A Sustainable and Inclusive Growth Agenda

Since the mid-1980s, durable reforms coupled with prudent macroeconomic management have brought steady progress to the South Asia region, making it one of the world’s fastest growing regions. 

Real GDP growth has steadily increased from an average of about 3 percent in the 1970s to 7 percent over the last decade. Although growth trajectories varied across countries, reforms supported strong per capita income growth in the region, lifting over 200 million people out of poverty in the last three decades. 

Today, South Asia accounts for one-fifth of the world’s population and contributes to over 15 percent of global growth.

Over the recent decades, Bhutan’s economic development has benefitted from increased economic integration with its neighbors. Supportive government policies and planning have enabled the development of FDI-financed hydropower, and improvement in infrastructure that can support a gradual diversification of the economy. FDI liberalization also facilitated higher value-added tourism. Macro policies have prioritized external stability, revenue mobilization, financial inclusion, and diversification. 

Moreover, as the only net carbon-neutral country in the world, Bhutan has laudably placed a high priority on sustainable growth.

A newly released paper by the IMF’s Asia and Pacific Department finds that South Asia is poised to play an even bigger role in the global economy going forward, in both relative and absolute terms. 

South Asia’s contribution to global growth is set to increase over the medium to longer term, while more mature economies decelerate. Greater economic diversification, with an expansion of the service sector, improvements in education, and a still sizable demographic dividend are among the key elements underpinning this performance. 

Bhutan has benefited from initial diversification from agriculture into hydropower electricity and tourism, but sustained progress in diversification, supported by continued improvement in skills, education, financial inclusion, and infrastructure, is critical to deliver job-rich growth that can reduce poverty and inequality, as prioritized in the 12th Five Year Plan.

Based on demographic trends, more than 150 million people in the region are expected to enter the labor market by 2030. This young and large workforce can be South Asia’s strength, if supported by a successful high-quality and job-rich growth strategy. Amid a changing global economic landscape, South Asia will need to leverage on all sectors of the economy in a balanced way, supporting improvements in agricultural productivity and a sustainable expansion of manufacturing, while promoting higher-skill services, to achieve this goal. 

In Bhutan, around 60 percent of workers are engaged in farming activities. In this context, higher agricultural productivity can improve the lives of many in Bhutan. Furthermore, relative to its large South Asian neighbors, Bhutan can leverage its small size to meaningfully benefit from specialization, including in high-value added agriculture and services, during its middle-income transitions.

To build on the strong performance to date and allow for growth to take off in earnest, the countries in the region will need to step up their policy and reform agenda. South Asian economies can further open up to trade and foreign direct investment (FDI), improve governance and infrastructure, and foster financial development to enable more efficient allocation of resources to the private sector and reduce the still significant state footprint in the economy. 

The region will also need to prepare its workforce for the challenges of the twenty-first century to be able to fully reap the benefits of its demographic dividend. Investing in human capital and addressing the large informal sector—taking significant steps to strengthen women’s economic empowerment and labor force participation and support the youth—would bring sizable economic gains to the region.

Sustained structural reform efforts, including successfully harnessing its young and large workforce alongside substantial trade and FDI liberalization, could bring India’s real GDP per capita to nearly 50 percent that of the United States by 2040, with important spillovers to the region. 

Under a full liberalization scenario, South Asia could contribute about a third of global growth by 2040, with real GDP growth surpassing 6.5 percent, compared to nearly 6 percent under the current baseline and 5 percent in a downside scenario where the benefits of the demographic dividend cannot be secured.

The region’s robust economic performance and recent elections in most South Asian economies offer a propitious window of opportunity to accelerate this reform agenda. 

In Bhutan, the strong parliamentary majority of the newly-elected government offers an opportunity to implement reforms that can deliver strong and inclusive economic growth. Cross-country evidence finds a higher likelihood of achieving more reforms, at lower cost, in the first two years of a government office. A frontloaded reform program is also more likely to succeed as it provides more time to see the reforms bear fruit.

Clear communication on the benefits of the reforms and prioritization based on their expected macrostructural impact are key to building reform momentum. Stronger social safety nets are especially important to supporting the most difficult structural reforms, notably to labor markets, minimizing their distributional impact on the most vulnerable segments of the population, and promoting strong and inclusive growth. To ensure the region’s growth path remains as strong as sustainable, new policies and initiatives need to remain mindful of fiscal, financial, and environmental risks. 

In this context, we welcome the government’s continued commitment to implement the Goods and Services Tax (GST), strengthen management of hydropower projects and their revenues, and improve budgetary processes to ensure that fiscal policies remain supportive of inclusive and sustainable growth.

Contributed by  Faisal Ahmed

He is the IMF’s Mission Chief for Bhutan