## isartoea

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### Executive Summary
- Since the mid-1980s, durable reforms coupled with prudent macroeconomic management have brought steady progress to the South Asia region.
- Real GDP growth increased from an average of about 3 percent in the 1970s to 7 percent over the last decade.
- Over 200 million people were lifted out of poverty in the last three decades.
- South Asia accounts for one-fifth of the world’s population and contributes to over 15 percent of global growth, driven by India; India has overtaken China as the fastest growing large economy.
- India’s tariff liberalization: the highest tariff rate declined from 355 percent in 1990 to 25 percent by 2003.
- India’s share of world service exports doubled to over 17 percent in a decade through 2010–14.
- Life expectancy rose by more than a decade to about 70 years.
- Demographics and labor supply:
  - More than 150 million people in the region are expected to enter the labor market by 2030.
  - South Asia median age: less than 27 years.
- Strategic growth approach:
  - Modernize agriculture, sustainably expand manufacturing, and promote higher-skill services.
  - Invest in human capital and address informality, strengthen women’s economic empowerment and labor force participation, and support youth.
- Policy priorities to unlock private-sector-led job creation:
  - Further openness to trade and FDI.
  - Improvements in governance and infrastructure.
  - Foster financial development and prepare the workforce through education and skills.
  - Strengthen social safety nets to support structural reforms and minimize distributional impacts.
- Reform scenarios and projections:
  - Full liberalization: real GDP growth surpassing 6.5 percent by 2040.
  - Current baseline: nearly 6 percent by 2040.
  - Downside scenario: 5 percent by 2040.
  - Under a full liberalization scenario, South Asia could contribute about a third of global growth by 2040.
  - Sustained structural reforms could bring India’s real GDP per capita to nearly 50 percent that of the United States by 2040.
- Political economy:
  - Recent elections offer a window to accelerate reforms; clear communication and prioritization are key.
  - Reforms should be accompanied by stronger social safety nets and attention to fiscal, financial, and environmental stability.

### 1. Export Diversification — Regional context and outcomes
- Population and growth context:
  - 2018 population: 1.5 billion in South Asia, of which 1.3 billion are in India and 165 million in Bangladesh.
  - India accounted for 15 percent of global growth in 2018 (PPP terms).
  - Under the current baseline, the region is projected to contribute around 28 percent of global growth by 2040; under a downside scenario the region would still account for about one-fourth of global growth.
- Export diversification outcomes (selected country-level changes, 1972–2016):
  - Bangladesh: Exports/GDP = 6 percent (1972); Exports/GDP = 16 percent (2016).
  - India: Exports/GDP = 4 percent (1972); Exports/GDP = 19 percent (2016).
  - Sri Lanka: Exports/GDP = 8 percent (1972); Exports/GDP = 22 percent (2016).
  - Maldives: Exports/GDP = 19 percent (1972); Exports/GDP = 72 percent (2016).
  - Nepal: Exports/GDP = 10 percent (1972); Exports/GDP = 9 percent (2016).
  - Bhutan: Exports/GDP = 10 percent (1972); Exports/GDP = 30 percent (2016).
- Sectoral notes:
  - On average, exports account for only 8 percent of GDP in South Asia; Bangladesh is an outlier at 14 percent.
  - Agriculture remains a large employer: in Bhutan and Nepal up to 70 percent of workers are engaged in farming activities.
  - India: services’ contribution to employment growth was 0.3 percentage points in FY2016, with services contributing about 60 percent to GDP growth.
- Productivity and structural change:
  - South Asia has substantial room to climb the global quality ladder; improving product quality is key for export diversification.
  - India’s ICT sector showed remarkable productivity increases (real value added per worker).
- Policy recommendations:
  - Invest in irrigation, storage, and better-functioning agricultural markets (including continued development beyond online marketplaces such as the e-NAM platform).
  - Implement land and water reforms and complement with active labor market policies for retraining.
  - Support service-sector dynamism while addressing limited employment generation in high-skill services and low wages in low-skill informal services.
  - Expand manufacturing sustainably through quality upgrades, improved skilled labor supply, and labor mobility.
  - Diversify trading partners and support domestic demand to mitigate weak growth in traditional advanced-economy markets.

### 2. Cross Country Employment Elasticities to Gross Exports — Key empirical and policy points
- Data and methods:
  - Employment elasticities derived from ARDL estimates, controlled for GDP growth and other labor market characteristics.
  - Exports data from TiVA; employment data from WIOD.
  - Panel: 43 countries, 2000–2016.
  - Definition: Percentage change in employment associated with a 1 ppt change in gross exports.
- Macro-fiscal and revenue mobilization:
  - Fiscal deficits and public debt levels are elevated and well-above ASEAN and emerging market peers, notably in Bhutan, Sri Lanka, India, and the Maldives.
  - India: Statutory Liquidity Requirement requires banks to hold 19 percent of assets in cash, gold, government securities, and state development loans.
  - Average tariff rate in the region: 10 percent in 2016.
  - India: GST introduced in 2017.
  - Maldives: plans to introduce a personal income tax in 2020.
- Financial sector and risks:
  - State-owned banks show weaker performance in capitalization and profitability in Bangladesh and India.
  - NPLs remain elevated in Bangladesh and Bhutan; NPLs are just below 10 percent of total loans in India and the Maldives—with higher levels in state-owned banks.
  - Credit growth: median pace about 15 percent in recent years.
  - Credit to the private sector: about 50 percent of GDP on average in South Asia.
- Monetary and exchange rate frameworks:
  - India adopted flexible inflation-targeting in 2015.
  - Sri Lanka on track to adopt flexible inflation-targeting by 2020.
  - Bangladesh intends to transition from monetary aggregate to interest rate targeting.
  - Bhutan and Nepal pegged to the Indian rupee; Maldives pegged to the US dollar with a horizontal band.
- Trade openness and FDI:
  - Identified barriers: cumbersome trade documentation, long processing times, FDI caps and negative lists, and complex approval systems.
  - India: relaxation of FDI caps and greater use of automatic approval.
  - Sri Lanka: 1,200 paratariffs removed since 2017.
- Infrastructure and climate vulnerability:
  - Existing infrastructure use associated with more than 60 percent of the world’s total greenhouse gas emissions; nearly two-thirds of emissions attributed to the energy sector.
  - South Asia is among the most affected regions by climate change.
- Financial development and PPPs:
  - Use of PPPs pursued in the Maldives and Sri Lanka.
  - India: special purpose vehicles helped attract FDI for large investment projects.
- Policy measures summarized:
  - Fiscal consolidation and revenue mobilization to make space for critical spending.
  - Strengthen prudential policies, regulation and supervision, resolution frameworks, and macroprudential policies.
  - Deepen domestic money markets and capital markets; promote greater exchange rate flexibility where appropriate.
  - Further opening to trade and FDI; streamline investment approval processes.
  - Safeguard the environment via pricing reforms and regulatory frameworks.

