Toward Faster, Cleaner Growth in South Asia

[Raj Kumar]
Hello and welcome, everyone. I'm Raj Kumar. I'm the President and Editor in Chief at Devex and delighted to be with all of you who are joining us from all over the world to talk about one particular region that rightly deserves to be spotlighted today, and that is South Asia. We're here because the World Bank has just launched its South Asia Development Update, a report that gets a lot of attention for good reason in any time, but particularly now because eyes are on South Asia, I think for very good reasons. It is the fastest growing region in the world. A lot of the world's hopes around achieving the sustainable development goals lie there given the size of the population and the dramatic needs that remain even as the economies broadly are growing and the need for energy transition is particularly acute in South Asia. So eyes are on South Asia in a big way. I think just a couple of days ago, the World Bank talked about slowing growth in East Asia, but South Asia is the focus and we are here with a group of tremendous experts from inside the bank and outside to hear what this report tells us and what the implications are. What can governments actually do at this point, given the realities the region is facing? Because a lot of what this World Bank report says, as we'll discuss during the conversation today, is that there is a big challenge and a big opportunity for governments that right now a lot of focus is on what governments decide to do around their fiscal policy. And so we'll get into that a little bit and what it might mean for a region that could grow potentially faster. But can it grow in a way that's sustainable and that's green? And so we're going to get into that I think in a rich conversation today. And I just want to mention who all we have here and then we'll begin with the first part of the conversation. So we'll be joined soon by Dushni Weerakoon, who is the Executive Director for the Institute of Policy Studies of Sri Lanka, Mustafizur Rahman, who's the distinguished fellow at the Center for Policy Dialogue in Bangladesh and Franziska Ohnsorge who is the World Bank Chief Economist for South Asia. We'll have a panel discussion and get into the meat and details of this report, but we're going to begin with a fireside conversation between two people who know this region very well, and I'm excited to hear their discussion. We have Martin Raiser, who's the World Bank's Vice President for South Asia, managing some $55 billion in a portfolio across the region, and V. Anantha Nageswaran, who's of course the Chief Economic Advisor to the government of India. So we're going to hear from the two of them and then we'll get into our panel conversation. So Martin, over to you. 

[Martin Raiser ]
Thank you so much, Raj Kumar, for this introduction. And you said quite a few things that I wanted to say by way of introduction, but I do want to start by welcoming Anantha Nageswaran, the Chief Economic Advisor to the government of India to this chat and also the other panelists and very much look forward to what they will have to say. Raj, as you said, South Asia is expected to grow faster than any other region in '24/'25. We predict 5.8% growth this year and 5.6% growth next year for the region, which is higher than anywhere else in the world. Yet if you compare this to pre-pandemic trend rates of growth, it's actually lower than the region was growing pre-pandemic. So it says something about how low global growth is that even South Asia, that is growing faster than anybody else, is not really quite at the levels that it was pre-pandemic and it's still short of the levels that the region would need to grow to reach its aspirations. For example, India wants to be a high-income country by 2047, the 100th anniversary of its independence, and for that it would have to grow closer to 8% than to the current 6% or so. Yet our report suggests that there are big opportunities out there, particularly in the clean energy transition, to generate jobs, to cut pollution, to reduce reliance on energy imports and overall increased economic resilience. And there may be significant opportunities related to the way global value chains are reshaping. So this is a moment where, as you rightly pointed out, Raj, all eyes are on South Asia. Can it be the world's next growth poll? And so in that context, let me start with my first question to you, Anantha. Against this background, what do you think are India's prospects in the short run and where do you see the main risks to this outlook? 

[Anantha Nageswaran ]
Thank you Martin, and thank you to World Bank for inviting me to this conversation. Good to see you, Martin, virtually. I hope I'll see you in person in Marrakesh in- 

[Martin Raiser ]
Yes, indeed. 

[Anantha Nageswaran ]
In about a week or so. So I think India's prospects for economic growth look good. Yes, you mentioned about the fact that 8% might be needed, but +6 is what is happening right now, but the global context has changed. When India was able to grow at +8% in the first decade of the millennium, export growth was a big contributor, world economy was in a much healthier state. So if India can achieve 6.5% per annum on average, which I believe it can, in the rest of the decade, that will be a very creditable achievement under the circumstances. And this I'm saying based on the assumption that no further economic reforms take place at the union government level or at the state government level and based on what has already been done in the last eight to nine years. However, if on top of those reforms we do have, let's say, more reforms in the state government side on reforming the power sector, on skilling the population, on reforming land loss and conversion of agriculture into non-agricultural use, et cetera. If all those things are addressed as well, along with the continued emphasis on ease of doing business, then I think growth rates of around seven to 7.5% will be feasible. So those are the prospects. The main risks as I see them, and I'll skip the near term risks coming from the oil price, the level of interest rates in the developed world and geopolitical fragmentation, et cetera, I'll focus on the medium term risk, which is also the topic of your report, the energy transition. I think there is a lot of emphasis from the point of view of the West, justifiably so, on emission reduction, whereas we need to also invest in adaptation and resilience considering the emissions that are already out there over the last couple of centuries, given that the half-life of carbon in the atmosphere is 120 years. And also, we need to make sure that economic good does not suffer in this energy transition because we don't see it as being anti-critical to the energy transition. We need economic growth because we need our own resource generation. We cannot depend on external capital, for that would have a big impact on external balances and current account deficits, et cetera. So maintaining steady and moderate to above moderate economic growth is actually a big challenge, but it's also a big imperator to achieve energy transition over the medium term and that is the biggest challenge and risk that I see in the coming years. I'll stop here and let you come up with follow-up questions. Back to you, Martin. 

