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ECONOMY: Meltdown Holds Mixed Results for South Asia

Prime Sarmiento

MANILA, Mar 17 2009 (IPS) - The global recession will raise the already high incidence of poverty in South Asia on the back of layoffs, decreased foreign aid and dwindling resources for social welfare, say economists and experts.

But the good news, according to a study commissioned by the Asian Development Bank (AsDB), is that the South Asian economies, particularly India, owing to limited exposure to the global financial system and lesser dependence on exports, can stay afloat amidst the crisis.

The AsDB study, presented at a forum here earlier this month, expects a 6.7 percent growth for South Asia in 2009. This may be modest compared to the 8.6 percent growth posted in 2007, but still implies that the AsDB does not expect the sub-region to fall into recession anytime soon.

Participants at the forum were agreed that the poor, especially in countries like Nepal and Bangladesh, whose economies depend heavily on remittances from its nationals working abroad, were likely to be worst hit.

“While some countries in South Asia have had relatively less exposure to the crisis from the adverse impacts of capital flows, more than half of the 900 million people in developing Asia who survive on 1.25 US dollars a day live in the sub-region, so any tempering of growth is a serious cause for concern,” AsDB president Haruhiko Kuroda said at the forum

In a speech delivered at the forum, Arun Shourie, member of India’s parliament and former minister of public sector divestment, noted that behind all the macroeconomic data are people who will lose their livelihoods or cannot send their children to school.

South Asia may be home to some of the world’s growing economies but positive fundamentals have not done much to improve the plight of the sub-continent’s poor.

India, one of Asia’s economic powerhouses, has posted an impressive eight to nine percent growth in the past few years. But 30 percent of India’s one billion populace subsists on less than two dollars a day.

The situation is worse in poorer economies like Nepal and Bangladesh where nearly 40 percent of the population live below the poverty level, experts at the forum said. The crisis will further intensify inequities with the wealthy remaining unscathed and the poor suffering more.

In an interview with IPS, Manu Bhaskaran, author of the AsDB study and chief of the Singapore-based consultancy firm Centennial Asia Advisors, said among South Asian economies it is India’s which will be most resilient while Bangladesh’s and Nepal’s are the most vulnerable.

Bhaskaran said that steady consumption will continue to support India’s economy. The implementation of the Sixth Pay Commission Awards which will increase the wages of civil servants and the expected bumper crop will promote consumption.

India is still predominantly agricultural and employs 60 percent of the country’s labour force. The central government is also one of India’s biggest employers, with 4.5 million people on its payroll.

Bhaskaran added that India’s well-supervised banking system and slowing inflation level will bolster consumer confidence. The AsDB forecasts India’s inflation to ease at 7.5 percent compared to last year’s 11.5 percent.

Bhaskaran said a contraction in remittances by workers in the Middle East will hurt Bangladesh and Nepal. A possible slowdown in the construction business in the Middle East may lead to lay-offs of Bangladeshi and Nepali workers there, he said.

In his study, Bhaskaran also noted that falling tourism receipts in Nepal and expected slowdown in Bangladesh’s textiles and footwear exports are putting these two economies at risk. The expected decline in foreign aid – which has been instrumental in alleviating poverty – will further hurt the Bangladesh and Nepal economies.

South Asia needs to implement a social safety net to address the twin burdens of poverty and unemployment, says Ashok Sharma, director of AsDB’s South Asian financial, public management and trade division.

“There’s a consensus among forum participants of the need to establish a social fund,” Sharma told IPS. He said such a social fund should be separate from the economic stimulus packages and should specifically address how the workers and their poor families will survive if they get fired.

Sharma did not say how this social fund will work but noted that AsDB is thinking of increasing its capitalisation to increase lending to help developing countries survive the crisis.

Kuroda said the bank will be increasing its current fund of two billion dollars “by several billions” to assist developing member countries.

Among South Asian economies only India has so far offered a stimulus package. This eight billion dollar package includes a 1.5 billion dollar credit window for smaller businesses, to be handled by the Small Industries Development Bank of India.

Bhaskaran believes that the crisis is likely to recede in 2010 when Asia could see a phase of vibrant growth. Prospects for growth in South Asia “remain good’’.

Asia’s problems, said Bhaskaran, stem from problems in the developed economies rather than any ‘’structural economic breakdown’’. “There is every reason to believe that the growth engines unleashed in many parts of Asia will stay strong.’’

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