### South Asia: Financial Depth — Inclusion, gender, and social protection
- Financial depth and governance:
  - Financial sector remains relatively shallow and largely bank-based; need for deeper capital markets.
  - Disinvestments and privatizations of state-owned banks can improve governance and efficiency.
  - Simplify business regulations, strengthen anti-corruption and AML/CFT frameworks, and improve fiscal and SOE governance.
- Human capital and digitalization:
  - Education spending broadly in line with peers but quality and coverage can improve; tertiary investment linked to high-skilled services growth in India.
  - India: “no frills” accounts reached over 300 million people (scheme introduced in 2014).
  - Bangladesh: mobile money accounts have grown rapidly.
  - Nepal launched a financial inclusion action plan in 2018.
  - Priorities: expand internet access, digital literacy, financial literacy, and leverage digital technologies for targeted social transfers with data security.
- Gender gaps and informality:
  - Female labor force participation (FLFP): 35 percent in Sri Lanka; 23 percent in India; well above 60 percent in China and ASEAN.
  - India’s FLFP declined from 43 percent in 2005.
  - Economic cost of gender gaps: income loss of 23 percent in the short run and 25 percent in the long run for South Asia; almost 40 percent of that loss due to occupational gaps.
  - Closing gender gaps in India yields long-run impact around 6 percent of GDP.
  - Informality: own-account and contributing family workers account for more than 70 percent of total employment in India and Nepal.
  - Youth unemployment: Sri Lanka youth unemployment more than 20 percent, and more than 30 percent for young women.
- Social safety nets:
  - Strengthen safety nets focused on protecting people, not jobs; apply to both formal and informal workers and improve targeting using digital technologies.
  - India links bank accounts to Aadhaar for direct electronic payments; PM-KISAN provides direct income support to small farmers with scope to rationalize other subsidies.

### India-specific reform scenario and spillovers
- Reform measures assessed for India:
  1. Reduce goods tariffs from current levels to zero.
  2. Substantially reduce nontariff barriers to trade in services by 30 percent.
  3. Reduce restrictions on FDI to the global average level.
- Modeling outcomes (GIMF simulation):
  - Combined effect would deliver a productivity (and GDP) increase of about 20 percent in India, taking gradual effect over 20 years.
  - Baseline: GDP per capita could reach US$32,000 by 2040 in PPP terms or about 36 percent of US income.
  - Reform scenario: GDP per capita could reach nearly US$40,000 by 2040 in PPP terms or about 45 percent of US income.
  - Real terms boost: more than 100 trillion rupees (US$1.4 trillion) to economic activity by 2040.
- Spillovers (APDMOD of FSGM):
  - India-specific structural reform would boost GDP levels in Bangladesh and Sri Lanka by about 3 percent relative to a no-reform baseline.
  - Mechanisms: productivity spillovers via imports of technology-embodied capital goods and increased Indian domestic demand raising imports from neighbors.
  - If all South Asian countries pursued similar reforms, the region’s contribution to global growth would rise substantially.

### 2040 — Long-term scenarios, reform priorities, and country experiences
- Long-term regional growth scenarios (GDP weighted):
  - Full liberalization: real GDP growth surpassing 6.5 percent.
  - Baseline: almost 6 percent.
  - Lost demographic dividend: just over 5 percent.
- Regional contribution to global growth:
  - Under the reform scenario, the region’s contribution could reach 35 percent by 2040.
  - India-specific projection: real GDP per capita could reach nearly 50 percent of that of the United States by 2040.
- Demographics and poverty:
  - Over 150 million people expected to enter the labor force by 2030.
  - Over 200 million people lifted out of poverty in the past three decades.
- Reform sequencing and fiscal constraints:
  - Prioritize reforms with short-term gains and large long-term payoffs: financial development, FDI liberalization, product market reforms, trade liberalization.
  - Labor market reforms face political resistance; complement with demand-side policies and stronger social safety nets.
  - Broaden the tax base and eliminate inefficient subsidies to create fiscal space.
  - Reduce the role of the state to improve credit allocation and capital market development.
  - Prioritize infrastructure, connectivity, financial inclusion, and digitalization where gaps are largest (Bangladesh and Nepal) within a realistic medium-term fiscal framework.
- Country experiences and selected priorities:
  - Bangladesh: transition from state control to private-sector expansion; priorities include fiscal policy strengthening, monetary modernization, NPL resolution, and reform of national saving certificates.
  - Bhutan: integration, hydropower FDI, value-added tourism, and sustainable growth emphasis.
  - India: mid-1980s liberalization, 1991 New Industrial Policy, FY2004 FRBM Act, inflation targeting (2015/2017), GST (2017), and removal of many FDI caps during 2015–18; sectoral successes include:
    - IT-BPM: $137 billion of exports in FY2019; contributes 9.3 percent to GDP; employs more than 4 million people.
    - Automobile and auto component industries: contribute over 2 percent to GDP; employ nearly 1.5 million people; sector revenue from $4.5 billion in 2002 to $53.6 billion in 2018; domestic vehicle production: 31 million vehicles in 2019.
  - Maldives: tourism accounts for over 27 percent of GDP and over 60 percent of foreign exchange receipts; tourism received 90 percent of FDI.
  - Nepal: early 1990s reforms liberalized tariffs, imports, banking, and allowed up to 100 percent FDI in major sectors.
  - Sri Lanka: liberalization in 1977–79 restored growth to around 6 percent; post-2009 reform momentum sluggish; recent EFF reforms include a new Inland Revenue Act, energy pricing reforms, and transition to flexible inflation targeting.
- Sectoral enablers:
  - Promote financial development and FDI liberalization.
  - Advance product market deregulation and trade liberalization.
  - Use targeted social safety nets to mitigate distributional impacts.
  - Prioritize infrastructure investment, financial inclusion, and digitalization.
  - Broaden tax bases and remove inefficient subsidies.