[Martin Raiser ]
Thank you, Anantha. It's interesting because the way we present this in the report, of course, what you just talked about, is in terms of the opportunity, and what we point out is that countries like India who have high domestic savings rates and quite developed capital markets actually have an advantage in that they can mobilize a lot of the resources, that they need to finance the energy transition internally. And you rightly pointed out that there are macroeconomic external balance questions associated with trying to finance it all from abroad. I think that's a point that sometimes in the discussion does not get as much as attention as it should. But coming back to this question of the investment opportunity, people like Nick Stern have been arguing that this green transition is a huge investment opportunity along the lines of big push theories of investment. Yet when you look at the drivers of investment in India over the last few years, the public sector has played an important role and the balance sheet of the public sector is constrained in how much further impulse it can give. So how do you turn this initial impulse, which has gone so much into infrastructure which has provided a lot of dynamism to the Indian economy, how do you turn this into an impulse from more private investment? You talked a little bit about the reforms, but if you could elaborate on that, that would be great. 

[Anantha Nageswaran ]
Yeah, I think you're right that first of all, it presents opportunities, no doubt. And I think the opportunities are definitely there, and in some cases it could be a win-win, but we should also not trivialize or minimize or ignore the challenges, especially on the social dimensions, such as labor market adjustments, dislocation disruptions and the economic choices always involve trade-offs. It is very difficult for us to believe that there are no hurdles or risk factors because foreigner solutions are seldom feasible. So we need a constrained optimization and the constraints are going to come from the labor market adjustments, availability of resources such as critical minerals and rare earths. And also even with respect to renewable energy, we need grid stability and storage technology to improve, et cetera. Now coming to the private sector, last decade, Indian private sector was repairing balance sheets because there was credit boom in the first decade. Both banks and the non-financial corporate sector were repairing balance sheets and that is why the public sector had to take up the mantle of driving infrastructure investment including on renewable energy, et cetera. But I believe now the private sector is ready and willing to invest and capable of doing so. Balance sheets are in good shape, retained profits are internal, resource generation is in good shape and the private corporate sector is also committed to helping the country along in the energy transition part. So it was the balance sheet issues that made the public sector, rightly so, take up the mantle of driving growth and driving investments in general, not just a regular infrastructure, but also climate compatible infrastructure. But this decade, now that the pandemic and other one-off shocks are hopefully behind us, the private sector will pick up the baton from the public sector with better balance sheets and banks are willing to lend as well as we are seeing in the credit data. So that is why I'm confident that economic growth, this decade, will be driven as opposed to the last decade by capital formation in the private sector and also thanks to the productivity improvements costs by India's investments in the digital public infrastructure. Back to you. 

[Martin Raiser ]
Thank you very much, Anantha. So this handover from the public to the private sector, both from an economic cycle point of view, but also reflecting the opportunities, I think is an important part of what we see in the South Asia region, not just for India, but for other countries as well that have relied so much on the public sector driving things and in some cases indeed crowding the private sector out. So this is an optimistic perspective that you're providing. I did want to emphasize the point that you made earlier about the importance that resilience and climate adaptation plays for South Asia. I think an area where we will need to see public to public sector investing and where we will need to see new innovative ways of combining public and private balance sheets is going to be climate adaptation and a topic of significant interest for us. And Franziska in a year's time or so will probably return with a report that pays more attention to that and we look forward to discussing it with you at that time. But I did want to talk a little bit more about the question of public balance sheets and debt because this is something that we have seen in the region, the South Asia region, and I'm not talking specifically about India, but about the region as a whole. And of course India is accredited to some of your neighboring countries, so I'm sure this is something you're following very closely. The South Asia region has the highest level of public debt to GDP of any of the emerging market regions that we track. It has a country in an active debt restructuring process in Sri Lanka. It has a number of other countries that are classified as being at risk of falling into debt distress. So what is your sense, what are the key policy priorities for governments to navigate in what is a really treacherous and difficult international environment? How do you navigate it, given that you're entering this period in the global economy with such a high level of debt? What can you do? 

