New Economic Regime for South Asia in the Post COVID-19 Era

Written By: Manmohan Parkash
Flags of participating countries for the 14th SAARC Summit at the central vista in New Delhi. Photo: V.V.Krishnan

Since the identification of the initial cases in late 2019, the outbreak of the coronavirus disease (COVID-19) has been spreading  across the globe. Followed by the initial spread in Northeastern Asia, COVID-19 spread rapidly in Europe, the Americas, and later in the remaining areas including South Asia, leaving no region free from the threat of the virus. As of 15 August 2020, more than 21 million cases were reported globally with about 755,000 deaths.[i] In South Asia,[ii] More than 3.1 million cases are reported with about 60,000 death. Some of the countries, which had been hit relatively in early-stage and managed the outbreak with a well-functioning health system, have successfully contained the outbreak while COVID-19 is still rapidly spreading in some other countries. South Asia was considered relatively safe from the threat even after the detection of the first cases in the countries. For example, after the first case was detected on 30 January 2020 in India and 8 March 2020 in Bangladesh, the number remained low for about one to two months in these countries. However, since then the number has increased rapidly, recording more than 2.5 million cases in India and 270,000 cases in Bangladesh as of 15 August 2020.

The ongoing pandemic is not merely a threat to the health system. The associated containment measures such as full or partial lockdowns of the countries with restrictions on the movement of people and goods within and across border have caused substantial economic and social cost through various channels. The supply chain disruptions have slowed international trade, putting many developing economies at risk, which are dependent on the export of manufacturing goods and import of intermediary goods. Domestic containment measures stalled economic activities, forcing many factories and offices to shut down during the lockdowns. As a result, domestic consumption and investment declined, which have been further worsened by the social distancing measures and fear. Travel bans, closure of the borders, and precautionary behaviour drastically reduced the travel demand, placing the entire aviation industry and tourism sector in an unprecedented crisis.

All these led to a global recession, accompanied by a huge amount of job losses. The Asian Development Bank (ADB) projects 0.1% of real GDP growth rate in 2020, compared with the 5.1% growth in 2019, for developing Asia while the major advanced economies of United States, Euro area, and Japan in the aggregate are expected to contract by 5.1%.[iii] An estimate by the International Labour Organization indicates that working-hour losses have worsened during the first half of 2020, especially in developing countries. Compared to the fourth quarter of 2019, working-hour losses for the first quarter of 2020 reached to 5.4% of global working hours, equivalent to 155 million full- time jobs, which has further worsened in the second quarter of 2020 to the loss of 14.0%, equivalent to 400 million full-time jobs, i.e., soaring unemployment rates.[iv] This will reverse the trend of the poverty reduction in the developing countries, pushing back many millions into poverty, wiping away the gains made in the last few decades.

This unprecedented pandemic and its impacts are changing the global landscape in social and economic activities. There will be a new norm in post-COVID-19 era in the movement of people and goods, social life, and economic activities. Certain areas will fall into decline under the rapidly changing environment while some will emerge to meet people’s new needs. The current situation, in that sense, is a challenge, at the same time opportunity. South Asia is not an exception to this and to continue its economic growth and social development as in the past decades, countries should quickly adapt to the new norm. This article intends to offer some thoughts on how the world would change and how to prepare the post- COVID-19 period for South Asian countries.

Development strategy with a stronger emphasis on the health sector

There exist large varieties in economical sizes and structure among South Asian countries from some of the world’s smallest economies like Bhutan and Maldives and the world’s fifth-largest economy of India by nominal GDP. Bhutan and Nepal as landlocked economies and Maldives as a small island developing State face challenges like limited resources, remoteness, and vulnerability to natural hazards and external shocks. Countries like India and Bangladesh are benefiting from its young and plentiful labour force and are well placed for globalization and linkage to the global value chain. Regardless of the varying economic characteris-tics, all the countries in South Asia are under development path as low-income or middle-income countries. Guided by the well-structured and targeted national strategies and plans, and benefited by the vibrant young population, South Asian countries have been successful in achieving robust economic growth in recent years and the region is now the fastest-growing in the world.