### Annex 2. India: Two Homegrown Success Stories — Economic complexity and empirical findings
- Economic complexity framework:
  - Revealed comparative advantage (RCA) definition; complexity combines diversity and ubiquity.
  - Economic Complexity Outlook Index measures average complexity of products a country can diversify into.
- Regional complexity outlook:
  - India, Nepal, and Sri Lanka are well positioned to improve export complexity; Bangladesh dominates ready-made garments but faces lower complexity outlook.
  - India exports products at the core of the product space (cars parts, ships, mobile phones), facilitating diversification into related complex goods.
- Macroeconomic models used:
  - GIMF: Global Integrated Monetary and Fiscal Model, non-Ricardian OLG structure, includes services, financial accelerator, and bilateral trade tracking.
  - APDMOD of FSGM: annual multiregion general equilibrium model with OLG consumption, Tobin’s Q investment, public capital, and productivity spillovers.
- Trade policy calibration:
  - Baseline (end-of-sample 2016) product-weighted effective tariff rate for India: 6.35 percent.
  - Comparative mean effective tariff rates: Bangladesh: 10.72; Sri Lanka: 4.43.
  - FDI regulatory restrictiveness index (2018): India: 0.2; OECD average: 0.07; Global average: 0.09.
- Empirical findings (growth regressions):
  - Sector-level (manufacturing industries, 40 countries, 1995–2014): tariff rates coefficient: 20.027*** (0.0044); Observations: 16,057; R-squared: 0.992.
  - Country-level (178 countries, 1988–2017): tariff and FDI coefficients show statistically significant impacts on growth; examples:
    - Tariff rates Column (1) ALL: 20.038** (0.015); Column (2) ALL: 20.045*** (0.015); Column (3) ALL: 20.077*** (0.016).
    - FDI inflows Column (2) ALL: 0.150*** (0.036); Column (3) ALL: 0.122*** (0.046); alternate: 0.314*** (0.046).
    - External demand Column (1) ALL: 74.671*** (11.645).
  - Observations and R-squared vary by specification (examples: Column (1) ALL Observations 9,871; R-squared 0.472).
- Aggregate interpretation:
  - A 5 percent decline in output tariffs leads to a 14 percent increase in sector-level labor productivity in the long run.
  - A 5 percent decline in output tariffs leads to an increase in the growth rate of real GDP per capita by 0.2 percent.
  - Tariff reductions and removal of FDI restrictions have quantitatively important and robust positive impacts on productivity and growth.

### Annex 4. Model Descriptions and Calibration — Key references and calibration inputs
- Referenced model documentation includes:
  - "Getting to Know GIMF: The Simulation Properties of the Global Integrated Monetary and Fiscal Model." IMF Working Paper 13/55.
  - "The Flexible System of Global Models–FSGM." IMF Working Paper 15/64.
  - "The Global Integrated Monetary and Fiscal Model (GIMF)—Theoretical Structure." IMF Working Paper 10/34.
  - Bernanke, Gertler, and Gilchrist (1999) on the financial accelerator.
- Calibration and theoretical foundations draw on literature including Lucas (1990), Barro (2001), Weil (1987), Griffith et al. (2004), Henn et al. (2013), and others.
- Thematic areas informing model structure:
  - Monetary and fiscal dynamics, financial frictions, supply-side reforms, infrastructure investment tradeoffs, trade and export quality, R&D and innovation, gender gaps, and climate impacts.

*Source: Executive Summary, chapters, annexes, and model descriptions from isartoea (IMF).*

### Executive Summary ������������������������������������������������������������������������������������������������������

### Executive Summary

### Building on Success
- Since the mid-1980s, durable reforms coupled with prudent macroeconomic management have brought steady progress to the South Asia region.
- Real GDP growth increased from an average of about 3 percent in the 1970s to 7 percent over the last decade.
- Over 200 million people were lifted out of poverty in the last three decades.
- Today, South Asia accounts for one-fifth of the world’s population and, thanks to India’s increasing performance, contributes to over 15 percent of global growth.
- India has overtaken China as the fastest growing large economy.

### South Asia’s Growth Story
- Reform efforts beginning in the 1980s and 1990s created space for the private sector and trade openness, supporting durable export-led growth.
- India’s tariff liberalization: the highest tariff rate declined from 355 percent in 1990 to 25 percent by 2003.
- Export diversification outcomes:
  - Bangladesh: moved from jute and tea to labor-intensive garments; garments now account for around 80 percent of exports.
  - Bhutan: hydropower electricity now accounts for 30 percent of its exports.
  - Maldives: diversified from fish into tourism.
  - Nepal: diversified from raw food products to ICT and tourism.
  - India: transitioned from tea and fabrics to services, car parts, capital goods, and pharmaceuticals.
- India’s services performance:
  - India’s share of world service exports doubled to over 17 percent in a decade through 2010–14—the largest increase globally for the sector.
  - Productivity growth since the early 2000s was driven by high-skill services (business, financial, and ICT services), followed by low-skill services (hotels and restaurants, trade and transportation, and storage services).
- Social progress:
  - Life expectancy rose by more than a decade to about 70 years.
  - The decline in poverty since the 1990s was most significant in Nepal, India, and Bangladesh.

### Delivering Job-Rich Growth to One-Fifth of the Global Population
- Demographics and labor supply:
  - Based on demographic trends, more than 150 million people in the region are expected to enter the labor market by 2030.
  - South Asia is the youngest region in Asia, with a median age of less than 27 years.
- Strategic growth approach:
  - A balanced multipronged approach is needed: modernize agriculture, sustainably expand manufacturing, and promote higher-skill services.
  - Prudent policies and governance reforms are prerequisites to avoiding macroeconomic imbalances and environmental excesses.
  - Investing in human capital and addressing the large informal sector—strengthening women’s economic empowerment and labor force participation and supporting youth—would bring sizable economic gains.

### Fostering Sustainable and Inclusive Growth
- Policy areas to unlock private-sector-led job creation and inclusive outcomes:
  - Further openness to trade and FDI.
  - Improvements in governance and infrastructure.
  - Fostering financial development to improve resource allocation and reduce the state footprint in the economy.
  - Preparing the workforce for twenty-first-century challenges through investments in education and skills.
- Social protection:
  - Stronger social safety nets are important to support difficult structural reforms (notably labor market reforms), minimize distributional impacts, and promote inclusive growth.
- Risk management:
  - New policies and initiatives must remain mindful of fiscal, financial, and environmental risks.

### Bolder and Safer Reforms to Unlock South Asia’s Growth Potential
- Reform scenarios and projections:
  - Sustained structural reform efforts, harnessing the young workforce alongside substantial trade and FDI liberalization, could bring India’s real GDP per capita to nearly 50 percent that one of the United States by 2040.
  - Under a full liberalization scenario, South Asia could contribute about a third of global growth by 2040.
  - Projected regional growth under scenarios:
    - Full liberalization: real GDP growth surpassing 6.5 percent by 2040.
    - Current baseline: nearly 6 percent by 2040.
    - Downside scenario (where the benefits of the demographic dividend cannot be secured): 5 percent by 2040.
- Spillovers:
  - Successful reforms in India would have important positive spillovers to the broader South Asian region.

### Building the Reform Momentum
- Political and timing considerations:
  - Recent elections in most South Asian economies offer a propitious window of opportunity to accelerate reforms.
  - Clear communication of reform benefits and prioritization based on expected macrostructural impact are key to building momentum.
- Sequencing and safeguards:
  - Reforms should be accompanied by stronger social safety nets to protect vulnerable groups during transitions.
  - Policymakers should balance ambition with attention to fiscal, financial, and environmental stability.

