What will South Asia look like in 2025?

  • Blog Post Date 19 December, 2012
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What will India and the rest of South Asia look like in 2025? This column argues that a growth miracle can quickly turn in to a growth disaster. It asks what can be done today to reshape tomorrow.

What will India, and the other South Asian countries, look like in 2025? There are two different views on this, the optimistic view and the pessimistic view. The optimistic outlook is that India will achieve double-digit growth rates. South Asia too will experience strong growth, primarily due to the growth of India. The pessimistic outlook is that growth will be derailed by the many transformational challenges the region faces. Which of these two outlooks will prevail?

The optimistic outlook

The optimistic outlook is based on favourable trends, including improved governance, the demographic dividend, the rise of the middle class, and the new faces of globalisation.

All countries in the region have an elected government for the first time since independence. Governance has improved in two ways that will enhance the politics of democratic accountability; the diminishing importance of identity politics; and the rates of incumbency – the likelihood of a sitting legislator or state government being re-elected – are down. This is leading to governments that are more focused on development.

While China’s spectacular growth has already benefitted from demographic dividend, India is yet to do so. By 2025 India will be more populous than China. Its population will also be much younger. More than 10 million new workers will join the workforce, every year, for the next two decades – the equivalent to the entire population of Sweden. The demographic dividend will accelerate growth not only through the swelling of the workforce, as the baby boomers reach working age, but also due to society’s ability to save more (a person’s working years are the prime years for saving) and the increased ability for governments to divert resources from spending on children to investing in infrastructure and technology.

A massive shift towards a middle class society is already happening. India’s middle class (daily expenditure of $10-$100 in purchasing-power-parity terms) will rise more rapidly compared to China, because Indian households will benefit more from growth than Chinese households, given the prevailing distribution of income. The size of the middle class will increase from 60 million in 2010 to more than one billion people by 2025. Growth, education, home ownership, formal-sector jobs, and better economic security are cause and consequence of an expanding middle class.

The world has already benefited from globalisation and the trade of goods. New faces of globalisation will focus on the trade of services. Technology intensive modern services can now be splintered in a value chain just like goods, and they can be electronically internationally transported through satellite and telecom networks. The number of services that can be transported digitally is constantly expanding – processing insurance claims; call centres; desktop publishing; compiling audits; completing tax returns; and transcribing medical records. In a not-too-distant future, patients at home will be able to speak with their doctors by satellite and students will access high-quality education via virtual classrooms. Labour matching is increasingly done online and platforms like Odesk can connect employers and employees across national boundaries. Trade of services is the fastest growing component of world trade. India’s service export is growing at a much faster rate than goods export from China.

Global migration rates have been sluggish over the last 50 years. This will change. Current demographic trends suggest a rapidly ageing population in OECD countries, and a young population in India and South Asia. This generates powerful incentives for people to move in search of work (labour mobility), as well as unique opportunities for a more efficient global economy.

But there is an alternative outlook.

The pessimistic outlook

The pessimistic outlook is backed by equally strong arguments. History tells us that there are no more than a dozen countries that have managed to sustain an average growth rate of 7% a year for 25 years. Many have reached middle-income status, but very few have escaped middle-income traps.

Growth can be derailed by poor infrastructure, small pockets of entrepreneurship, deep pockets of poverty, large informal sectors, huge social and gender disparities and high levels of conflict in the region.

Rapid growth has produced billionaires in India. However, the broad character of the region remains agrarian and rural. This has more to do with the peculiarities of growth patterns – service-led growth, which is more skill-intensive, compared to manufacturing-led growth in China, which is less skill-intensive.

Entrepreneurship is central to job creation. But our understanding of entrepreneurship is still at an early stage. Is it young businesses or established firms who contribute to job growth? Have manufacturing sectors or service sectors created more jobs? What is the geographical scale at which entrepreneurial mechanics work? Why are some cities competitive? Others not? Is it infrastructure, education or business climate that makes cities more competitive? Why do agglomeration economies and networking differ across cities, industries, and gender groups?

Contrary to popular belief, India has too few entrepreneurs for its stage of development. While India has a disproportionately high rate of self-employment and many small firms, this has not readily translated into as many young entrepreneurial firms and rapid job growth as could be hoped. There are huge differences in entrepreneurship across states in India. Yet there is no question that entrepreneurship works; formal-sector job growth has been strongest in regions and industries that have had higher rates of entrepreneurship. Indeed, agglomeration economies are estimated to be much stronger in India compared to USA. So there is hope.

The informal sector remains overwhelmingly large and persistent, and it does not seem to disappear with rapid growth. In India, the unorganised sector accounts for over 99% of establishments and 80% of employment in manufacturing. The unorganised sector is stubbornly persistent. It accounted for 81% of manufacturing employment in both 1989 and 2005. This persistence is not due to particular subsets of industries or states, as most industries and states show limited change in unorganised sector employment shares. Policymakers will need to be more innovative to overcome informality traps.

Most countries in South Asia are currently immersed in, or are just emerging from, conflicts of varying nature and scope, ranging from the recently ended civil wars in Sri Lanka and Nepal and insurgency in Afghanistan and Pakistan, to low-level localised insurgency in India. The result is human misery, destruction of infrastructure and social cohesion, and death. The knock-on effects are huge.

India, despite reaching middle-income status, is home to the largest concentration of poor people in the world. More than one billion people lived on less than $2 a day in 2005. Nearly 250 million children are undernourished and suffer from hidden hunger. Child mortality and malnutrition levels are among the highest in the world. More than one-third of adult women are anaemic. One woman dies every five minutes from preventable, pregnancy-related causes. India accounts for 20% (56,000 deaths annually) of global maternal deaths. The share of female employment in total employment is among the lowest in the world, and gender disparities in economic activity and earnings are deep and widespread. Disparities in voice and agency continue to persist and women are abused by their partner in their lifetime. In India, women are less likely than men to be aware of their entitlements under National Rural Employment Guarantee Act. Under-investing in women puts a brake on poverty reduction and limits economic and social development.

What can be done?

Growth should not be taken for granted. A demographic dividend could morph into a demographic disaster, if people (particularly women) are not healthy, educated, and trained. Globalisation also does not automatically engender growth. India needs physical infrastructure – ports, transport, and communications – to take advantage of trade. This is not just about the shift away from agriculture and into industry and services. It is also about the transformation required to move from informal to formal sectors and into higher-quality goods and services.

But growth is not sufficient. Social progress – education, health, and women´s participation in economic activities – have not kept up with income growth. Boys outnumber girls in school enrolment. Gender disparities, which begin at childhood in the region, have significant adverse long-term effects. Women and girls bear the largest and most direct costs of social disparities.

So policymakers should consider direct policy interventions to accelerate social progress, with a particular focus to enhance gender inclusiveness. They should not think of growth as separate from inclusion. Increased income and social disparities should not be viewed as the price to pay for higher growth. A development response that aims to promote growth first and deal with human misery later is not sustainable.

The demographic dividend is a time-bound opportunity. It provides policymakers with an incentive to redouble their efforts to promote the skills of the working-age cohort so that it has the ability to contribute productively to the economy. Time is of the essence. Policymakers need to take action today in order to reshape tomorrow.

This column is a summary of Reshaping Tomorrow - Is South Asia Ready for the Big Leap? (World Bank and Oxford University Press 2011).

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