The success of economic growth in South Asia was anchored by the infrastructure development and export-oriented growth strategy of which the effectiveness was proven by other countries in Asia like Japan, Republic of Korea, and the People’s Republic of China. It is still believed such a strategy would be effective considering the abundance of the labour force and demographic dividend in the region. However, the pandemic has revealed the importance of the health systems, which had received relatively low attention in the course of development. The pandemic indicates that a well- established health system directly contributes to economic resilience and countries with well- functioning health systems have showed the possibility of quick and robust economic recovery. The governments recognized the importance of the health infrastructure and allocated a significant portion of the relief packages to the health sector. In South Asia, the allocation on health is slightly higher at 0.6% of GDP than the average allocation of 0.5% of GDP in the packages announced by G20 countries. National budgets and development plans are also expected to put a stronger emphasis on the development of the health sector in the coming years. For example, the national budget of Bangladesh for the fiscal year 2021, announced in June 2020, allocated 7.2% of the total budget for the health sector, increased by 14% compared to the previous year. It is also expected that the Eighth Five Year Plan for Bangladesh would initiate significant reforms in the healthcare system. Under the new norm in the post-COVID-19 era, a more robust health system, including a well-functioning public health system, with widespread health insurance program, will be a critical factor that can reduce the uncertainty in similar events like the COVID-19 pandemic.

Social protection and social safety net

Social protection and social safety nets are critical for inclusive growth, protecting the poor and vulnerable from impacts of economic shocks, natural disasters, and other crises like the ongoing pandemic. It is estimated that about 36% of the very poor escaped extreme poverty because of social safety nets, including cash, in-kind transfers, social pensions, public works, and school feeding program. They also lower inequality and reduce the poverty gap.[v] The cascading impact of the health crisis to economic and social crisis during COVID-19 pandemic stresses the efficiency and effectiveness of the social protection and social safety net. In response to the urgency for basic needs of the poor and vulnerable, who lost their job and whose movement were restricted, countries expanded their existing social protection and safety net programs by adding additional beneficiaries and provided direct cash transfer and free or subsidized food. Due to the timely and immediate actions taken by the authorities, many of the poor and vulnerable were relieved from the stress for basic needs.

At the same time, the experiences during the pandemic also revealed the weakness in the existing programs in areas of efficiency, traceability, accountability, coverage, etc. There still exist vulnerable groups which are not well covered by the existing programs. For example, informal workers who occupy the majority of the labour force in urban areas of some South Asian countries are not fully covered by the existing programs or the relief package against the COVID-19 impact. Due to weak monitoring and tracing system, there exist chances for omissions of the potential beneficiaries or leakage to the unqualified citizens. Also, due to the weak financial status of the governments, all the qualified beneficiaries may not be covered in the respective program or the level of benefit may not be sufficient to cover the basic needs. The COVID-19 pandemic raised these aspects to the surface and provided the opportunity to revisit existing social protection and safety nets. The reforms in social protection and a social safety net should be towards more comprehensive coverage and immediate delivery to the targeted beneficiaries.

Agriculture sector productivity and economic resilience

While the share of agriculture sector in national economies of South Asian countries is not as high as the manufacturing and services sectors, it is still the largest labour employing sector in South Asia. For example, while the share of agriculture in the Indian economy is only about 14% of GDP, the employment share is about 49%. Similarly, with 13% of share in GDP, the agriculture sector employs about 40% of labour in Bangladesh. This means the sector is still labour-intensive in South Asia, unlike the capital-intensive agriculture in advanced economies. Due to such characteristics, the agriculture sector in South Asia has been severely affected by the COVID-19 pandemic. With the lockdowns and restrictions in movement, harvest activities were hampered due to the lack of seasonal migrant workers, and access to farm inputs like seeds and fertilizers became challenging. Disruption in the transport system caused challenges in the delivery of agricultural products to the consumers though governments allowed the movement of the agricultural products. In addition to the supply side disruption, limited mobility and reduced income due to prolonged lockdown and closure of the businesses disrupted the demand for food, resulting in food security greatly affected, and raising concern for the nutrition status of the poor and vulnerable.