*Source: Executive Summary, isartoea - Executive Summary (IMF).*

### 1. Export Diversification

### 1. Export Diversification

### Regional context and key statistics
- One-fifth of the global population calls South Asia home.
- 2018 population: 1.5 billion in South Asia, of which 1.3 billion are in India and 165 million in Bangladesh.
- More than 150 million people will enter the South Asian labor force by 2030.
- India accounted for 15 percent of global growth in 2018 (in purchase power parity [PPP] terms).
- Under the current baseline, the region is projected to contribute around 28 percent of global growth by 2040; under a downside scenario the region would still account for about one-fourth of global growth.
- Advanced economies’ growth has been structurally weak at around 2 percent since the global financial crisis, down from an average of 3.5 percent in the 1960s to the 1990s.

### Export diversification outcomes (selected country-level changes, 1972–2016)
- Bangladesh: Exports/GDP = 6 percent (1972); Exports/GDP = 16 percent (2016).
- India: Exports/GDP = 4 percent (1972); Exports/GDP = 19 percent (2016).
- Sri Lanka: Exports/GDP = 8 percent (1972); Exports/GDP = 22 percent (2016).
- Maldives: Exports/GDP = 19 percent (1972); Exports/GDP = 72 percent (2016).
- Nepal: Exports/GDP = 10 percent (1972); Exports/GDP = 9 percent (2016).
- Bhutan: Exports/GDP = 10 percent (1972); Exports/GDP = 30 percent (2016).

### Sectoral composition and trade structure
- On average, exports account for only 8 percent of GDP in South Asia; Bangladesh is an outlier at 14 percent.
- Services and tourism feature prominently in several countries’ export baskets (e.g., travel and tourism shares observed across multiple sample entries).
- Agriculture remains a large employer: in Bhutan and Nepal up to 70 percent of workers are engaged in farming activities.
- India: services’ contribution to employment growth was 0.3 percentage points in FY2016, with services contributing about 60 percent to GDP growth.

### Productivity, structural change, and quality upgrading
- South Asia has substantial room to climb the global quality ladder; improving product quality (unit value adjusted for production costs and selection bias) is a key channel for export diversification.
- India’s ICT sector showed remarkable productivity increases (real value added per worker), illustrating services-driven productivity gains.
- Manufacturing expansion is feasible and could complement services in generating job-rich growth, but current low export-to-GDP ratios imply scope for greater export-led industrialization.

### Scenarios and long-term projections
- Baseline: Per capita income could reach over 30 percent of the US level in Bhutan, India, the Maldives, and Sri Lanka by 2040; Bangladesh and Nepal also catch up from lower initial income levels.
- Downside scenario (assumes no growth contribution from labor force via increases in working-age population, with proportional adjustments to capital stocks): average per capita income in the region would be lower by about 4 percentage points relative to the baseline.

### Policy implications and recommendations
- Pursue a balanced, multipronged growth strategy that leverages all sectors (agriculture, manufacturing, high-skill and low-skill services) and relies on the private sector to discover new opportunities.
- Improve agricultural productivity to support reallocation of labor and reduce rural distress:
  - Invest in irrigation, storage facilities, and better-functioning agricultural markets (e.g., continued development beyond online marketplaces such as the e-NAM platform).
  - Implement land and water reforms.
  - Complement productivity measures with active labor market policies to facilitate retraining and lower search frictions.
- Support service-sector dynamism while addressing limited employment generation in high-skill services and low wages in low-skill informal services.
- Expand manufacturing sustainably by:
  - Pursuing quality upgrades within existing product baskets.
  - Improving skilled labor supply and facilitating labor mobility.
- Diversify trading partners and support domestic demand to mitigate weak growth in traditional advanced-economy markets and risks from automation-driven labor displacement.

*Source: Atlas of Economic Complexity; IMF (2014); IMF staff calculations and text in "Is South Asia Ready for Take Off" chapter on Export Diversification.*

### 2. Cross Country Employment Elasticities to Gross Exports

### 2. Cross Country Employment Elasticities to Gross Exports

### Employment elasticities and data sources
- Employment elasticities are derived from ARDL estimates, controlled for GDP growth and other labor market characteristics.
- Exports data are from TiVA, and employment data are from WIOD.
- Panel data include 43 countries from 2000 to 2016.
- Definition note: (Percentage change in employment associated with a 1 ppt change in gross exports)

### Sectoral productivity and employment patterns
- Figure 12 (Productivity and Employment Elasticities Across Sectors) distinguishes Manufacturing, High-skill services, Low-skill services.
- India: Changes in Productivity Growth reported as (In percent, difference between 2002–15 avg. and 1981–91 avg.).
- Bangladesh: ready-made garment industry accounts for over 80 percent of total exports.
- India: scope to further close the technology gap in the auto component industry.

### Macro-fiscal policy space and public debt
- Fiscal consolidation is needed to lower high public debt and make space for critical spending.
- Fiscal deficits and public debt levels are elevated and well-above ASEAN and emerging market peers, notably in Bhutan, Sri Lanka, India, and the Maldives.
- India: under the Statutory Liquidity Requirement, banks are required to hold a substantial portion of their assets (19 percent at present) in cash, gold, government securities, and state development loans.
- Public debt measures and figures appear in Figures 14 and 15 (General Government, percent of GDP, 2018; and 2014–18 averages).

### Revenue mobilization and tax reforms
- Greater revenue mobilization can support fiscal consolidation while making space for critical social and investment spending.
- Regional tax observations:
  - Average tariff rate in the region: 10 percent in 2016.
  - India: introduction of the goods and services tax (GST) in 2017.
  - Sri Lanka: value-added tax reform and overhaul of the income tax regime in 2016–18.
  - Bangladesh: modernizing its value-added tax in 2019.
  - Maldives: plans to introduce a personal income tax in 2020.
- Policy directions: broaden the tax base, improve tax efficiency, streamline tax exemptions, and strengthen tax administration.

### Financial sector footprint and risks
- Excessive reliance on state-owned bank lending can lead to inefficiency and resource misallocation.
- State-owned banks play an important role in financing private and public investment in South Asia.
- Evidence of weaker performance in state-owned banks relative to private and foreign banks (capitalization and profitability lower in state-owned banks in Bangladesh and India).
- Nonperforming loans (NPLs):
  - NPLs remain elevated in Bangladesh and Bhutan.
  - NPLs are just below 10 percent of total loans in India and the Maldives—with higher levels in state-owned banks.
- Credit composition and depth:
  - Credit in the region has grown at a median pace of about 15 percent in recent years.
  - Credit to the private sector accounts for about 50 percent of GDP on average in South Asia, well below regional peers, suggesting scope for further financial deepening.
- Policy measures: address financial sector weaknesses, strengthen prudential policies, reduce the footprint of the state in the economy, enhance regulation and supervision of banks and nonbanks, upgrade resolution frameworks, and establish effective macroprudential policies.
- India: steps taken to improve recognition of nonperforming assets, recapitalize public sector banks, and implement the new insolvency and bankruptcy code.

