countries played a key role in boosting confidence and accelerating recovery.”

The report says that remittances have become the biggest source of foreign earnings in the region representing a (simple unweighted) average of 10 percent of GDP, a figure that is 5 times larger than net foreign direct investment flows.

The “New Normal” looking east
According to Ernesto May, Sector Director for Economic Policy for the South Asia Region, the region is facing a very different global economy over the medium term. “There is significant consensus now that what will emerge from this crisis will not be simply a return to pre-crisis conditions, but a “new normal." Developed countries are starting to save more and spend less, are burdened with large fiscal and financial adjustment after, and are likely to grow at a much slower pace, especially in Europe and North America, whereas Asia and emerging markets will become much bigger drivers of global growth.”

While high-income markets will continue to be important for South Asia, even if at a slower pace than in the past, other emerging markets and regions are also fast-growing and increasingly important partners. In looking for future drivers, the Update focuses on trade and investment integration opportunities and recommends three principal directions for the countries in the region:

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