Loading...

Drivers of economic growth in South Asian

| Updated: October 19, 2017 11:29:56


Drivers of economic growth in South Asian

In recent years, South Asia has become the fastest growing region in the world. According to the Asian Development Bank's Outlook of 2017, the impressive growth performance of South Asia is, in fact, expected to drive economic growth for overall Asia in the coming years.  
Now, what are the factors driving economic growth in South Asian countries? This article analyses the pattern and trend of growth of five South Asian countries namely Bangladesh, India, Nepal, Pakistan and Sri Lanka and explores the major drivers of economic growth for these countries. 
To keep uniformity, we have used time series data for the selected countries for the period of 1980-2015. The data are collected from World Development Indicators (WDI) and Penn World Table (PWT) version 9. We have analysed the factors of growth using the neo-classical growth framework. In the econometric model, instead of looking at the growth of GDP, we have focused on the growth of GDP per effective labour which is basically real GDP divided by human capital adjusted labour (human capital multiplied by labour). The rationale behind using growth of GDP per effective labour instead of growth of GDP is that, while the former inherently captures the dynamics of growth in GDP, population and human capital altogether, the later only focuses on growth in real GDP. High growth of GDP per effective labour inherently indicates a high GDP growth, however, the converse may not be true. In our econometric analyses, real GDP per effective labour is considered as the dependent variable and capital stock per effective labour (capital stock divided by human capital adjusted labor), CPI, export, remittances, FDI, financial development and money supply are used as independent variables. Financial development is measured by the domestic credit to private sector. All the variables are transformed into log form. The long-run and short-run relationships between real GDP per effective labour and its determinants have been analysed using Engle-Granger cointegration technique. The order of integration has been tested using the ADF test and the Phillips-Perron test. The results show that all the variables for each country are I(1) except capital stock per effective labour for India. However, analysing the correlogram of this variable, we have considered it to be I(1). 
The five graphs on trends and patterns of growth for South Asian countries suggest that while Bangladesh, India and Sri Lanka experienced an upward trend of growth during the last three decades, Pakistan experienced a downward trend. Nepal, on the other hand, experienced a stagnant and low growth trend. It is also clear that among these five countries Bangladesh experienced the least volatility in growth rates around the trend. During 2011 and 2015, the average growth rates in Bangladesh, India, Nepal, Pakistan and Sri Lanka were 6.3 per cent, 6.8 per cent, 4.2 [er cent, 4 per cent and 6.1 per cent respectively. Drivers of growth have been estimated using time series regression for each country following the Engle-Granger cointegration technique. 
As theories suggest, capital accumulation stands out as an important factor of growth for each of these countries. The regression results suggest that the long-run elasticity of real GDP per effective labour with respect to capital stock per effective labour is 0.52 for Bangladesh while the elasticities are 0.63, 0.29, 0.90 and 1.06 for India, Nepal, Pakistan and Sri Lanka respectively. 
Moreover, the long-run cointegration equation for each country shows that export and remittance are the major drivers of growth in South Asia. Export has a positive and significant impact on real GDP per effective labour for each country except Nepal. In the long-run, one per cent increase in export in Bangladesh leads to 0.07 per cent increase in real GDP per effective labour whereas it increases by 0.04 per cent in India, 0.16 per cent in Pakistan and 0.12 per cent in Sri Lanka. 
As already mentioned, remittances play a positive and significant role in the growth of real GDP per effective labor for Bangladesh, India, Nepal, and Pakistan whereas its impact appears to be insignificant for Sri Lanka. One per cent increase in remittance leads to increase in real GDP per effective labour by 0.05 per cent in Bangladesh, 0.09 per cent in India, 0.06 per cent in Nepal and 0.04 per cent in Pakistan. While FDI stands out as another key variable for attaining a higher growth rate of real GDP per effective labour for India and Pakistan, its impact on other countries is not significant meaning that FDI inflow is yet to work as a growth driver for those countries.
 The elasticity of real GDP per effective labour to FDI is 0.008 for India and 0.014 for Pakistan. Financial development has a positive and significant impact on real GDP per effective labour in India and Nepal, however, it appears to be insignificant for other countries. One per cent rise in domestic credit to private sector increases real GDP per effective labour by 0.05 per cent in India and 0.09 per cent in Nepal. 
Inflation, measured by CPI, has a negative and significant effect on real GDP per effective labour in Bangladesh and Nepal, whereas it appears to have an insignificant effect in India, Pakistan, and Sri Lanka. In the long-run, one per cent increase in CPI decreases real GDP per effective labour by 0.14 per cent in Bangladesh and 0.15 per cent in Nepal. Money supply does not appear to have any significant effect on the long-run growth in five South Asian countries. 
Error correction models (ECM) of the long-run cointegrating relationships have been estimated for each of these countries. The estimated coefficients of the error correction terms are negative, less than one in absolute value and statistically significant for each country. This implies that real GDP per effective labour may deviate from the long-run equilibrium, however, the deviation is being adjusted each year. This deviation from the long-run equilibrium is being corrected each year by 40 per c ent in Bangladesh, 44 per cent in India, 84 per cent in Nepal, 75 per cent in Pakistan and 34 per cent in Sri Lanka. 
The article thus draws some important policy directions for the selected South Asian countries. For further growth acceleration and sustaining high growth rates, the South Asian countries need to investment quite significantly on the improvement in human capital. Also, these countries need to foster their exports further through export diversification policies, and in this context, access to finance at lower costs along with better infrastructures and better quality institutions are important. Also, the role of remittances could be magnified if steps such as improving the quality of migrant labourers through training and education and reducing the cost of migration and remittance are taken. Finally, the role of FDI as a driver of growth needs to be critically explored and required promotional measures need to be taken in most of the South Asian countries in the coming days.
Dr. Selim Raihan. Executive Director, SANEM. [email protected]
Md. Jillur Rahman. Research Associate, [email protected]
Mahtab Uddin. Lecturer, Dept. of Economics, DU. [email protected]

Share if you like

Filter By Topic