### Monetary policy and exchange rate frameworks
- South Asia has lowered inflation toward mid-single digits in recent years.
- India adopted flexible inflation-targeting in 2015.
- Sri Lanka is on track to adopt flexible inflation-targeting by 2020, with major changes to the central bank law to strengthen its mandate and independence.
- Bangladesh intends to transition from monetary aggregate to interest rate targeting.
- Policy emphasis: develop deeper domestic money markets, greater exchange rate flexibility to foster external competitiveness and facilitate adjustment to shocks, and strengthen liquidity and interest rate management in countries with exchange rate anchors.
- Exchange rate anchors: Bhutan and Nepal are pegged to the Indian rupee; Maldives is pegged to the US dollar, with a horizontal band.

### Trade openness, FDI, and private sector entrepreneurship
- Region has progressed on trade and FDI liberalization, but average tariff rate remains 10 percent in 2016, with significant nontariff barriers.
- Identified barriers: cumbersome trade documentation and long processing times; investment constraints include caps in India, negative lists in Bhutan, and complex approval systems in Nepal.
- Recent liberalization steps:
  - India: relaxation of FDI caps and greater use of the automatic approval process.
  - Sri Lanka: 1,200 paratariffs removed since 2017.
- Policy direction: further opening to trade and FDI to support diversification, integration into global supply chains, and more competitive export sectors.

### Infrastructure, environmental sustainability, and climate vulnerability
- Inadequate infrastructure hinders productivity and discourages private investment across South Asia (energy, ports, roads, air connectivity).
- Large investments required in energy, transport, water, and urban services; land reforms noted as facilitative, especially in India.
- Environmental considerations:
  - Existing stock of infrastructure and its use are associated with more than 60 percent of the world’s total greenhouse gas emissions (source references in text).
  - Nearly two-thirds of emissions attributed to the energy sector.
- Policy measures: safeguard the environment via policies and regulatory frameworks; energy pricing reforms (as implemented in India and Sri Lanka) can incentivize reduced energy consumption and development of renewable energy sources.
- South Asia is among the most affected regions by climate change.

### Financial development and mobilizing private investment
- Capital formation in South Asia has accelerated broadly in line with peers.
- Given limited fiscal space, infrastructure and investment needs should be supplemented by private investment.
- Use of public–private partnerships (PPPs) has been pursued in the Maldives and Sri Lanka to undertake large-scale projects.
- India: creation of special purpose vehicles to acquire land and obtain permits helped attract FDI for large investment projects.
- Policy priorities: reduce the public sector footprint, mitigate quasifiscal risks, ensure rigorous project appraisal and selection, strengthen public financial and investment management, and deepen domestic capital markets to mobilize private finance.

*isartoea - 2. Cross Country Employment Elasticities to Gross Exports*

### 2. South Asia: Financial Depth

### 2. South Asia: Financial Depth

### Financial sector depth and capital markets
- South Asia’s financial sector “remains relatively shallow vis-à-vis regional comparators and largely bank-based,” with a need for “deeper capital markets to spur private entrepreneurship and effectively mobilize long-term capital for investment.”
- More focus on disinvestments and privatizations of state-owned banks can foster governance and efficiency gains.

### Governance and business environment
- Sustained governance reforms are critical to create an enabling business environment for private investment and growth.
- Perception-based indicators suggest scope to improve: fighting corruption, enhancing regulatory quality, and increasing government effectiveness would contribute to increasing private investment and boosting productivity.
- Recommended actions:
  - Simplify business regulations and streamline the investment approval process.
  - Upgrade anticorruption and anti-money laundering/counter-financing of terrorism frameworks, as warranted.
  - Improve fiscal and state-owned enterprise governance.
  - Strengthen the rule of law.

### Investing in people and human capital
- Human capital (knowledge, skills, education, health) raises productivity and is key for sustained economic growth, especially amid rapid technological change.
- Education spending in South Asia is broadly in line with peers, but coverage and quality can improve—from primary education to vocational training and public health.
- India: investment in tertiary education linked to strong growth in high-skilled services; should be complemented by increased spending on primary education to broaden access and boost literacy, including for young girls.
- Greater public and private R&D efforts could yield high returns if accompanied by improvements in education, research institutions, and university–industry collaboration.

### Digitalization and financial inclusion
- Adopting digital technologies and expanding internet access are key to workforce preparation and broader financial inclusion.
- Large shares of the population still lack internet access.
- Financial inclusion can ease financing constraints, boost investment and consumption, increase income levels, and correct market failures.
- Regional fintech and digital payments progress:
  - In India, “no frills” accounts have reached over 300 million people under a scheme introduced in 2014 to expand access to financial services.
  - Bangladesh: mobile money accounts have grown rapidly and facilitate receipt of domestic remittances.
  - Nepal launched a financial inclusion action plan in 2018.
- Priorities:
  - Invest in telecommunications infrastructure to expand internet access and enhance digital literacy.
  - Improve financial and technology literacy.
  - Leverage digital technologies for better-targeted social transfers, with adequate data security controls.

### Gender gaps, labor markets, and informality
- Female labor force participation (FLFP) levels:
  - 35 percent in Sri Lanka.
  - 23 percent in India.
  - Well above 60 percent in China and ASEAN (peers).
- India’s FLFP declined from 43 percent in 2005.
- Economic cost of gender gaps (Cuberes and Teignier, 2016):
  - South Asia shows income loss of 23 percent in the short run and 25 percent in the long run.
  - Almost 40 percent of that loss is due to occupational gaps.
- Country-level estimates:
  - Closing gender-based education and financial inclusion gaps in India would have a long-run impact of around 6 percent of GDP, even allowing for absorption of female labor supply increases in the informal sector.
- Policies to increase FLFP and female empowerment:
  - Greater access to childcare and enhanced maternity leave; Sri Lanka example includes companies’ ability to deduct payrolls for women during maternity leave.
  - Improvements in public safety and access to clean water and energy to lower home care burdens (Bangladesh).
  - Programs to increase access to finance and entrepreneurship (e.g., India’s National Rural Livelihood Project).
  - Promote flexible work arrangements, telework, STEM and vocational education.
- Informality:
  - Own-account and contributing family workers account for more than 70 percent of total employment in India and Nepal, much higher than other Asian peers.
  - Youth unemployment: Sri Lanka youth unemployment is more than 20 percent, and more than 30 percent for young women.
  - Policy implications: address informality through private sector–led investment and growth, human capital, infrastructure, access to finance, and labor market reforms balancing worker protection and incentives for formal hiring.

### Social safety nets
- Strengthen social safety nets to protect vulnerable populations during structural transformation; focus on protecting people rather than protecting jobs.
- Programs should apply to both formal and informal workers and be well-targeted to ensure efficiency and effectiveness.
- South Asia’s social assistance spending is in line with regional peers, but most countries have significant scope to improve targeting.
- Digital technologies (with data security) can improve targeting; India links bank accounts to Aadhaar for direct electronic payments of specific social benefits. The PM-KISAN scheme provides direct income support to small Indian farmers but there is scope to rationalize other subsidies to ensure fiscal affordability.

