Improved Governance, Infrastructure Key to Higher South Asia Growth, Says ADB Report

MANILA, PHILIPPINES - A new ADB report says that improved governance, better quality of regulation and infrastructure can help South Asian economies emerge as the “New Tigers” of Asia.

The South Asia Economic Report (SAER) underscores that South Asia, led by India and Pakistan, posted stellar growth in 2005 and has registered higher growth than its peers in Southeast Asia in the past five years. High growth is forecast to continue through 2007.

While developments in India are clearly the predominant factor in the improved economic performance of South Asia, most other countries in the region have been on a similar trend, although their improvements generally are more modest.

The banking sectors in South Asia have not only improved their performance over the recent past, but have also reduced the performance gap between themselves and other economies in Asia. However, the performance in state-owned banks has generally been weaker than that of private and foreign banks. Restructuring and privatizing state-owned banks should remain a high priority on the reform agenda.

Despite a shift towards market liberalization, South Asia continues to be overregulated. As a result, it is not fully realizing its growth potential. Firms are frequently confronted with a heavy burden of administrative regulations. For example, while it only takes an average of 5 signatures from government officials to export goods and 7 to import in large Southeast Asian economies, the corresponding number of signatures required in South Asia is 12 to export and 24 to import.

“South Asia stands at critical juncture today, where the potential for sustained high growth and poverty reduction is excellent. A unique opportunity exists to drastically reduce poverty over the next decade, provided the right choices are made,” said Kunio Senga, Director General of ADB’s South Asia Department.

The SAER, the first in a series of biannual reports on economic and development issues in the South Asia region, concludes that there is considerable scope for improvement in the effectiveness and efficiency of government interventions. Common problems among South Asian countries include the highly bureaucratic nature of government administration, a lack of coordination between different ministries and government agencies, and overstaffing and inadequate pay and benefit levels in the public sector.

The SAER recommends that public investments be targeted at areas where infrastructure bottlenecks are emerging. Electricity is one of the most critical bottlenecks. Private generators have to provide 15% of electric consumption in South Asia; compared with 2% in PRC and 3% in Thailand. The quality of the transport infrastructure also needs improvement.

“In addition to increasing public and private spending on infrastructure, there is a need for better targeting of investments and in particular, for improvements in sector policies, governance, and institutional environment,” said Juan Miranda, Director General of ADB’s Central and West Asia Regional Department.

The report says that intra-regional trade and investment offers immense opportunities for accelerating growth and reducing poverty in South Asia. India could become a hub for stimulating the growth of intra-industry trade in the region and boost the inflow of foreign investment into South Asia.