Exchange rate regimes and macroeconomic performance in South Asia

We review the macroeconomic performance in South Asian countries, and analyse why, despite opening out at a time of major international shocks, they have done reasonably well. The reason may be a gradual middling through approach that combined opening and market development. The choice of flexible exchange rate regimes with restrained volatility contributed. But the exchange rate was not undervalued, unlike China. The region largely had a current account deficit. Perceptions of what are stable policy combinations in emerging markets tend to be driven

by past crises. In Latin America fiscal profligacy resulted in repeated macroeconomic crises despite a variety of macro stabilization efforts. In East Asia crises occurred despite fiscal surplus because of too rapid financial liberalization combined with policies such as fixed exchange rates that created a moral hazard. But conditions in South Asia (SA) differ. Although the region has fiscal deficits, large private savings cover government dissaving. Domestic debt ratios are manageable due to prospects of high catch-up growth absorbing labour in more productive occupations. Foreign debt is limited. We build a set of stylized facts, to identify unique features of the SA region, and analyse

differences from other regions. Apart from quantity variables, we also seek to discover patterns and co-movements in time series for key prices such as interest rates, inflation and exchange rates across the region. Examining why acceleration in growth accompanied openness would be instructive. Dualism in the SA labour market due to high population density and low per capita incomes

affects macroeconomic outcomes, as do political systems. Similar features such as dualism should lead to convergence in macroeconomic policies, but differing political systems are a factor leading to divergence within SA. Experience in robust democracies differs from other countries. Democracies have a tendency to short-term populism and repressed inflation. Slow moving consensus tends to reduce growth rates.