### India-specific reform scenario (trade and FDI liberalization)
- Reform measures assessed (India):
  1. Reduce goods tariffs from current levels to zero.
  2. Substantially reduce nontariff barriers to trade in services by 30 percent.
  3. Reduce restrictions on FDI to the global average level.
- Modeling and outcomes:
  - Simulations using the IMF’s GIMF model indicate the combined effect would deliver a productivity (and GDP) increase of about 20 percent in India.
  - These reforms and associated benefits are assumed to take gradual effect over 20 years.
  - Gains need to be supported by revenue mobilization and complementary reforms (infrastructure, human capital, labor and product market deregulation) to manage sectoral and labor reallocation costs.
- Projected macro impacts and scenarios:
  - Under the baseline scenario, GDP per capita could reach US$32,000 by 2040 in PPP terms or about 36 percent of US income.
  - If reforms boost productivity by 20 percent over two decades, India’s GDP per capita could reach nearly US$40,000 by 2040 in PPP terms or about 45 percent of US income.
  - In real terms, this reform scenario would represent more than a 100 trillion rupee (US$1.4 trillion) boost to economic activity by 2040.
  - The substantial reforms considered, if sustained, could add over 100 trillion rupees to India’s real GDP by 2040.

### Spillovers to South Asia and broader region
- Spillovers from the India reform scenario (APDMOD of the IMF’s FSGM):
  - The India-specific structural reform scenario would be expected to boost the level of GDP in Bangladesh and Sri Lanka by about 3 percent, relative to a no-reform baseline.
  - Spillovers to the rest of Asia and globally are smaller in percent terms.
- Mechanisms:
  - Productivity spillovers via imports of technology-embodied capital goods from India and dissemination of technological advances.
  - Increased Indian domestic demand raises import demand, benefiting exports of neighboring countries.
- If all South Asian countries pursued similar reforms, the region’s contribution to global growth would rise substantially.

*isartoea - 2. South Asia: Financial Depth*

### 2040. Evidence suggests that both Bangladesh and Sri Lanka have substantial

### isartoea - 2040. Evidence suggests that both Bangladesh and Sri Lanka have substantial

### Long-term scenarios and regional growth contributions
- Under a full liberalization scenario (goods and services trade, lowering tariff and nontariff barriers), real GDP growth for the South Asian region (GDP weighted) could surpass 6.5 percent over the long term.
- Baseline scenario: almost 6 percent long-term real GDP growth for the South Asian region (GDP weighted).
- Scenario with lost demographic dividend: just over 5 percent long-term real GDP growth for the South Asian region (GDP weighted).
- Under the reform scenario, the region’s contribution to global growth could reach 35 percent by 2040.
- India-specific projection: real GDP per capita could reach nearly 50 percent of that of the United States by 2040.

### Demographics, labor force, and poverty
- Over 150 million people in the region are expected to enter the labor force by 2030.
- Past three decades of reform and macroeconomic management have helped lift over 200 million people out of poverty.

### Reform priorities, sequencing, and fiscal constraints
- Reforms with short-term gains and large long-term payoffs should be prioritized.
- Reforms highlighted as effective and relatively easier to implement:
  - Financial development and FDI liberalization: support consumption and investment by relaxing credit constraints and boosting productivity.
  - Product market reforms and trade liberalization: promote entry of new firms and greater efficiency; have expansionary short-term effects.
- Reforms that face larger political resistance and require complementary policies:
  - Labor market reforms (for example, reducing excessive employment protection) may face resistance from regular workers and are easier to implement if supported by demand-side policies and stronger social safety nets.
- Fiscal space and reform sequencing:
  - Given limited fiscal space, reforms need to be consistent with debt sustainability and allow for complementary social spending.
  - Broaden the tax base and eliminate inefficient subsidies to create fiscal space.
  - Reduce the role of the state in the economy to promote more efficient credit allocation and capital market development.
  - Expand infrastructure and connectivity (including financial inclusion and digitalization), especially where large infrastructure gaps exist (Bangladesh and Nepal), within a realistic medium-term fiscal framework.

### Political economy, timing, and regional initiatives
- Political constraints often delay or dilute structural reforms; weak economic conditions often become the trigger for reforms.
- Recent and upcoming elections in the region create a propitious window to accelerate reforms; frontloaded reform programs are more likely to succeed.
- Peer pressure and regional initiatives can spur trade liberalization and reform efforts.
- Institutional innovations (for example, national productivity councils) have helped advanced reform agendas in more advanced countries.

### Country experiences and priorities (selected)
- Bangladesh:
  - Post-1971 reforms moved from extensive state control to private-sector expansion (notably ready-made garments).
  - Reforms included reductions in food and agricultural subsidies, financial liberalization, easing import restrictions, unification of the exchange rate, removal of restrictions on capital and profit repatriation, creation of a board of investment, replacement of sales tax by VAT, and higher allocations to human resources and poverty alleviation.
  - Recent priorities: strengthen fiscal policies, modernize the monetary policy regime, address large nonperforming loans in the banking sector (especially state-owned banks), and reform the national saving certificate scheme to support private investment and domestic debt market development.
- Bhutan:
  - Benefitted from increased integration with neighbors (especially India), hydropower development with solid FDI, improving infrastructure, value-added tourism, and emphasis on sustainable growth.
- India:
  - Reform trajectory: mid-1980s liberalization, major 1991 New Industrial Policy, post-2000 focus on macro stability, FY2004 Fiscal Responsibility and Budget Management Act, inflation targeting framework introduced in 2015 and formalized in 2017, pan-India Goods and Services Tax rolled out in 2017, and caps on FDI largely removed during 2015–18.
  - Sectoral successes:
    - IT-BPM industry:
      - $137 billion of exports in FY2019.
      - Contributes 9.3 percent to India’s GDP.
      - Employs more than 4 million people.
    - Automobile and auto component industries:
      - Contribute to over 2 percent to India’s GDP.
      - Employ nearly 1.5 million people.
      - Sector revenue growth: from $4.5 billion in 2002 to $53.6 billion in 2018.
      - Revenue composition: three-fourth from the domestic market and one-fourth from exports.
      - Domestic vehicle production: 31 million vehicles in 2019.
      - Trade deficit in auto components declined from $5 billion in 2012 to $2.5 billion in 2019.
      - India’s penetration in the global auto component market remains below 2 percent.
      - Nearly 50 percent of autopart imports are from Asian countries; 24 percent of total imports originate from China.
- Maldives:
  - Tourism accounts for over 27 percent of GDP and over 60 percent of foreign exchange receipts; tourism received 90 percent of FDI.
  - Development driven by tourism and fishing; recent focus on diversification and further FDI liberalization.
- Nepal:
  - Early 1990s reforms included tariff reductions, abolition of import restrictions and export duties, banking deregulation, Industrial Enterprise Act, and the Foreign Investment and Technology Transfer Act allowing up to 100 percent FDI in major sectors.
- Sri Lanka:
  - Post-independence growth weakened after the late 1950s due to state-led import substitution, nationalization, tight import restrictions, and rigid employment protection.
  - First liberalization wave in 1977–79 restored growth to around 6 percent; civil war in the 1980s later undermined recovery.
  - 1990s reforms included privatizations and return of plantations to private control.
  - Post-2009 reform momentum was sluggish; recent reforms under an Extended Fund Facility include a new Inland Revenue Act, energy pricing reforms, and transition to flexible inflation targeting.