The current experience under the pandemic further emphasizes the need for improved agricultural productivity and reforms in the agriculture sector in the region. For this, a comprehensive and holistic plan with actions for different time span should be established and implemented. In the short term, measures to mitigate the impact of COVID-19 should be implemented, especially for the small and micro- farming houses. First of all, the disrupted supply chain for agricultural labour and farm inputs should be restored with enough safety measures on the ground. Access to up-to-date information about the pandemic situation and market prices should be provided to the farmers with the support for access to the market. Groups farming in India is a good example which overcame the impact of the pandemic through information exchange among farmers, aggregated production and arrangement of transportation.[vi] Financial support to the farmers and agribusiness is also essential as a short-term measure to ensure the continuity in their business activities. It is a relief that several stimulus packages announced by the governments include support to the agriculture sector with loan guarantees, working capital finance, and refinancing schemes. International collaboration should be sought to ensure food security and stabilize food prices. ASEAN Plus Three Emergency Rice Reserve is an excellent example of international collaboration in strengthening food security, poverty alleviation and malnourishment eradication without distorting regular trade among its member economies.[vii] Countries in South Asia can establish a similar mechanism to enhance the food security and respond to emergency food shortage situation, utilizing existing frameworks such as SAARC, SASEC, or BIMSTEC.

COVID-19 pandemic is an excellent opportunity to further strengthen the medium to long-term actions with policy reforms that can ensure sustainable and resilient development in agriculture. Continued investment in agriculture infrastructure can enhance the competitiveness of the sector. In addition to investment in the traditional infrastructure, lessons from the pandemic urge the development of the strengthened logistics system, which can directly link the farmers and small agribusinessmen to the consumers, ensuring fair prices for the producers. Mechanization and automation in agriculture and agri-business is another area where medium to long-term intervention is required. This will not only improve productivity but also enhance the resilience to events like a pandemic. As such, the process is costly, especially for small-scale farming, innovative modalities can be considered like equipment leasing and sharing economy. Besides, investment in agricultural research and development, institutional and legislative reforms to support the new and innovative initiatives would contribute to the productivity increase and enhanced food security.

Urbanization and Urban Policy

The spread of COVID-19 pandemic has been severe in large cities due to high population density, large gathering, and the intensive movement of people. The urban sprawl caused by unplanned urbanization, insufficient water, sanitation and hygiene services, and lack of medical facilities has aggravated the impact of the pandemic. However, large cities drive economic growth as centres of production and consumption, employment generation, and innovation. The progress of urbanization is still at an early stage in South Asia, with only 34.4% of the total population living in urban areas, compared with the world average of 55.7% or 80.8% in OECD countries.[viii] Therefore, urbanization will continue to increase, given its critical role in economic development.

In preparation for the post-COVID-19 era, countries should revisit urbanization policies so that cities in South Asia can be livable, resilient, and smart. The governments should look at optimal population that cities can host, and adopt integrated and sustainable urban planning, facilities and utilities, and standards. Targeted investments in clean water, sanitation, public health, food supply, energy provision, and transportation networks, with better and innovative technologies and systems, will help optimize the economic activities. The development of peri-urban areas, satellite cities and urban renewal will lessen the burden of the megacities and diversify economic centres. A planning approach with broader consultations with different stakeholders can help control the urban sprawl and create a stronger coalition for change, thereby helping cities become a pillar of resilience.