[Anantha Nageswaran ]
Martin, that's a very important question and I wish there were easy answers, because if they were, they would've been pursued already. I think the problem is that as your report points out, countries face lower growth, post-pandemic recovery is uneven. They have been saddled with debt, both due to the fiscal stimulus they had to provide and due to denominator shrinking the GDP numbers. And on top of that, now they have to maintain growth. Frankly, 

[inaudible ]
we have to prioritize and countries have to prioritize and that is where technical inputs and suggestions from international organizations in helping countries sequence their priorities right now will be extremely helpful because there are no easy or right answers. Context matters and the advice and the conversation should be very open and frank and discuss all pros and cons and ultimately choose the ones that seem to be the least damaging. In which case, my personal answer would be that countries do have to prioritize economic growth because that is what will help them bring their debt back to sustainable levels and also generate confidence in the public or in the economy, in the leadership, and that in turn will become a virtuous cycle. If we now prioritize on austerity or focus on energy transition by making fossil fuels more expensive and then making people more unhappy, because that is the case even in advanced nations. When you are asked to pay, people's support for climate transition policies drop considerably and the levels of disposable income in the developing countries is even less. And therefore, right now the prioritization should be on restoring economic growth as far as possible and providing support and relief by international organizations and develop countries for them to come back to growth. And that is what will also provide social economic stability and confidence in the system and which will then become a virtuous cycle and later on then countries can concentrate on paying back their debt, bringing it to sustainable levels and also have resources to invest in energy transition. This is how I would be looking at the situation. Back to you. 

[Martin Raiser ]
Yeah, that's interesting. I think India has passed a budget for this coming year, which is an unusual budget given that it's a country that is entering into a general election cycle, which emphasized capital spending. So that's very much linked to your recommendation that countries should focus on economic growth. Of course India has given itself the room through the GST Reform and other reforms in the past that generated the revenue that gives it a bit more flexibility than some of the other countries. We would argue, and we do that in the Report, that for a number of the countries in the region really there's no alternative than to raise revenues. And I'm sure we'll hear more about that from some of our panelists going forward. I did want to ask you a final question in the three minutes that I'm indicated we have remaining for our conversation, which is, how much potential do you see in efficiency gains in the delivery of services? One of the experiences that India had during the pandemic is the use of digital technology to reach vast waves of the population much more efficiently and quickly through cash transfers. We've seen digital medicine, we've seen online education, we've seen the recent G20 agreement on the digital public infrastructure. Is this a potential additional driver of allowing governments with constrained balance sheets to deliver services more effectively? What can one learn from India's experience? 

[Anantha Nageswaran ]
Thank you, Martin. I think my answer to your previous question was more about other developing countries in the region, not particularly with relevance to India, because India's situation, as you pointed out, is somewhat better, and significantly so. And India's nominal GDP growth is much higher than the cost of capital it has. And India's debt ratio compared to 2005, for example, pre-2008 crisis and 2021 post-pandemic had hardly changed. So my answer was more with respect to other countries in the region as to prioritizing economic growth. Now coming back to your last question, yes, I do see the digital public infrastructure and delivery of services playing a very big role in lifting the potential growth. One is the balance sheet improvement and the second driver of the incremental growth over and about the 6% that organizations such as yours mentioned as the possible trend growth, and I'm talking about 6.5%. Roughly, the additional 50 basis point comes from the fact that capital formation in the private sector is going to improve and another quarter percentage point coming from the productivity gains coming through formalization of the economy, financial inclusion and better market access for small micro and medium enterprises that the digital infrastructure provides, which they cannot do if they have to only establish physical presence and then try to market themselves, then they will be circumscribed by their size. The digital technology enables them to overcome these constraints on size that physical locations and the physical businesses present them with. And that is why I feel that going forward, India's economic growth will be better served because of the investments made in the digital public infrastructure. Now, it has not been quantified yet, and it is difficult to do so, but we are working on it, as to how much it could contribute incrementally to India's potential GDP growth. Now conservatively, I'm expecting that to be somewhere between 25 to 30 basis points with another 25 to 30 basis points coming from the enhanced capital formation this decade compared to last decade. Back to you. 

[Martin Raiser ]
Thank you very much. So we end on an optimistic note regarding the opportunities of the digital transformation. I think we have a balanced picture regarding the opportunities of the energy transition. We outlined some of those opportunities in the report to put it in a very crude form. I think you could say that the cheapest energy is the one you don't need to consume because you're more energy efficient, and that offers a lot of opportunities even just through the adoption of modern technologies that are not entirely or dependent on price mechanisms like the ones you described. I think we do have a clouded outlook fiscally for a lot of the rest of the region and something that needs to be addressed with some urgency. And I hope that the panelists that come after us, Anantha, will delve a little bit more deeply into those questions of the challenges. But thank you very much and indeed looking forward to seeing you in Marrakesh. And after Marrakesh, I'm coming to Delhi, so looking forward to seeing you. 

[Anantha Nageswaran ]
Okay, that's good. Look forward to that. 

[Martin Raiser ]
Thank you so much, Raj, back to you. Thank you. 

[Raj Kumar ]
Thank you, Martin. Thank you, Anantha. That was a fantastic discussion and we will take up that call to action, Martin, and get into some of the threads that you began to pull on there in that really interesting discussion. So maybe Franziska, I can start with you. As I mentioned, you're the Chief Economist for the South Asia region at the World Bank. And I guess one of the issues that Anantha and Martin got into a bit there is this idea that a lot of the growth, in India in particular, and we can talk about the region as a whole, but of course there's quite a bit of diversity, we've got a couple of countries with less than 2% GDP growth. We can talk about the situation in Sri Lanka, which is quite different than others. But in general your report talks about growth and we heard that in the conversation, there's been a lot of growth. It might be slowing but it's the highest in the world, but it sounds like a lot of that growth was driven through public sector investment over the last decade. And the key issue here, which Anantha was very forceful on, is that's going to shift, we're going to get private sector investment now because we know it's not sustainable to simply have the government funding this kind of investment to drive that growth. Is that a shift that you see happening or is that a risk to the growth picture that you outlined in your update? 

