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[Music] more than in other emerging markets and developing economies South Asia's growth relies on the public sector private investment is really weak private investment is weak in two Dimensions first it's weak because growth has slow well below the pre-pandemic averages and then so that's sort of a post-pandemic factor but then there's also a longer structural issue the the ratio of private investment to GDP in South Asia is much less than it is in other emerging markets and development

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economies and has always been has been for a decade now so there is a structural weakness in private investment as the world bank's Chief Economist for South Asia francisa onar has been responsible for leading research programs on key economic issues in South Asia alongside informing policy debates and World Bank lending before holding this position she was the manager at the development economics vice presidency for the bank where she spare headed the flagship Global economics Prospect report prior

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to joining the World Bank Francisca onar worked in the office of Chief Economist to the European bank for reconstruction and development and at the IMF with a PhD from the University of Toronto francisca's research which has been featured in both peerreview journals and policy Publications has covered a wide range of topics relating to International macro economics and finance including debt and financial crisis inflation and monetary policy growth and informal labor markets her work has been widely cited by

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Publications like the e Economist The Wall Street Journal and the financial times she joins us today on our latest episode of advoca conversations Franchesca onzaga welcome for advocat conversation thank you very much pleasure to be here for the benefit of uh audience why don't we start first with a little bit about your story thank you very much it's a pleasure to be here um I am the chief Economist for South Asia at the World Bank for the last year and before that I was for 10 15 years at the IMF and a

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couple of years at the European bank for reconstruction development in London as well so I've worked on a large range of countries but this is my first time I'm working on South Asia and what has brought you to Sri Lanka we are launching the south Asia development up upd dat uh which is the semiannual report that the World Bank produces on the growth Outlook of the region but also on whatever topics are currently occupying policy makers that policy makers are currently struggling with and

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this year's report what is the focus on so this year's report focuses on two things first is climate adaptation this region is very vulnerable to climate and at the same time as everyone Sri Lanka knows governments are strained so climate adaptation really has to be done by the private sector we have a piece that deliberately looks at how the CL private sector can adapt to climate change and the second big topic and I know that's been a challenge for Sri Lanka as well is job how to create

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job what's wrong with the job market why aren't there more jobs why aren't why isn't a large number larger number of people employed and in your in your report in table in chapter one uh you have titled it deceptive strength why so yes on the face of it south Asia is the fastest growing emerging markeet and developing economy so we're expecting growth of six and 6.1% this year 24 and 25 next year but that is mainly because of strong growth in India it's India that is growing very

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fast and that's even surprised on the upside last year many because of of an strong investment but that appears to have been largely due to strong public investment the other countries in the region are actually growing at somewhere around four and a quarter per. and that is kind of in line with other emerging markets and developing economies and the reason the rest of the region is lagging behind is that they're still struggling to emerge from these recessions last year three countries in the region are

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among that one quarter of emerging markets in development economies that were financially stressed in some form or other in the last year or two so they either rated C by moodies or they're rated as in or near debt distress by the the World Bank L DSA that sustainability analysis so those countries are still struggling to emerge from these recessions because the debt has not been fully resolved the government debt is is being resolved but the process has not been completed and also in several

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countries the policies that were put in place to address these balance of payment pressures in the last couple of years are themselves Weighing on growth so for the last uh either last year or the previous year a lot of policy steps have been taken to restrict Imports for example in several countries now these have been Unwound or partially Unwound but it still takes a little bit of time for economic activity to to really pick up after the sunline so the growth that you said in India is extremely strong is that a cyclical

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factor that they had low growth during covid and it's catch up or there are certain structural changes that are driving the gr um there is so we assume that that strong growth is going to normalize this year so last year was very strong around 70% this year we expect something around 6 and a half% because we expect last year's boost to unwind the it's especially one quarter the third quarter of their fiscal year that was very very strong and that will unwind us investment normalizes that