### Sectoral policy implications and enablers
- Promote financial development and FDI liberalization to relax credit constraints and boost productivity.
- Advance product market deregulation and trade liberalization to foster firm entry and efficiency gains.
- Use targeted social safety nets to mitigate distributional impacts of difficult reforms (notably labor market reforms).
- Prioritize infrastructure investment, financial inclusion, and digitalization to support inclusive growth and job creation.
- Broaden tax bases and remove inefficient subsidies to free fiscal space for public investment and social protection.

*Sources: IMF, World Economic Outlook; and IMF staff estimates.*

### Annex 2. India: Two Homegrown Success Stories

### Annex 2. India: Two Homegrown Success Stories

### Economic complexity and diversification: definitions and stylized facts
- Economic complexity is derived using the concept of revealed comparative advantage (RCA). An economy has RCA in a specific good if its share in the economy’s exports is larger than the good’s global export share.
- Economic complexity combines:
  - Diversity: the number of products in which the economy has RCA.
  - Ubiquity: the number of countries that have RCA in those products.
- Economic complexity is thus a measure of the knowledge in an economy as expressed in the products it makes.
- The Economic Complexity Outlook Index measures the average complexity of products that a country can diversify into—that is, how strategically positioned a country is in its product space.

### South Asia: complexity outlook and product space implications
- The economic complexity outlook index indicates substantial scope to increase the complexity of South Asia’s exports.
- India, Nepal, and Sri Lanka are especially well positioned to improve export complexity because many complex products lie near their current productive capabilities.
- The product space depicts connectedness between products based on similarities of required know-how:
  - India exports several products at the core of the product space (examples noted: cars parts, ships, and mobile phones) and thus can more easily diversify into related complex goods.
  - Bangladesh dominates the ready-made garment sector but has a lower complexity outlook because garments are less connected to other more complex industries; consequently, it would be harder for Bangladesh to move up the complexity scale without concerted policy measures.

### Macroeconomic models used for simulations
- Two models used for scenario and spillover analysis:
  - GIMF (Global Integrated Monetary and Fiscal) model:
    - Used to assess implications of trade liberalization, allowing explicit consideration of tariff and nontariff barriers.
    - Each economy is structurally similar but with different steady-state ratios and behavioral parameters, based on a stylized dataset consistent with 2015 and 2016.
    - Key features:
      - Consumption dynamics driven by saving households (OLG framework: Blanchard 1985; Weil 1987; Yaari 1965) and liquidity-constrained households.
      - Model is non-Ricardian; long-term real global interest rate is endogenized to equilibrate global savings and investment.
      - Services sector included (priced as input for consumption domestically or exported); demand elasticity vis-à-vis consumption goods is 0.9.
      - Private investment uses the Bernanke-Gertler-Gilchrist (1999) financial accelerator; investment cumulates to private capital for tradable and nontradable firms.
      - Monetary policy: inflation forecast–based interest rate reaction function; fiscal sector reproduces simplified fiscal accounts.
      - Trade tracked bilaterally by region and disaggregated into noncommodity goods and services, commodities, final goods (consumption and investment), consumption services, and intermediate goods, allowing differential tariffs and NTBs.
  - APDMOD (Asia-Pacific Department Module) of the FSGM (Flexible System of Global Models):
    - Annual, multiregion general equilibrium model combining microfounded and reduced-form sectors.
    - Real GDP determined by sum of demand components short run and potential output long run.
    - Key components:
      - Private consumption: discrete-time Blanchard-Weil-Yaari OLG model with liquidity-constrained households.
      - Private investment: updated Tobin’s Q model with quadratic real adjustment costs.
      - Public absorption: exogenous government consumption and investment; public investment cumulates into public capital raising productivity permanently.
      - Exports and imports: reduced-form equations (exports increase with foreign activity and with depreciation in the RCI; imports increase with domestic activity and with appreciation of the real effective exchange rate).
      - Aggregate supply: Cobb-Douglas production technology with trend total factor productivity, steady-state labor force, NAIRU, and actual capital stock.
      - Core price: CPIX (CPI excluding food and energy) determined by an inflation Phillips curve; degree of forward-looking behavior is country specific.
      - Commodities: three types—oil, food, metals—to distinguish core and headline inflation; demand and supply of commodities are relatively price inelastic in the short run.
      - Monetary policy: represented by an interest rate reaction function (standard inflation forecast–based rule under flexible exchange rate, with scope for other regimes).
      - Productivity spillovers: improvements in one country transmit to trading partners based on distance from US productivity frontier and trade openness.

### Trade liberalization scenario calibration and observed trade policy levels
- Trade liberalization scenario in GIMF follows IMF (2018c).
- Baseline (end-of-sample 2016) product-weighted effective tariff rate (mean) for India: 6.35 percent.
- Comparative mean effective tariff rates:
  - Bangladesh: 10.72
  - Sri Lanka: 4.43
- FDI regulatory restrictiveness index (as of 2018):
  - India: 0.2
  - OECD average: 0.07
  - Global average: 0.09

### Evidence from growth regression analyses: methods and identification
- Two sets of exercises due to data availability:
  1. Sector-level analysis controlling for country-year shocks: models sector productivity y_{i,j,t} as y_{i,j,t} = α_{i,j} + γ_{i,t} + φ τ_{i,j,t} + ε_{i,j,t}, where τ_{i,j,t} denotes output tariff rate; identification assumes τ_{i,j,t} uncorrelated with ε_{i,j,t}.
  2. Country-level annual growth analysis modeling g_{i,t} = α_i + μ_t + Z_{i,t}′β + v_{i,t}, where Z_{i,t} includes structural indicators (tariff rates, FDI inflows to GDP ratio, and others), with country and time fixed effects.

