Enhancing the region’s integration into global value chains and promoting the diversification of exports could also boost productivity growth and private sector investment. In other regions, international trade integration has been associated with faster economic growth, but SAR lags behind them in regional as well as global integration of trade and investment flows (Pathikonda and Farole 2017). Closer trade and investment ties could be supported by closing infrastructure gaps, removing regulatory and other impediments to business, and promoting a shift toward higher value-added manufacturing (Lopez-Acevedo and Robertson 2016). The region’s exports remain highly concentrated in a narrow range of products, which are often of relatively poor quality and less complex than those of peers (Lian et al. 2021). Policies to promote diversification of exports could focus on raising research and development spending, investing in infrastructure (including in digital technologies) and education, adopting new technologies, and increasing openness to trade.

There is significant room for improving SAR’s business environment. In particular, reform priorities include improving government effectiveness and controlling corruption.

Additional steps to address corporate and banking sector balance sheet vulnerabilities in the region could lift credit growth and the growth of investment and potential output. Banks’ high ratios of non-performing loans hold back the supply of credit. At the same time, high corporate debt hinders credit demand and investment, and parts of the corporate sector may require debt restructuring or even the exit of firms. Addressing the problem of so-called “zombie firms”—firms that are unable to cover interest payments from operating profits—could free up credit and resources for more productive uses (Banerjee and Hofmann 2022). In India, for example, 10 percent of non-financial firms, accounting for 10 percent of total bank credit, have been identified as zombies (Pattanaik, Muduli, and Jose 2022).

Greater investment in human capital may also help lift productivity, labor incomes, and potential output, including by fostering shifts of resources to higher value-added and more innovative sectors (Aturupane et al. 2014). Policies in this area include measures to raise the participation of women in the workforce, increase access to higher and better education, and invest in vocational training programs. Improving women’s access to economic opportunities—still far more limited in SAR than in other EMDE regions— remains a significant source of potential growth gains (Hsieh et al. 2019). Less than onefourth of working-age women are in the labor force in SAR, compared to more than half in other EMDE regions (World Bank 2022m). Women’s participation in the workforce can also bring complementary benefits, including improvements in the nutrition of children and associated increases in productivity.

Country-specific reform agendas are key to boosting potential growth in the region. For example, in Bangladesh, reforms could focus on strengthening trade competitiveness through tariff reform and implementation of the Bangladesh National Single Window and the Customs Modernization Strategic Action Plan (2019-22); increasing investment and FDI through the full operationalization of new economic zones; increasing investment in