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quarter was really mainly driven by investment and even government services growth was stronger than expected stronger than the rest of the economy so a lot of that boost last year seems to have reflected in some formal other government activity and that is some a reflection of the broader region as well well more than in other emerging markets and developing economies South Asia's growth relies on the public sector private investment is really weak private investment is weak in two Dimensions

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first it's weak because growth has slowed well below the pre-pandemic averages and then so that's sort of a post-pandemic factor but then there's also a longer structural issue coming back to your question along a structural issue about private investment weakness there the ratio of private investment to GDP in South Asia is much less than it is in other emerging markets and developing economies and has always been has been for for a decade now so there is a structural weakness in private

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invest now India dominates South Asia your size do you think there's a growth spower to the other countries from India's growth so that's a good question it's true that India is 3/4 of GDP and 3/4 of population so it it dominates any aggregate you prepare are there spillovers we haven't looked at it in this specific report but in 2016 we tried to estimate that for South Asia and for other emerging market and developing economy region it turned out at the time that there actually very

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very few emerging markets in developing economies that do have spillovers so China is an obvious one Russia has some spillover used to have some spill overs that was 2016 to it's the the old well kind former Soviet Union countries in Eastern Europe India did not have spill overs to the other countries in the region and in fact this region is particularly low on intra regional trade So within South Asia but it's not just intra regional trade the region is also exceptionally low on trade First St so

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what since you are in Sri Lanka one of our Ambitions is somehow to link into the whole Indian growth story especially in South India and the only direct benefit we are seeing is in tourism obviously there are lots of Indians with lot of disposable income who can travel and on the port sector because we have perhaps it's always said colbo is India's largest port uh but in other ways there has been limited benefit to us now uh you talk about the private investment uh and in your report there

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was a box on uh private investment acceleration um can you shed further light on uh what you found out in terms of what you meant by private investment acceleration what were the findings and what was the Nexus between public investment and private investment so it's that private investment weakness that that inspired us and to look at private investment accelerations it seems that so what is a private investment acceleration it's a sustained period of at least six years where private investment to GDP private

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investment per capita growth Rises strongly so by the end of that sustained period private investment per capita is higher than above investment tend to be very volatile so we're trying to remove the episodes where it's where it's just a a dip after recession and then a strong rebound we're deliberately looking at extended periods of time and we find that these Peri these periods when you have at least six years of sustained private investment acceleration these are transformation

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it's not just private investment so acceleration means more than 4% growth a year right yes exactly more than 4% growth a year on average over the six years and then by the end of it a private investment cap is higher than was at the beginning to make sure we smooth out these dips this volatility in private investment but the the the incredible thing is that it's not just about private investment they are transformational they really come with everything else that is good they come with poverty reduction per capita income

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growth they come with public investment improvements they come with they just come with a good economic time and that's what then made look at the conditions that need to be in place for these acceleration periods to start what kicks them off what what what what has to be right for private investment accelerations to to take off like lift off if you think of a plane so um so what were some of the causal factors I mean you speak about certain structural changes or reforms that catalyze this can you elaborate a

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little bit more yes exactly so the causal causality is always difficult in in our line of business but we can tell you what the preconditions were that made it more likely these private investment accelerations there's three in particular one is um trade open just trade and capital floor openers openers to the world um the second is good institutions an improvement in institutions and the third is a well aligned exchange rate and the exchange is not overvalued so the two that are really relevant for most of the region

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not just small pockets of the region are trade openers and capital flow openers and good institutions so what we estimate is that for example um so the the the Improvement take take trade openness for example the the the Improvement in trade has been on the order of about 5 percentage points of GDP over the last decade or so that's Compares with 12 percentage points elsewhere so it's much less in this region elsewhere if South Asia had improved its trade as much all the way up to the emde average the Emerging