[Franziska Ohnsorge ]
Thank you, Raj. So the region is growing at almost 6%, whereas all the other regions are growing somewhere between 2 and 5%. And the relative strength, this particular year, this year and the next couple of years, it has some fundamental factors but it also has some cyclical factors that are causing this recovery. First, potential growth in the region is high. Anantha has already touched on this. The investment prospects are good. The other thing that the region has is a young and growing workforce. For the next decade or so, that will definitely be a growth driver. The question is, can it be leveraged into faster growth, all this potential? But there are two other cyclical reasons why the region is doing better than others: first, the region is much more closed than other regions, and I'm happy to go back to it. So it doesn't get hit so much by these global shocks that are currently affecting the global economy. And the second reason is that several crises affected countries. I know 

[laughs ]
Mustafizur, you will talk about this more, but several of these are rebounding now, things are looking better. So those are kind of the three drivers of the relative strengths of this region compared to others. Now on your question, what can be done to accelerate growth and make sure that this private sector, that there's this handoff from public sector to private sector? Just two things to bear in mind. Anantha spoke about India. He could have just as well spoken about the other countries. For every country for which we got data on private investment, for all of them, private investment growth over the last five years has been less than the private investment growth or less than the pre-pandemic average. So this private investment weakness is really in all the countries, it's a real challenge for the region. Some countries, and not just India, there's 4 out of the 8, make up for it by having very strong public investment. But of course with the current fiscal positions and with debt that high, exactly what was mentioned already will be a challenge. How can you sustain this? This cannot be sustained over long term. So that then raises the question, how can you boost private investment? And there, unfortunately, it becomes very difficult. There's no silver bullet. A whole number of things have to go right. The business climate has to be good, the financial system has to work, and not just finance the government, it has to work to finance the private sector. 

[Laughs ]
Private investment is also often encouraged by trade, by interacting with the rest of the world. And in two of these dimensions, the region actually falls short. First, I was really struck when I started working on this region. The region is really, in many dimensions, the most closed emerging market and developing country region of all. It's got trade costs that are averaging a terrible equivalent of about 140% compared to the rest of the other emerging markets, about 120%. It's really difficult to trade with this region, and this is not just because of tariffs that are higher than elsewhere, it's also just really hard to cross borders. The logistics don't work very well. It's just really expensive to trade with this region internationally. And the second way in which the region is relatively close to the outside world is capital controls. They're much higher, both on inflows and on outflows, in the region than outside— in other countries. So by closing towards the rest of the world, it's an opportunity missed, an opportunity for technology transfers, for investments coming in. And the third item maybe what was touched on already, another opportunity not yet missed, perhaps realized, is the energy transition. We point out in the report how firms in the region have been enthusiastic adopters of very basic energy efficient technologies like LED lamps. What's missing is the adoption of advanced energy efficient technologies. And here, there doesn't need to be a tradeoff between growth and energy efficiency. We've shown that firms that have improved the energy efficiency use those savings to expand employment, to create jobs. So there could be a win-win in this. Back to you. 

[Raj Kumar ]
There could be, yeah. And of course it does raise the implication that Anantha also described, which is some labor force shifts, which we can get into as well as we talk a little bit more about energy transition. But I do want to bring some of our other panelists into the conversation. Dushni Weerakoon is with us. Dushni, you lead Institute of Policy Studies in Sri Lanka, a country that we've talked about, has defaulted, has gone through some very serious fiscal challenges. The conditions under which South Asia is operating now have changed quite a bit. We are no longer in the zero interest rate environment, interest rates are marching up all around the world. We are also in a situation where oil is now $90 a barrel, and this is a region that is largely an importer of energy. How did those two shifts in the macro circumstances of the region affect it? We heard from Franziska that these are typically more closed economies than elsewhere in the world, but nonetheless, these interest rate and energy price shocks ought to affect their growth prospects going forward. How do you see that playing out? 

[Dushni Weerakoon ]
Thank you, Raj. Well, I think that the South Asian region is in some sense more vulnerable to the kinds of external shocks that you mentioned for two reasons: one is that I think it was mentioned we have fairly weak fiscal positions across the region, and second also, we don't have very resilient export sectors far from a diversified export baskets or we're not linked to global supply networks, et cetera. So the response to those kinds of crises in that situation, I think many countries did manage to introduce reasonably macro tools allowing the exchange rate to absorb some of these shocks and where possible if the fiscal positions allowed it to give some additional social protection, et cetera. Now having said that, South Asia, and I think Franziska very correctly said, we are prone to embracing protection in not only as short-term risk management tools, but also more in the medium to long-term. And some of our countries, and I placed Sri Lanka as one of the countries that rolled out series of import restrictions... To me, at a point when your balance of payments position is extremely under pressure, I think short-term import restrictions on certain non-essential consumer items and items like vehicle imports, I think that's justifiable. But the risk is that these tend to then spread more widely into other consumer imports as well as into intermediate imports. And that also then has a downside impact on our export competitiveness. So as a short-term tool, yes, I think in certain conditions we can learn to live with it, but over the medium to long-term import restrictions really should not be deployed. 