Supply Chain and Logistics

Logistics industry facilitates global manu- facturing by connecting firms to markets through various services like multimodal transportation, freight forwarding, warehousing, and inventory management. Better logistics performance is positively related to the higher income, and it demonstrates the sector’s contribution to productivity and economic growth. Better efficiency in the logistics sector means higher competitiveness and potential for higher economic growth.[ix] The COVID-19 induced lockdown, restriction in movements, and travel bans have directly affected the supply chains and brought drastic changes in the logistics industry. The impact was not even on the different segments of the industry. The business-to-business logistics market was almost at a standstill with the disrupted supply chains. In the meantime, the business-to-consumer market has remarkably expanded as people opted for online shopping for the essentials. With the reopening of the economies, companies are diversifying their sources and relocating the supply chains closer to their business to avoid potential disruption in the future. The profile of the goods being delivered to consumers have changed and this segment of the logistics industry is expected to flourish in the post COVID-19 era.[x]

For South Asian countries, many of which set export-oriented strategy as a critical pillar for development, it is critical to catch the changing environment and adapt to new normal quickly. In the post-COVID-19 era, several changes in the supply chains and logistics are expected, which will also affect the manufacturing base in South Asian countries. The foremost changes would be shortened and diversified supply chains through nearshoring in regional level or domestically reshoring for companies to enhance the resilience to the external shocks like the pandemic. This may benefit countries with capable manufacturing sectors and favourable beneficial exports policies. As the least integrated region with intra-region trade at less than 5% of total trade, such development can be challenging as many of the main export products overlap among the countries. However, at the same time, this can promote the diversification of the products and services in different countries with enhanced regional cooperation. In the business-to-consumer market, the last mile logistics with e-commerce will be further expanded as we already observe during the lockdown periods in many parts of the world. The technology solutions like real-time tracking, smart locker, and use of robots and drone will further evolve, which make safe, convenient, and contactless delivery possible. These changes will be complicated, and the implications will be multifold, but for South Asia to remain the fastest-growing region, it will be critical to adapt to the changing environment and grab the opportunity quickly.

Role of Governments and Policy Recommendations

Those mentioned above will be only a part of the changes we will face in the post-COVID-19 era. This will affect all economic units— consumers, farmers, manufacturers, services providers, and the public sector. While all need to prepare for the new norm, the role of governments are especially crucial as the new norm should be directed to the sustainable, inclusive, and resilient economic growth path. A few points are listed here that the government should take in the changing world with policy recommendations.

The foremost and urgent role of the governments is to bring the disrupted economies by the COVID-19 pandemic back to normal. All governments in South Asia are implementing the stimulus and relief packages to mitigate the impact of COVID-19 and stimulate economic recovery. While the size and the contents of the packages vary depending on the economic structure and the impact on the economy, they commonly include measures for strengthening healthcare system, protecting the poor and the vulnerable, preserving employment, and supporting businesses, including micro, small and medium enterprises (MSMEs). Central banks in the region have also injected liquidity to financial markets to support business continuity and recovery. Properly implementing these measures as intended will be the first step for facilitating economic recovery in the short run. However, the economic recovery process will be longer than expected with the prolonged pandemic situation, and the new norm will prevail as discussed above. Therefore, while implementing the immediate stimulus and relief measures and preparing further policy actions for economic stimulus, the governments should acknowledge that the situation after COVID-19 will not be same as before and new norms should be taken into account. Accordingly, adjustment of the national strategies or reflecting the new norm in the new national strategies will be required.

Sound and prudent fiscal and monetary policies will be critical for governments to maintain political and economic stability in the coming years. Concerns exist in South Asian countries due to the worsening macroeconomic imbalances by COVID-19. National revenue will reduce due to the disruption in economic activities while the expenditure will increase to implement the stimulus and relief packages, debt level will increase due to significant borrowing, and non-performing loans are expected to soar. Therefore, the fiscal and monetary policies should be appropriately designed so that they can benefit the sectors that fit in the new norm after COVID-19. Enough liquidity should be provided to those sectors with proper regulatory reforms that can provide an enabling environment. Borrowings from international financial markets and multilateral development banks should be wisely planned so that the much-needed sectors can be adequately supported. Reforms in the financial sector will be critical to enhance the resilience of the economy.