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Market in developing economy average the probability of sparking such an investment episode would have been nearly one half higher now in 2000 was it 2009 I think the world development report uh focused on economic geography uh and there was some on even Sri Lanka Etc so now many countries in South Asia have to urbanize significantly urbanize I'm assuming that that whole urbanization Trend will be captured in private investment growth uh like what happened in China where there was a mass movement of

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people from the rural to the urban areas um do you think that South Asia there is a stronger Trend towards urbanization actually South Asia Falls well behind other emerging markets in developing economy I don't remember the exact numbers but urbanization rates in South Asia are well below doors elsewhere and this may be one reason why climate adaptation and non-agricultural job creation maybe so much lower in South Asia than elsewhere so what what is the Nexus between public investment and private investment are they

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complimentary so that depends on the circumstances we have estimated in the past not in this particular Edition but in the past we have estimated that the that there is a spillover from the public sector to the private sector from P public investment to private investment but there's a catch it depends a bit on this uh spending on how it's financed if there spending is very large and if a lot of it is financed by the government through I mean really uh through the government absorbing a lot of the

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private credit then that will be crowding out the private sector private bank credit for example for we estimated in the last Edition that the the share of in those countries where government debt is more than half no is more than is more where government debt is financed by the private sector more than the than in the media on emerging market and developing economy Bank credit to the private sector which presumably mostly goes to private investment or at least we hope it goes there Bank credit to Pro the

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private sector is about six percentage points of total Bank claims less so if a lot of the government debt is financed by domestic Banks it can crowd out private in investment just as a point of reference in Sri Lanka I mean that ratio is more than 50% the state owned Enterprise and the government Bank credit is more than 50% because there was so much of credit growth happened so now India is also going through a massive public investment Bove and yet they are running very large deficit so is the big public

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investment uh driving GDP uh we think so but anecdotally we think so but the the last data point that was published was for 2021 so it's very hard to tell whether the recent growth was driven by public investment but anecdotally it appears what what we know for sure is that public that investment growth as a whole was very strong last especially last quarter the last fiscal quarter of uh the third fiscal quarter of the Indian fiscal year and anecdotally it appears that a lot of this was driven by a public investment

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in infrastructure but of course that is textbook development in many ways this is the public infrastructure is meant to be one of the the foundations of development we haven't quite seen the spill over to strong private investment yet we're hoping it it'll come but for now public investment has definitely supported grow as a visitor India I mean you can see that physically when you go um so your your your report also talks about climate change um and I believe some previous analysis said that South Asia is very

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vulnerable to climate change in fact actually Sri Lanka was one of the countries most vulnerable climate change uh can you talk a little bit about the distributional impact of climate change yeah climate change is really a big problem for this particular region so just to give you two factoids one is this South Asia is the region that is most vulnerable to climate change by the Notre Dam University's vulnerability index the second is on average 60 million people per year on average are hurt by some sort of climate shock over

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the last 10 years that a lot of people and it's not always every year the same 60 million people it moves around so it's actually a lot more people affected by it this is a largest of any emerging market and developing economy region so climate change is a big problem does it hurt does it have asymmetric distributional impacts yes or no so we haven't done the analysis for South Asia yet but uh in preparation for this analysis that we'll feature in the next report we have looked at the literature we have

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identified every study we could find on the distributional impact of climate change distribution of asymmetry in the impact of climate change so that covers I think it was 66 countries and 12 cross country studies it's really a good reflection of the world and it there two ways in which the poor might be more affected than more affluent households one could be that the poor live in places where they're just getting hit more frequently they're more exposed and the other way could be that the poor

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don't have the assets to adjust so if they hit they're hurt more it turns out in both instances it's not always but the majority of the time the poor are worse off so for example in two-thirds of the the studies that we've reviewed we found that the poor are more exposed to climate shocks and that is tends to be especially a case for floods they seem to be living closer to rivers or or especially closer to Rivers so they seem to be hit more by floods whereas the heat wave is something that