[Raj Kumar ]
Right, it can create a vicious cycle. 

[Dushni Weerakoon ]
It is a vicious cycle and if we continue with that policy we will not be able to improve our export performance and that is the only way that we can ensure that the region is less vulnerable to similar risks in the future as well. So the policy prescriptions that was previously mentioned, I think, were all well known, well understood. The problem for South Asia really has been that we have not been able to push through a reform agenda and sustain it. We tend to see policy reverses with changes of government, and that really is the problem here. How do we build cross-party political consensus on the need for certain crucial reforms and ensure that those are sustained even if there are changes of government every four or five years? 

[Raj Kumar ]
Well, I think like most issues in global development, a lot comes down to political economy. And as you say, these are challenging issues because you might start them as a short-term fix, but you end up creating a situation where there have to be winners and losers when you change policy, and that is politically really challenging. But there seems like there are some opportunities here. We just briefly talked about energy, and it seems like the energy transition could be a big opportunity for the region, especially in an era of very high energy prices, to be able to generate clean energy domestically. And the other big opportunity I want to bring Mustafizur Rahman into the conversation on this point is around more of an opportunity to globalize. So in the geopolitical contest with Russia and China and the West, there is now a big move toward French shoring, diversifying supply chains, building more regional resilience of supply chains. And you might think of South Asia being an opportunity to benefit from this, and we've seen Apple, for example, moving some of its iPhone production to the subcontinent. And so I wonder Mustafizur, when you think of this issue, you're an expert in globalization, is the region positioned to benefit from this macro shift in supply chain design? What would it need to do to benefit from this change? 

[Mustafizur Rahman ]
Thank you, Raj. I think you have touched upon a very important issue. As we go forward, I think that's the way to strategize and restrategize because South Asia, in fact, has remained one of the most disjointed and de-linked countries so far. But in recent times, we have seen that there are movements with regard to deepening our transport connectivities, I think which can provide us a good opportunity to create value chains and production networks. You perhaps know that four South Asian countries have signed the Motor Vehicles Agreement BBIN, Bangladesh, Bhutan, India, Nepal. Bangladesh has been implementing a lot of infrastructure connectivity projects under the three lines of credit provided by India. So I think that this creates an opportunity for multimodal connectivity, which is also very important in terms of attracting investment. I recall that one Bank report, A Glass Half Full, mentioned that exporting from Dakar to Kathmandu was 1.5 times small than exporting from Dakar to Sao Paulo. So we will have to do the infrastructure and logistics connectivity. And if we can triangulate trade connectivity, investment connectivity and transport connectivity, then I think the nearshoring that you're mentioning about and attracting FDI from outside... Not only for the global market, but also South Asia, is a big market and we are also in the region of Asian and also Southeast Asia. Bangladesh only exposed 12% of its global export to South Asia, East Asia and Asian countries, although it imports two third from this region. So I think that there is now a growing opportunity for production networks and value chains. Bangladesh's export is 85% ready-made garments and there we have benefited from the value chains from, for example, importing cotton yarn fabrics from India and then value adding and exporting to the developed country of North America and Europe. But I think there are a number of initiatives and measures and reforms that we have to do. Franziska mentioned about the South Asia being very protective. I think that that is, one, we have fiscal reasons for that, but I think domestic resource mobilization through direct taxation has become very important because high tariffs and protections are creating problems for not only consumers, but also producers and export-oriented entrepreneurs. But let me just also add one point that whilst we do understand the importance of opening up, I think with respect to some of the products in the developed country markets also, the tariffs are very high. The tariffs on ready-made garments in European Union is 12%. The tariffs on the ready-made garments that we export to the United States and Canada, it's 18%. So because we are LDC till now, we don't feel it because in many countries we get zero axes. But beyond 2026, when Bangladesh graduates from the LDC Group, we will lose the preferential treatment. So I think that that part also should be kept in mind. But I agree fully with your main hypothesis and what 

[Unintelligible ]
said. 

[The chat ]
also mentioned, and also Franziska, that we need to open up. I think our reforms in tariffs and trade liberation have slowed down. And the other point is that we do have many investment friendly policies, but I think that cost of doing business, one-stop service for the investors, so those type of implementation capacities is very important. So state effectiveness is becoming very important in terms of attracting the FTA, both for the regional markets and also for the global market. 

[Raj Kumar ]
That's a very interesting way to put it. It is about state effectiveness when you have a global market. Companies and investors can go anywhere. They're looking to governments that have policies that are effective. And you also put an interesting point on the table, which is it's not just about global trade, really it starts in the region. And it's a big region. And if trade between the countries of South Asia isn't smooth, isn't easy, if the barriers are too high, then how can you expect to change the global picture and become a go-to source for nearshoring and offshoring? Dushni, I'd love to get your take because you sit on the Board of Investment in Sri Lanka, and I wonder, when you have conversations about how to increase investment in that country, do you think about these same issues that we just heard from Mustafizur? How do you increase trade within the region first and reduce those barriers for entrepreneurs and businesses? 

