Reform best path to growth: WB Chief Economist

• Warns South Asia will not see sustained high growth unless it is committed to structural changes 
• After five years region seeing sharp drop in growth 
• But does not have space for fiscal stimulus, warns SL in same situation 
• Calls for local policymakers to strike fine balance between rolling out stimulus and ensuring economy does not overheat 
• On top of global issues SA also suffering under protectionism, low competitiveness,  lack of integration    
• Says protectionism reason for small formal sector, low female participation in labour force  
• Insists governments must have relentless commitment, new thinking to address issues 

By Uditha Jayasinghe 

Sustained high growth in South Asia is dependent on relentless commitment by governments to structural changes, including rolling back protectionism and integrating with the global economy, a

The World Bank’s Chief Economist for South Asia Hans Timmer – Pic by Ruwan Walpola

prominent economist said this week, warning Sri Lanka may not have the needed fiscal space for ambitious stimulus. 

The World Bank’s Chief Economist for South Asia Hans Timmer, delivering a public lecture titled ‘Global Economic Outlook and Challenges with a Focus on Sri Lanka’ at the Central Bank’s Centre for Banking Studies on Tuesday, said that after five years of being the fastest growing region in the world, South Asia was seeing a steep reduction in its growth projections. 

He pointed out that the main reason for this was because global economic challenges were affecting South Asian nations and they were coming on top of existing internal structural problems the countries had been struggling with for decades. 

Responding to questions, Timmer also cautioned on the wide-ranging economic stimulus package announced by the Government last month and warned policymakers would have to strike a fine balance so the loosening of fiscal policy would not result in the overheating of the economy.  

“What you normally do in a situation like this is try to mitigate the impact through counter-cyclical policies. Especially when it is seen as a temporary slowdown then fiscal policies appear very effective. If there are structural issues then governments are tempted to go with monetary policy changes. However, the big problem in South Asia is there is no fiscal room to really engage in counter-cyclical policies. This is true for most countries in South Asia because in the past they have not built any buffers they can use during difficult times.

“For Sri Lanka it is a challenge. There is reason for fiscal stimulus but there may not be space to do so. You also have to be careful to keep the balance right because if you overstimulate and there is no room then you could potentially destabilise the economy while attempting to do the opposite,” he said.  

Sri Lanka has been encouraged by numerous entities and experts, including the World Bank, to continue reforms that would see key structural changes to its economy including continuing fiscal consolidation by broadening the tax base and aligning spending with priorities; shifting to a private investment-tradable sector-led growth model by improving trade, investment, innovation and the business environment; improving governance and SOE performance; addressing the impact of an aging workforce by increasing labour force participation, encouraging longer working lives and investing in skills to improve productivity; and mitigating the impact of reforms on the poor and vulnerable with well-targeted social protection spending. Stimulus will not sidestep the need to continue with these efforts, Timmer noted.    

South Asia as a whole was struggling with huge uncertainty in global markets due to trade wars, policy inconsistency, geopolitical tensions and other reasons for growth to tank around the world. South Asia is additionally strongly affected by cyclical developments in the global economy that arrive on top of structural problems that already existed within the countries, which has made finding solutions even more difficult, Timmer said.   

“This is a challenge for policymakers in all of South Asia. Growth is no longer guaranteed but high growth is the natural target of the region, which wants to become developed. It is not guaranteed that South Asia will realise sustained high growth. I think this because to achieve that you have to invest in solving some of the big structural challenges you are facing and I’m not completely sure that the region sees the urgency and has the commitment to go all out to address those challenges.”  

Outside of standard challenges such as infrastructure, urbanisation, energy, water security and environmental problems, South Asia also has issues that are quite unique to the region, according to Timmerman.  

“One common issue seen across South Asia is the ‘insider-outsider’ policy, which is also sometimes called crony capitalism. In most countries, a relatively small group has created a preferential position, whether they be public workers or companies that have created very shielded positions for themselves. You can only do this by keeping the group very small, which is why the formal sector is very small in most South Asian economies and as a result there are a lot of outsiders or why the informal sector is very large.” 

In Timmerman’s view, not only does this result in underproductive economies and less investment attraction, a limited formal sector can also result in problems such as low female labour force participation. 

“This is an issue that needs to be addressed because there is a lot of underutilised potential in the informal sector that has to be developed. Different thinking is needed to resolve this issue. The World Bank traditionally focused on bringing the informal sector into the formal space because that is when people have access to credit, social welfare, better working environments, have economies of scale and pay taxes. But given that more than 80% of the workforce in Asia is informal, new thinking is needed to organise this sector.”