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affects everyone the second where the evidence is much clearer is on being hurt by climate shock there really the overwhelming evidence is that the poor are more hurt by climate shocks than more affluent households because they can't they can't prepare they don't have the the the means to prepare and once the shock hit they don't have the means to adjust and recover so they they tend to have lasting damage from climate shocks so Sri Lanka also has had its fair share of weather event and

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invariably it is the poor that suffers the most may have been of course the tsunami was a outlier but it was those people who live close to the beach because they were fisherman there are people who live on unstable land because it's cheaper more accessible and then susceptible to to land slip uh so what can what are the type of policies that governments can put in place to give uh protection to the bder yeah this is the critical question if the governments have no money if they're fiscally

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constrained how will climate adaptation happen it'll have to happen by households farmers and firms so again we've done this we've taken 5,000 studies and Whitt them down to 300 plus studies to really do a a canvas the word everything has ever been written about how hosel farms and Fir farmers and firms adapt to climate change and it turns out where two things that really stand out first firms are much better at it than households and Farmers so firms can offset about three quarters of the

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climate damage households and Farmers somewhere between a third and half but the second thing that stands out is the typ typ of strategy they use for climate adaptation so firms are good at better not perfect but better at climate adaptation because they can ad they can adopt Technologies and like cooling Technologies and things like that and they have access to those and that is quite effective households and Farmers they have to adapt well if the government doesn't help them they have to adapt through

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Labor markets they have to move into non-farm non-agricultural activities but it turns out that that's an very inefficient way of adjusting to climate change government policy is still the most efficient way it really helps the households and farmers and the way it helps is in old-fashioned development it's not even the climate resilient kind of development it's the old-fashioned development it's simply having two Bridges so one of them floods and then you have the other one where

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you can still get to markets and and places and work or it's having a piped water oldfashioned piped water that works even if there's a flood and it's not all contaminated or uh the local Clinic that reduces child mortality when you have a heat wave so it's the old-fashioned development that really households need to adapt to climate change because the alternative strategy is moving into non-agricultural activities and that our jobs work shows is very hard in South Asia in fact U the world Banks uh

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systematic country Diagnostic in 2015 one of the lowest hanging fruits in Sri Lanka was investment of about $100 million in uh building new irrigation tanks right and refurbishing old tanks exactly uh but unfortunately our governments never did it but the multiplier benefit from that outweighed any investment in any other infrastructure and I remember reading it 9 years go so that's oldfashioned stuff but more pronounced during climate change exactly exactly that's a great example actually have to remember that

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um so moving on to chapter 2 um you have titled it jobless development explain yes so is actually I think this this is the perfect topic to look at for South Asia so when you think of development you usually think of structural transform economic activity and employment everything shifts from agriculture into non-agriculture and that's the process that's broken in the region it seems at least in some countries in the region the majority of countries in the region so you need two wheels for that process

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you need the agriculture to shrink and you need non-agriculture and to expand and absorb all this labor that's coming out of Agriculture no this is the the the miracle of China's development this is the urbanization you spoke about that everyone moves out of Agriculture and then finds jobs in these vibrant Urban economy but that bit is missing so the the agricultural wheel is turning just fine so the the region the agricultural sectors across the region are shedding labor just like everywhere else there's

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nothing special about South Asia that's working just fine it's that other wheel that's stuck it's a non-agricultural sector it's there that we don't see employment picking up as much as we see it elsewhere so um The Gap so first now uh currently in the latest data agric the non-agricultural sector employs about 34% of the working age population in South Asia as a whole compared to 51% in other emerging markets and developing economies there's a big gap now the Gap has always been there but

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for the last ever since 2000 actually for the last 22 years that Gap has always been there non-agriculture has always been weak but it's in the last 20 years that this Gap has widened and now it's really a gap of 17 percentage point in non-agricultural employment not happening at least happening less than in other emerging markets and developing economy and the next step is then of course to ask why no and that's what we did then in the in the that was the bulk of the analysis of that chapter