[Dushni Weerakoon ]
I think that discussions on investment, what is guiding trade flows, what is guiding investment flows, that landscape has changed if we just simply look at trade. Trade has become a battleground and all rules and disciplines are being thrown out the window. We are having export bans being imposed, import bans being imposed, even FDI flows are being channeled to countries closer to home that are considered to be friendly. So a lot of geopolitics now drive trade and FDI flows and advanced economies. If you look at the volume of subsidies and other tax credits that they are channeling to their domestic economies to expand capacity as well as to secure their supply chains in crucial sectors. Now, developing countries, and in this region in South Asia particularly, the governments don't necessarily have the fiscal resources to do all of that. So in some sense I think the global playing field is again tilting against us. We were told many times, "Don't export subsidies and all of these things should be haltered. We must focus on improving macroeconomic fundamentals to attract FDI, et cetera." Now, I would still imagine that policy consistency and political stability would be the key factors that investors will look for if they are entering a country. And if you really don't have that basis from which to launch any efforts to attract investment, it's going to be an uphill battle. But aside from that, and this has been somewhat of Sri Lanka's experience as well, I think trade agreements have also played a critical role if you look at Sri Lanka's bilateral FTA with India, and that was confined to goods, but we benefited mostly on the investment side because I think Indian investors felt there was some code and agreement dispute. Settlement mechanisms were built into it. There was consultative mechanisms in there. And what we saw really was that that generated a significant inflow of FDI in Sri Lanka from India. So trade agreements and Sri Lanka is doing that. We are looking at various bilateral FTAs as well as regional FTAs. It could be an important bridging measure right now to try and link efforts to attract investment into countries and especially countries like mine that's struggling on the macro front to convince investors that the economic outlook is stable and will improve over time. So various measures out there, but I would still say that policy and political stability is still what investors are looking for rather than tax credits and tax policies. We've rolled those out in the past a nd they've not really worked as we would've expected them to. 

[Raj Kumar ]
Yeah, interesting point you're putting on the table, that you first have to think about the basic, the ante. You have to start with political stability, you have to start with some basic policy framework that investors can feel is safe, like dispute resolution. But that's also in the context, as you say, o f advanced economies doing significant subsidies on strategic industries including countries that long said they're against industrial policy are all doing that now. So it is a very different macro picture that you're facing. We want to get into a couple of more issues here. In particular, I'd like to discuss the fiscal picture that countries are facing. And so maybe you can go quickly back to you, Dushni, but we'll go more quickly so we can get to all of these questions and issues. Sri Lanka suffered a debt default last year. It's not the only country in the region that has significant debt distress. What is your advice or lesson maybe that you've learned from the situation in Sri Lanka that could be applied to other countries that are facing a significant debt challenge? 

[Dushni Weerakoon ]
I think one thing is if you are forced to restructure, then preemptive restructuring, I think, is always the preferred option. And having defaulted, I think the space in which to maneuver is very tight. And there is somewhat of a tension, I see, that in the sense that governments want to do a deal quickly, and understandable because the more prolonged your negotiations are, the bigger the impact on the output contraction. And even for creditors, I think they would rather get their money early rather than later. So in that, there's a trade-off, and if you conclude negotiations swiftly, you might not really go into a deep restructuring in the sense of demanding much larger haircuts as a result of which the risks are there. And your report points that out very clearly that countries may again, in two to three years, default once again and become serial defaulters. Now, I'm going through this exercise here for Sri Lanka. I think what I would say are there are two things that we need to do. One is within the control of national governments and that is to ensure that there are strong institutional structures in place to manage debt, set up independent debt management of built capacity to analyze debt sustainability, do all of that groundwork. The second is on the global multilateral front where I feel that the lack of a framework for debt restructuring —and Sri Lanka feels it particularly as a middle income country— we don't qualify for the G20 framework. So getting all of these diverse creditors, and it's a very complex set of creditors that we have, for instance, bilaterals, China, Japan, India, and bond holders on the other hand, to get the uncertainty itself, I think, creates so much negativity on your economic outlook that recovery then gets hampered even more so than earlier. So World Bank, ADB, IMF, the multilaterals have to come together with the major bilateral creditors, including China, to resolve this because the debt pile up 

[and it ]
means that Sri Lanka isn't going to be one of the last countries to get into trouble. There'll be many more emerging market economies that will follow. 

[Raj Kumar ]
There are, and it's a really important point and yet another example of where the geopolitical picture is affecting what might seem like very domestic situations because, as you say, a country like Sri Lanka suddenly finds itself caught because there is no framework and there is no framework in part because there is a geopolitical contest over how to resolve these issues. So it is not an easy thing for any individual country like Sri Lanka to address, especially when you're in a moment of a fiscal crisis. Franziska, what do you think countries should do? I know you talk about this in the report, countries that are finding themselves in a very unsustainable debt picture. What are some of the steps they ought to take? 

[Franziska Ohnsorge ]
Yeah, thank you. Just to put the number on what Dushni said before, this region stands out. This region is 86% of GP in government debt and is much more than any other region and it has a revenue ratio of 18% of GDP on average compared to 30% of GDP in other emerging markets or the emerging market average as a whole, so it really has- 

[Raj Kumar ]
So it's borrowing 

[inaudible], but it's not raising as much tax as other countries are to pay back debt. 