### Main empirical findings and magnitudes
- Sector-level result (Annex Table 5.1):
  - Dependent variable: log(real value-added per employee).
  - Sample: 40 countries, manufacturing industries at 3-digit ISIC, 1995–2014; merged WIOD vintages.
  - Tariff rates coefficient: 20.027*** (0.0044)
  - Observations: 16,057
  - R-squared: 0.992
- Country-level growth results (Annex Table 5.2):
  - Sample: 178 countries, 1988–2017 (unbalanced).
  - Selected coefficient estimates (standard errors in parentheses):
    - Tariff rates:
      - Column (1) ALL: 20.038** (0.015)
      - Column (2) ALL: 20.045*** (0.015)
      - Column (3) ALL: 20.077*** (0.016)
      - Columns (4) and (5) Asia Only: reported but specific tariff entries not shown in excerpt beyond these columns’ labels.
    - FDI inflows:
      - Column (2) ALL: 0.150*** (0.036)
      - Column (3) ALL: 0.122*** (0.046)
      - Column (3) ALL (alternate specification): 0.314*** (0.046)
    - Log(income):
      - Column (1) ALL: 6.099* (3.359)
      - Column (2) ALL: 0.764 (1.950)
      - Column (3) ALL: 10.500** (4.725)
      - Column (4) Asia Only: 0.124 (5.633)
      - Column (5) Asia Only: 27.083 (4.005)
    - External demand:
      - Column (1) ALL: 74.671*** (11.645)
      - Column (2) ALL: 43.531*** (10.133)
      - Column (3) ALL: 63.335*** (15.338)
      - Column (4) Asia Only: 0.330 (19.772)
      - Column (5) Asia Only: 2.101 (10.666)
  - Observations and R-squared by column:
    - Column (1) ALL: Observations 9,871; R-squared 0.472
    - Column (2) ALL: Observations 1,130; R-squared 0.374
    - Column (3) ALL: Observations 719; R-squared 0.615
    - Column (4) Asia Only: Observations 166; R-squared 0.672
    - Column (5) Asia Only: Observations 162; R-squared 0.575
- Aggregate interpretation of results reported in text:
  - A 5 percent decline in output tariffs leads to a 14 percent increase in sector-level labor productivity in the long run.
  - A 5 percent decline in output tariffs leads to an increase in the growth rate of real GDP per capita by 0.2 percent.
  - The positive impacts of tariff reductions and removal of FDI restrictions on productivity and growth are quantitatively important and robust to analyses limited to Asian countries.
  - Caveat: the effects may not be permanent given the static nature of parts of the analysis.

### Policy-relevant implications (as reflected in the findings)
- Further reduction of trade barriers in India could yield sizable productivity and growth gains:
  - India’s average tariff in 2017 was still higher than the median of emerging markets and developing economies.
- Further liberalization of FDI policies also has significant room for gains:
  - India still underperforms most emerging markets and developing economies on FDI restrictiveness relative to OECD and global averages.

*Source: Annex 2. India: Two Homegrown Success Stories (isartoea - Annex 2. India: Two Homegrown Success Stories).*

### Annex 4. Model Descriptions and Calibration

### Annex 4. Model Descriptions and Calibration

### Referenced models and model documentation
- "Getting to Know GIMF: The Simulation Properties of the Global Integrated Monetary and Fiscal Model." IMF Working Paper 13/55, Anderson, Derek; Benjamin Hunt; Mika Kortelainen; Michael Kumhof; Douglas Laxton; Dirk Muir; Susanna Mursula; and Stephen Snudden. 2013.
- "The Flexible System of Global Models–FSGM." IMF Working Paper 15/64, Andrle, Michal; Patrick Blagrave; Pedro Espaillat; Keiko Honjo; Benjamin Hunt; Mika Kortelainen; René Lalonde; Douglas Laxton; Eleonora Mavroeidi; Dirk Muir; Susanna Mursula; and Stephen Snudden. 2015.
- "The Global Integrated Monetary and Fiscal Model (GIMF)—Theoretical Structure." IMF Working Paper 10/34, Laxton, Douglas; Susanna Mursula; Michael Kumhof; and Dirk Muir. 2010.
- "The Financial Accelerator in a Quantitative Business Cycle Framework." Bernanke, Ben S.; Mark Gertler; and Simon Gilchrist. 1999. Handbook of Macroeconomics, edited by J. B. Taylor and M. Woodford, 1341–393.
- Additional model-related and methodological references included across the annex bibliographic list (titles, authors, years, and outlets provided in the source).

### Calibration, theoretical foundations, and methodological inputs
- Supply-side and growth theory foundations:
  - "Supply-Side Economics: An Analytical Review." Lucas, Robert. 1990. Oxford Economic Papers 42 (2): 293–316.
  - "Human Capital and Growth." Barro, Robert. 2001. American Economic Review: Papers and Proceedings 91 (2): 12–17.
  - "Permanent Budget Deficits and Inflation." Weil, Philippe. 1987. Journal of Monetary Economics 20 (2): 393–410.
- Micro- and sectoral evidence informing calibration:
  - R&D and productivity: Griffith, Rachel; Stephen Redding; and John Van Reenen. 2004. Review of Economics and Statistics 86 (4): 883–895.
  - Export quality and trade: Henn, Christian; Chris Papageorgiou; and Nicola Spatafora. 2013. IMF Working Paper 13/108.
  - Labor market regulations and reallocation: Kambourov, Gueorgui. 2009. The Review of Economic Studies 76 (4): 1321–58.
- Policy-relevant model applications and empirical inputs:
  - Structural reform assessments and frameworks: IMF. 2016a. "Staff Note for The G20—A Guiding Framework For Structural Reforms."
  - Financial sector and fiscal interactions: Gonzales-Garcia, Jesus; and Francesco Grigoli. 2013. IMF Working Paper 13/206.
  - Public infrastructure and investment tradeoffs: Atolia, Manoj; Bin Grace Li; Ricardo Marto; and Giovanni Melina. 2017. IMF Working Paper 17/105.
- Cross-country and regional studies used as empirical context for calibration:
  - "Sustaining Long-Run Growth and Macroeconomic Stability in Low-Income Countries—The Role of Structural Transformation and Diversification." IMF Policy Paper. 2014.
  - Regional and country studies cited throughout (Bangladesh, India, Sri Lanka, South Asia climate impacts, and others), with specific working papers and reports listed in the source.

### Thematic areas covered by the cited literature (informing model structure and parameters)
- Monetary and fiscal model dynamics (GIMF, FSGM references).
- Financial frictions and the financial accelerator.
- Supply-side reforms, structural transformation, and labor reallocation.
- Infrastructure investment, public capital composition (roads versus schools), and growth implications.
- Trade, export quality, and global value chains.
- R&D, innovation, and productivity transmission mechanisms.
- Gender gaps, labor market participation, and distributional effects.
- Climate impacts and natural disaster vulnerability as they affect long-run living standards and resilience.

*Source: isartoea - Annex 4. Model Descriptions and Calibration — https://www.imf.org/-/media/files/publications/dp/2019/english/isartoea.pdf*

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_Source: https://www.imf.org/-/media/files/publications/dp/2019/english/isartoea.pdf_