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now we know that South Asia has a relatively young population uh but in your report uh you talk about the employment ratio um what exactly is that and what are the trend yes that's really that's a very important question because this there the region differs from the other this is one of the two reasion where the working age population is still growing so if we had written this report about another region we could have just looked at employment growth or employment Aggregates but because and that's all

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that would have mattered because the working age population isn't growing so fast but in South Asia it's still growing very rapidly on the order of 1 and a half% per year so the policy makers problem is not just to create employment but to create enough employment enough to absorb the working age population and that's what's captured with this employment ratio it measures employment relative to the working age population and that's the ratio I spoke about this is what is really low in South Asia so we you know

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earlier part of the year we had this investment U uh Observer called RI Sharma he visited Sri Lanka also he's bought out a book and he he talks about the growth in the working age population as a filter of where to invest Sri Lanka does not fit that because our demographic dividend was before we didn't really exploit it and our median age is 34 while South Asia is maybe between 24 and 27 so the trend what I understood was that uh on any one year there is about 19 million people who are increasing in

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the working age but only 10 million jobs are being created so the unemployment rate basically uh should be increasing uh so not quite not quite because of women right yeah it's a so a large share large share of women simply is not interested in the work or is not engaged in the labor force at all so they you wouldn't see them in unemployed either they're just not economically active in the official or in the labor force they're not captured in labor force so the unemployment rates doesn't

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necessarily have to be very high it's that they're not even in the statistic and that is that is another so the region stands out in two ways one is this non-agricultural employment ratio but the other is women's employment ratio and there all countries except I believe Nepal rank in the bottom quartile of other emerging markets and developing economies in the share of women of working age that are employed that is a weakness across the region yeah women's employment ratios are just very low well

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below the emerging market and develop eony a so that drives on the Aggregates as well so when I uh had a similar conversation with your colleague morito uh we talked about why this was so low now in Sri Lanka the female labor participation rate is only 35% and I believe some of the other South Asian countries like Pakistan is even lower Bangladesh a bit higher because of the large parel sector why why do you think I mean and as a comparison East Asia has very very different Dynamics so we are all Asians

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but different very different uh what why do you think this is a very South Asian thing what do you think is the reason so that that's a million dollar question could be demand could be Supply you know so that's where where the two the debate usually goes on the supply side is so Norms that prevent people women from working and discourage men from hiring them or discourage husbands from letting their wives work so that's a supply side issue and could be another supply side issue could be education very low education it

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could be that uh safe transport is not available the number of supply side things and the World Bank is working on these as well and then there's the demand side the there are just not enough jobs so if so in agriculture aot lot of women are employed in agriculture and in non-agriculture there just very few jobs for both men and women much fewer than elsewhere so it's it's a bit it's it's a combination of factors that we look at in much more detail in our forthcoming October update and it'll

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actually be morito who will be leading this one uh just to give you some context uh we have as a think te look at the Lanka's label law which they want to change also and there are Provisions there that women can't work for example after 9:00 right and uh but one positive benefit that has happened in Sri Lanka is that women now ride motorcycle so if you go to the rural areas it was never there because of the scooter and uh it's much easier for them to ride a scooter than a motorcycle so

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perhaps that getting safely to work and getting back and you see that in Vietnam which I believe has a very high female labor part participation everybody is on M yeah yeah that could be yeah yeah the thing is that the labor laws across the region the the restrictions yes they're there but they're not the worst I mean with some exceptions in the region no I mean they they very restrictive but in most countries in South Asia they're kind of below the average but not in the worst quarti the issue seems to be in

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many cases not just the law but the implement mation of the law the enforcement of the law so that's something we want to look at a bit more closely um you know you also interestingly talk about uh productivity and the firm size now there was an establishment survey done in Sri Lanka in 2012 or 13 and we have large number of micro Enterprise I believe from the establishment survey 91% or 92% surveyed by microenterprises which had less than four people four or less than 4 people but at the same time uh