[Franziska Ohnsorge ]
Exactly. So it does stand out in its fiscal problems. Now, like Dushni said, defaults are really difficult to make them work. It's surprising how few of them don't even achieve the most basic objective to improve debt positions. Actually, we showed that one third, more than one third of defaults, never achieve what they're meant to do. They don't reduce debt five years later or they don't reduce borrowing costs five years later. So it's really difficult to make a default work. The defaults that did work in that sense, at least restoring fiscal positions a bit, are those that came with growth accelerations, fiscal consolidation, and Dushni already touched on this, the ones for the external debt defaults, the ones that had above median debt restructuring. So debt restructuring is really critical, but it will have to come with domestic fiscal consolidation, and there, debt management, debt transparency can help bring down borrow costs, but it's unlikely to really reduce the financing requirement. So it's back to basics, it's raising revenues, we just spoke about this, it's improving spending efficiency as well. Now, on raising revenues, it's incredibly difficult to achieve because it means getting more people into a tax net. Most of the time it's a matter of broadening the tax base, not so much raising rates, but broadening the tax base, bringing more people in and enforcing. It's also a very difficult thing to do for governments if they don't have a prebuilt capacity already. On the spending side, there's some easy wins, but they're much more difficult wins too. So one —well, at least economically easier win, maybe not politically easier win— is to remove subsidies. In the region, despite some reforms, energy subsidies still account for 1.5 to 2% of GDP, fiscally costly and distortive. So really, it's a win-win to remove them. The problem is of course the political implications of this. So it has to be accompanied by reforms that then support the vulnerable groups. 

[Raj Kumar ]
And they're easier to remove when energy prices are low, which is not the case right now. 

[Franziska Ohnsorge ]
Exactly. And the final point is that a lot of countries have found it useful to use fiscal rules exactly to force these reforms on the revenue side and on the spending side. And four of the countries in the region actually have fiscal rules. Sri Lanka is one of them, India is another one of them, Pakistan is another one of them. The problem is fiscal rule is not equal to fiscal ruled. The fiscal rules in the region are actually all on the softer side, but it's the stronger, the more enforced ones, that are associated with slower debt buildups. So three dimensions where things can be improved: revenues, expenditure, and the structure, the institutional arrangements for the fiscal accounts. 

[Raj Kumar ]
What do you think about this, Mustafizur? I'd love to know the situation in Bangladesh because I think of Bangladesh as one of the success stories of the region. It's had a lot of growth. You mentioned it's no longer going to be, at least, a lower developed country, it'll move to middle income status in 2026, but yet there may be a debt challenge there as well. How do you see the picture there? What does the country need to do? 

[Mustafizur Rahman ]
Yes, Raj, that's a very raw nerve that you have touched. It's true that Bangladesh's success story has been very well-documented. But right now, as we speak, we are under significant macroeconomic stress. Franziska mentioned about 18% and I think 30% Bangladesh's revenue GDP ratio is less than 10%. And if you add on 5% of fiscal deficit, you can only spend 15% of GDP. So it's a major problem. And two thirds of the revenue come from the indirect taxes. So it is also inequalizing. So I think that Franziska rightly mentioned, and Dushni mentioned about proactive policies, I think we have been very reactive. For example, exchange rate of taka, it has depreciated over the last one and a half years from 88 to 110. So what type of imported inflationary pressure the country is now facing? With regard to also debt, our total debt to GDP ratio is only 32%, foreign debt is 2% and domestic debt is 20%. So it's less than the 55% IMF threshold, but then it is rising at a fast pace. And because of the Ukraine-Russia war and also our own monetary policies, our reserves have come down from $48 billion to, according to IMF estimates, $21 billion. From 48 to 21 over a period of one and a half years. So debt repayment, which was not an issue in Bangladesh, is increasingly becoming an issue. And because we have made the transition from low income country to lower middle income country in 2015, according to World Bank category, we are also not getting non-concessional loans. So loans are becoming highly— The interest rates are very high. Today, I was looking at the statement by the World Bank that they will give Bangladesh debt, but it'll be about 5%. Now, the ideal loan was 0.75%. So you see the conditions are becoming stringent. So I very much agree with Dushni that one will have to be proactive. We just should not really react when things are coming. So I think that one is domestic mobilization and I think here digital technology can be very good tool in order to broaden the text net and also bring direct taxation under the text net. So this is one. The other is obviously to take the reforms, for example, for a long time we have not depreciated the taka. We thought that imported inflation will come, but now we have to depreciate from 88 to 110 when the global prices have also gone up. So double win. So I think that debt sustainability will become a problem, even for a country like Bangladesh. And I think I agree with Dushni that we need to also think about whether global debt restructuring and those type of initiatives would be becoming very important. 

[Raj Kumar ]
And of course anytime there's a debt circumstance, the sooner you start addressing it, the easier it is to address. And I wonder if the same thing can apply to the green transition. We know this transition will take place. The question is how long is the timeframe before countries like Bangladesh start to make that shift? We have very little time left. So your last comment here, Mustafizur, I'd like to get your take on the opportunity for a country like Bangladesh, which is big in ready-made garments, low-skill manufacturing. What's the opportunity to transition for Bangladesh? 