The governments in South Asia should allocate more resources in public research and development (R&D) and promote private R&D. Governments need to be proactive in promoting and investing in R&D for the development of innovative systems. Otherwise, the R&D environment in South Asia will be further deteriorated by COVID-19. It is a well-known fact that investments in R&D are crucial for economic growth. Recognizing the importance of the R&D to recover from the pandemic swiftly, several governments in the world are strengthening their R&D capacity. For example, the UK government has declared plans to expand public R&D investment as a strategy to cope with the COVID-19 induced recession. South Asian countries should strengthen the R&D environment and invest in future technologies to realize their potentials, bring diversity in the economy, enhance resiliency, and adapt to the new norm in the post-COVID-19 era. Not only should there be an increased investment in R&D, math and science education should be accompanied to provide soil for future innovation.

Regional cooperation among South Asian countries and other regions will be critical to quickly recover from the economic downturn and prepare for the post-COVID-19 era. Regional cooperation has never been more important than the current time. In addition to overcoming the health crisis, countries can collaborate for enhanced food security, development of new supply chains, and political and economic stability. Wide range of difference in economic size and structure can enable us to find win-win solutions for the regional members. Potential for increased intra-region trade in South Asia should be actively sought with economic diversification in each country. Economic regions may be defined by economic resources such as raw materials, industry concentrations, labour markets, and available infrastructure. They can share talent, capital and technology across regions and national boundaries to drive one- another’s prosperity. South Asia is large enough to achieve a critical mass of companies, institutions, infrastructure, and talent. With almost a quarter of the world’s population living in the region, “act regionally, and compete globally” can help the region prosper.

Regions vary by relative strength from which regional specialization or comparative strengths can emerge. Recognizing the region’s strength and connecting with other regions for mutual benefit could help establish value chain and production networks that perform value-added activities and compete in the global marketplace. It can attract large employers, open up new opportunities for prosperity and raise their stakes for participation. The regions become a locus of economic development, with economic authority de- centralized to the region and region to region relationship fostering regional networks. In today’s world, global or regional value chain networks supplier and buyer are integral partners. Value chain and production networks weave together different specialized clusters, giving rise to a network of clusters. For seamless trade, facilitation measures should be taken, aligned to international standards. It is like envisioning South Asia as a network of the region each playing a different role in the value chain and creating a win-win outcome for each other, leading to shared prosperity. Discussions beyond the traditional areas can be brought to prepare the post-COVID-19 era collaboratively.

The ongoing and expected changes will render South Asia an opportunity to become a new growth engine for the global economy. To shorten and diversify supply chains, companies will look for alternative or additional manufacturing bases. South Asia, with almost a quarter of the world’s population, is an attractive location which can provide abundant and competitive labour forces. The region itself is also a vast market which is rapidly expanding with the increasing purchasing power of the people. In the course of reshaping supply chains, South Asia can seek an opportunity to upgrade its industry profile by attracting high

value-added industries. For this, human capital needs to be upgraded by strengthening skills, technical and vocational education and training, and higher education. The investments in human capital will not only result in higher wages for the citizens but also transform the economy into innovation and knowledge-driven economy.

The COVID-19 pandemic is still an ongoing crisis. Nobody knows when this crisis will be put to an end and how the new world will look like. However, the world is continuously changing bit by bit to cope with the COVID-19 and prepare for the new norm. Countries in South Asia should not fall behind in these changes, instead lead the changes by utilizing its strength and reinforcing its weakness. The new norm is coming, and the one who takes the first step will lead in the new world.

The views expressed in this article are those of the author and do not necessarily reflect the views and policies of the Asian Development Bank (ADB), its Advisory Council, ADB’s Board of Governors, or the governments of ADB members.

*Manmohan Parkash is Country Director, Bangladesh Resident Mission, Asian Development Bank (ADB). Mr Parkash has extensive experience in international finance and development, including policy formulation and reforms.


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