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you know what your report is showing is that the small Enterprises and the micro Enterprise actually a productivity um and but the politicians romanticize MSM that we have to so how do you solve this pandrum that the evidence shows that you know the small Enterprises basically seldom become largepr but the policy because of maybe social policies that it tries to support the lower productivity small guys because there are many more of them and opposed a highly productive Enterprise you have any view on this

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yeah you know this came up in our jobs factor it's jobs chapter this this is something that seems to be really different in the region and significantly related with lack of job creation in a non-agricultural sector yeah because our whole emphasis is on the non-agricultural sector employment creation the the the lower the firm size the smaller the employment Creation in the non-agricultural sector so and that is something where the region really stands out most countries in the region have again they

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have firm sizes that are in the bottom quartile of emerging markets and developing economy and it's it seems to be partly the what you're describing so size dependent policies policies that really favor small firms over large firms so all sorts of regulations that kick in at a certain employment level that's perhaps a little low so that could be labor laws that could be product Market laws but the other restriction that seems to be the other constraint in the region that seems to be especially

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biting for the mediumsized firms is land just land markets the inefficiency of land markets the the difficulty firms have midsize firms have large te large firms seem fine but midsize firms seem to have great difficulty as getting the land to grow so product land and labor markets are considerably more challenging for firms to navigate in South Asia than other emerging markets and developing economies but the other aspects to this may just be the lack of competition and one way to get competition is just opening opening to

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trade and the reason we spoke about this now the region is very very low in its trade to GDP ratio that is a way of inviting in competition and and making sure the least productive firms fold and move their their workers move to more productive firms is good for the workers their wages grow is good for the economy aggregate productivity Rises it's good for everyone if the smallest firms can be folded into larger ones so you have a more productive use of all the of all the factors of product Capital labor

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land so uh there was a think tank effort in Sri Lanka headed by the center for International Development at the Kennedy School by regard house and they did their grow diagnostic framework in straight up M to identify binding constraints that is holding back uh investment into export oriented industry land was one of the key binding concern good I'm glad to hear that 82% of the land in Sri Lanka is owned by the government B yeah uh so we had issues with the titling system we have something called Bim aware which is

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going away from the deed system so it is well understood but it was not executed in fact the MCC Millennium challenge Corporation was going to give us money uh to improve the whole land market but unfortunately our president decided not to take the $480 million that was grant money um my final question is that you know as an economist many of your your findings are logical uh but then the politics uh is something completely different um so what why is there such a big disconnect you think between the

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politics and what the economist Sayes you have any view on that so even take for example open to trade I mean all all many economies although disputing whether you should open too early the world seems to be going the other way yeah currently there is a lot of effort especially on large Advanced countries to engage in industrial policy which is fine for large Advanced countries that have very that have they can sustain higher debt ratios you can afford it in a way it's a very different matter for

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emerging markets and developing economies that struggle to finance these kinds of industrial policy so they for actually much more efficient recipe for success for emerging markets and developing economies is to just thrive on other people's economic dynamism through trade for example what you're saying though about the economics and politics is not specific to the region I think it was Juna who said that we all know what needs to be done we just don't know how to be reelected after we we've done it

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so this is this is a a perennial problem but the the I think a lot of countries in the region are now at a juncture where it actually makes more sense than ever to implement these well-known reforms because all of them are struggling with growth all of them have to fix their a lot of them have to fix their fiscal position they this is the moment where it there is good outside pressure there is very little room to to avoid the outside pressure to implement all these reforms so now now is the moment

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never waste a good crisis now is the moment that is more so in Sri Lanka because it's the crisis of many generations and this is the real critical juncture that we could go on a different path so on that note uh thank you very much francisa to be on the advocat conversation and uh we will be attaching your report basically to a YouTube video and I always wish that at least 100 people in Sri Lanka read your report thank you very much wonderful and download it thank you [Music]