A series of ‘once in a lifetime’ shocks destabilised South Asian economies last year. Can growing participation in global trade provide a lifeline?
24 April 2023
The economies of South Asian nations have been thrown into turmoil by multiple events over the past year, which have eroded the benefits that global trade has delivered to the region over the previous decade. While rising costs and turbulent geo-political factors can certainly account for the majority of the change, these issues have been multiplied by the COVID-19 global crisis. The pandemic has had a disproportionate health impact on developing countries compounded by global supply chain disruption and engorged government debts. Recovery from these effects has been hampered by both local and global factors in Bangladesh, India, Pakistan, Sri Lanka and surrounding nations.
In its report,Coping with Shocks: Migration and the Road to Resilience, the World Bank outlines these issues. “In short order, a series of once-in-a-lifetime shocks has hit South Asia. The devastating floods in Pakistan, a full-blown economic crisis in Sri Lanka, and the ongoing war in Ukraine, which caused skyrocketing commodity prices, are happening when countries in South Asia are still trying to recover from COVID-19,” it said.
According to Pronab Sen, director at the Indian School of Public Policy, the impact on energy prices from the Ukraine war is another key factor hindering efforts to restore the balance of payments in these countries. All South Asian countries are energy dependent, making electricity yet another expensive import working against their recovery.
“In Sri Lanka and Bangladesh, the problems essentially stem from the fact that they’ve simply run out of foreign exchange,” says Sen. “Both have approached their bilateral donors for rolling over the debt, but that will not work until they get the balance of payments into some shape. That means increasing exports — which is not easy when a lot of exports are dependent upon importing first — or reducing imports, which is domestically very painful.”
The region’s biggest economy, India, has remained relatively resilient although growth has been hindered by the global economic downturn. The country was shielded from regional turmoil partly due to greater foreign investment, which means it is less reliant on trade. And investors are likely to retain a positive outlook. Sen notes that the Indian stock market has proved robust, staying stable despite a recent major financial scandal involving infrastructure developer Adani Group’s artificial inflation of its equity price to fund growth.
The outlook for trade in the region depends largely on the global economy, and is thus likely to remain subdued in the short to medium term. The IMF is advocating its usual brand of medicine: reducing trade barriers to increase global value chain integration and competitiveness. For countries like Bangladesh and Sri Lanka, which have already put themselves at the mercy of global markets, that may be a bitter pill to swallow.
Analysis of the region paints a complex picture of the benefits of participation in what the International Monetary Fund (IMF) calls the ‘global value chain’ – with no single ladder to success. Of the three South Asian economies that requested IMF bailouts last year, one had largely cut itself off from external trade (Pakistan), another had introduced radical reform to entice greater trade (Sri Lanka), and the last had long been a prime example of growth driven by exports (Bangladesh). The next steps must aim to make that trade, and its benefits, more resilient.
Per the ICS Protectionism in Maritime Economies Study 2022, this resilience is more likely to be achieved with pro-market policies that reduce trade barriers rather than protectionist or restrictive measures. National trade policies in countries with access to efficient maritime transport services are more likely to reap benefits, such as a higher income and competitiveness, when in tandem with corresponding improvements in the quality of its laws and governance.