By Dinesh Weerakkody
South Asia hosts more than a fifth of the world’s population and contributes more than 15% of global economic growth. It also suffers from high rates of poverty and inequality, as well as major infrastructure and connectivity constraints. For these and other reasons, some experts believe South Asia will be hit quite hard economically by the end of the COVID-19 pandemic.
A recent World Bank study predicts that South Asia may experience its worst economic performance in 40 years, and that half the region could experience a serious recession. Growth in South Asia is expected to average 1-2% in 2020 and then improve to 4-5% in 2021.
The deepest contraction is expected in the Maldives. The Maldives in 2020 are forecasted to see a contraction of 13%. For FY2020, India’s economy will contract by 3.2%. Pakistan had been struggling to grow since 2017, the estimate for 2020 is 0.2%.
Sri Lanka’s growth projection for the next six months comes with downside risks—growth could be lower by another one percentage point, depending on the severity and the duration of domestic infection going forward. However, quick measures to contain the domestic spread of the virus and the policy action to provide relief to those adversely affected has mitigated the fallout to a large extent.
Looking beyond the immediate challenge of weathering the ongoing health crisis and its economic fallout, there is an urgent need to reduce our overreliance on the country’s narrow production base, which can amplify the effect of adverse shocks. Sri Lanka needs to participate aggressively in global value chains, which if increased could help to diversify the country’s economic base.
Traditionally, our industries have stronger backward linkages than forward linkages—they tend to rely more on foreign intermediates than they supply to foreign producers of final products. In both these aspects, Sri Lanka trails Malaysia and Vietnam but is on par with South Asian neighbours such as Bangladesh, Pakistan and India.
Policy measures are therefore required beyond the immediate challenge of weathering the ongoing health crisis and its economic fallout, there is an urgent need now to reduce our reliance on our narrow economic base, attributes such as entrepreneurship, innovation, skills and management is required to drive this change in a post-COVID-19 economy. The wheels of the informal economy during the pandemic have chugged along.
Today, the informal sector stands to lose the most if the recovery is stunted, particularly the workers who rely on this cash-based sector to provide them with the bare-minimum income required to meet their daily consumption needs. Therefore future waves of the COVID-19 outbreak requiring new lockdowns in the world would further amplify economic uncertainty, as well as economic and social costs.
The first is the entrepreneurship to seek out opportunities and to take calculated risks. Standing still is a sure way of extinction. The second attribute, innovation, is what creates new products and processes that add value. The third factor is good management. To grow, companies have to open up new markets and create new distribution channels.
The economy will be driven by new knowledge, new discoveries in science and technology, innovation that are taken to the market by entrepreneurs. So discovering new knowledge, research and development, management and marketing, banking and finance, and the myriad of new subjects will need to be mastered. We would need to have inventors, innovators, venture capitalists, and entrepreneurs; they must bring new products and services to the market to enrich the lives of people.
Also the global landscape for investments is changing fast.
First, advances in technology and virtualisation has reduced the cost of outsourcing, made distance less of a barrier, and changed the economics of how businesses can best structure their operations across countries.
Second, technology and innovation have become more important for economic creativity. Investors will distinguish between innovative countries and countries that are merely good recipients of technology transfers, reflecting the weight investors give to technological sophistication, and not simply low wages.
Third, competition for investment has intensified; the key to innovation and technology is people. We must develop and nurture our talent so that innovation and creativity will be integral to education and training. Our education system will be forced to revamp to nurture innovation and creativity, from kindergarten to university, and on to lifelong learning.
The new global marketplace for goods, services, capital, and knowledge will become even more mobile and online. These developments will accelerate the integration of regional markets. However, in order to benefit, countries must ensure that their laws and financial institutions facilitate the global flow. There is a fundamental need for the rule of law. It ensures stability and predictability.
Next, between participating countries, a congruence of laws and rules governing trade and investment will develop. This will ease economic activity by lowering transaction costs. The roman and British Empire were solid examples in history of how trade flourished for hundreds of years under the protection of a comprehensive unified system of laws.
Businesses post-COVID-19 will invent, collaborate, or acquire technologies and capabilities globally to sustain their competitive edge. The internet post-COVID-19 will make markets more contestable and accessible, digital opportunities would certainly brighten the growth and development prospects for Southeast Asian economies once South Asia gets to the other side of this global crisis.