Opening Remarks at Launch of Economic and Social Survey for Asia and the Pacific 2018
Delivered at Foreign Correspondents’ Club of Thailand (FCCT), Penthouse, Maneeya Center Building in Bangkok, Thailand
Ladies and gentlemen,
Asia and the Pacific’s dynamism and diversity has positioned it to continue playing a preponderant role as the engine of the global economy for years to come. The region’s growth in 2017, estimated at 5.8 per cent, was not only higher than last year and exceeded expectations, it also stands out for being broad based. About two thirds of the region’s economies, accounting for more than 80 per cent of the region’s GDP, grew faster in 2017 than the previous year.
Amid a relatively favourable global economic environment, and underpinned by a revival of demand and steady inflation, regional growth was driven by robust domestic consumption and recovering investment and trade. This growth trajectory and its fundamental strengths, underpin a stable outlook for 2018.
There remain risks and challenges.
First, while trade rebounded in 2017, trade protectionism continues to be a threat to global and national economic stabilization, and it may adversely affect the region’s export-oriented economies.
Second, potential financial vulnerabilities along with high private and corporate debt, particularly in China and some countries in South-East Asia have risen, and in the case of a few South Asian economies resulted in pressures on foreign exchange reserves.
Third, uncertainty regarding trends in oil prices are cause for concern. Our policy simulation for 18 countries suggests that a $10 rise in the price of oil per barrel will compound these pressures and dampen GDP growth by 0.14-0.4 per cent and widen external current account deficits by 0.5-1 percentage points, while fostering exchange rate and inflationary pressures in oil-importing economies.
The medium-term growth outlook will continue to be impacted by long term challenges facing the region’s economies. Low productivity and slower capital accumulation along with an ageing population has held back potential growth in several economies. At the same time, rapid technological advancements, while promising immense opportunities are also posing considerable challenges in terms of job polarization, and income and wealth inequalities.
Monetary management will remain complicated, as advanced countries reverse their monetary easing and gradually increase interest rates. Inflation is picking up, as aggregate demand is gaining momentum and international oil prices have risen. Inflation should remain moderate overall, although it could become a concern for oil-importing countries and those vulnerable to movements in exchange rates.
Fiscal policy should be focused on lifting productivity growth and reducing inequalities. In addition to budget reallocation in favor of development spending, governments should increase expenditure efficiency, ensure equal access to basic public services, and consider progressive taxation.
Lifting productivity will require a “whole-of-Government approach” for fostering science, technology and innovation and investments in relevant skills and infrastructure. Similarly, strengthening social protection and mainstreaming resource efficiency targets into national plans and budgets will help improve the region’s economic dynamism and prospects for sustainable development.
The implementation of several policies would require not only effectively utilizing existing financial resources, of both the public and the private sectors, but also creating additional financial means. The investment requirements to make economies resilient, inclusive and sustainable are sizeable − $2.5 trillion per year for developing countries worldwide. But so are the potential resources: the combined value of international reserves, market capitalization of listed companies and assets held by financial institutions, insurance companies and various funds is about $56 trillion. Effectively channelling these resources to finance sustainable development holds considerable potential.
Nevertheless, coming up with additional financial resources is critical. Public finances are frequently undermined by a narrow tax base, distorted taxation structures, weak tax administrations, and ineffective public expenditure management. Despite a vibrant business sector, the lack of enabling policies, legal and regulatory frameworks, and large informal sectors, have deterred sustainability and its appropriate financing. The external assistance from which some countries benefit is insufficient to meet investment requirements, a problem often compounded by low inbound foreign direct investment. Capital markets in many countries are underdeveloped and bond markets are still in their infancy.
Governments should take the lead in increasing investments and leveraging private capital. Improving tax administrations and expanding the tax base could considerably increase government revenue. If the quality of the tax administrations in individual Asia-Pacific economies are assumed to match that in OECD economies, revenue could be as high as 3 to 4 per cent of GDP in major economies such as China, India or Indonesia. Broadening the tax base by rationalizing tax incentives for foreign direct investment and introducing a carbon tax could generate almost $60 billion in additional tax revenue per year.
Increasing prudent sovereign borrowing should also be considered, but it must be done without compromising public debt sustainability. Public bond issuance remains uncommon in some economies. For example, 20 countries in the region have never issued government bonds. A better regulatory framework and a favourable current account performance would enhance government bonds’ issuance in both domestic and international markets.
Government action must be complemented by the private sector to pursue sustainable development. The right policy environment could encourage private investment by institutional investors in long-term infrastructure projects. This may include a setting designed to facilitate public-private partnerships, stable macroeconomic conditions, developed financial markets, and an effective legal and regulatory framework.
I must also highlight that while much of the success in mobilizing development finance will depend on the design and implementation of national policies, regional cooperation is vital. For instance, coordinated policy actions are needed to reduce tax incentives for foreign direct investment. For instance, coordinated policy actions are needed to reduce tax incentives for foreign direct investment.
To conclude, let me just say that this is a timely analysis of how we can link an assessment of the macroeconomic situation, with the ‘bigger picture’: what the current sustainable development challenges are, how we want to address them, what we need to do, and how this will take us forward to sustained, inclusive and sustainable economic growth.