[Mustafizur Rahman ]
I would like to appreciate the South Asia development update because they have brought this very important issue. And for Bangladesh, it is becoming crucially important because as we graduate from the LDC Group and don't get preferential treatment, the conditionalities and the demands of green production, carbon content, carbon emission, et cetera, are becoming very important on the side of our development partners and for market access in developed country markets. So we are taking some steps; Bangladesh is committed to transiting to green industry as distinct from green technology because we are still far from there, but at least decarbonizing and for example, plastics and for example, ready-made garments, 85% of our export. There, if you look at the knitwear sector, most of the ones LEED certification need to 

[Unintelligible ]
factories are in Bangladesh and a platinum certification as well. So this is very important. We need to incentivize it. There should be technology transfer when we hear from the entrepreneurs that when they invest for green technology and green production, they don't get the money that they thought they would be getting from the major buyers. So I think that there should be also from, not only from our supply side, but also some part from the demand side as well. 

[Raj Kumar ]
Thank you. Yeah. We just have a couple of minutes left, but I want to get back to this issue, Dushni, that I mentioned earlier and that Anantha brought up, which is about what the transition to green means for the labor force. Because while it might create many new jobs, it does suggest there could be a transition. There's lots of workers in the region whose jobs are tied to more carbon-intensive industries. Give us in just a minute, what do you think is the picture around the labor force transition that's required? 

[Dushni Weerakoon ]
I think South Asia faces two key challenges. One is that informality in South Asian labor market is extremely high. That means they're not getting social protection, but most importantly they're not even getting retraining. And the education sector also is not geared to upskilling the workforce as required. So this, I think it can't be looked at in silos or in isolation. The labor market reforms and education sector reforms have to come together to bridge this transition and then more high-skilled workers moving into green financing. Reforms, again, I mentioned before, we've discussed it and know what to do is matter of the political will go ahead and implement them. 

[Raj Kumar ]
Thank you. And I just want to turn to Franziska, if I can, to close out our conversation today, because we have heard a lot about the challenges. Rightly, we focused a lot on them, but it does seem that there is an opportunity, and Anantha talked about it in India, where you can reduce the informality that Dushni just described through digital. Mustafizur talked about through digital you can increase maybe revenue collection, that there is this green transition which could create new opportunities for investment. And you talked about, Franziska, new savings that firms can use to invest in growth and new jobs. So it does seem like with all the challenges there is a path forward where the green transition could be a benefit. Maybe you can just describe that a little more as we close out our conversation this morning. 

[Franziska Ohnsorge ]
Yeah. Thank you. It could indeed. And there are things that even cash-strapped governments can do. So we elaborate some of these in the report. And really, there are four elements of this. One is market-based regulation. We've reviewed every study we could find into a literature review. Really, regulation works, especially if it's market-based. It's not market-based, it has a side effects, it causes economic pain. But if it's market-based, if it sets a price on emissions or on pollution, it tends to work without the pain. Second is access to finance. Firms always complain about it. There's more and more evidence that giving firms access to finance, 

[they ]
actually invest it in new technologies that improve productivity and efficiency. Third is just a reliable power grid. If you don't give firms a reliable power grid, they're not going to get rid of those generators that are dirty and energy inefficient, big one. And fourth is something that brings me back to what Mustafizur said. How can you get these firms to adopt these technologies? And there we've done a beautiful experiment in Bangladesh in the textile, leather textile industry actually, that shows if you just install a meter and a better motor, in a few firms, not all of them, just a few firms, firms caught on very quickly to technologies that are useful. So you see the energy savings 80% in our experiment when firms only expected 30%. And you see all of the firms, not just the ones who got the motor under the meter, all of the firms start adopting, within three months they start adopting this new technology because word spreads. When there's a new technology that works that's worth the cost, word spreads and new technologies will be adopted. So those are the kinds of opportunities that need to be facilitated by governments. 

[Raj Kumar ]
Yeah, that's fantastic. Thank you for ending us on a positive note of what's possible. And in the same way words spreads there, I think word is spreading about South Asia and its growth story. And the key question that you and this report, Franziska, this important report highlight for the world is can that growth continue? Will this be a story we're talking about a decade from now or will it be a short blip in economic history? And the difference between those two stories is really whether or not the ideas that were brought up in this panel conversation today come to fruition. There are huge opportunities, but huge challenges too. So I recommend the report to anyone who's interested in this theme. I think it will really outline a lot of what you've heard today in greater depth. And if you want to join the discussion, there's a conversation happening on Twitter or X, you can go to the hashtag #SouthAsiaDevelopment to learn a bit more. It's been a real pleasure to be with all of you. These are topics we at Devex are covering all the time, and so we appreciate the chance to be with all of you today. Thank you to my panelists. Thank you for everyone for joining the conversation. 

[Mustafizur Rahman ]
Thank you, Raj. Thank you, Franziska. Thank you, Dushni. 

[Franziska Ohnsorge ]
Thank you. 

[Raj Kumar ]
Thanks, everyone. 

[Mustafizur Rahman ]
Thank you.