The Forum for Partners in Iran's Marketplace

July 2013, No. 67

Global Economy

Outlook for Asia and the Pacific in 2013

Despite the moderation in growth in the region as compared to previous robust rates, Asia and the Pacific still remains the most dynamic region globally and exerts increasing influence on other developing regions.

The near-term economic performance of the region is likely to pick up in 2013 but still be below its growth potential. Developing Asia-Pacific economies as a group is projected to expand by 6% in 2013, up slightly from 5.6% in 2012. Steady, although subpar, growth in the United States, and a rebound, though limited, in most major emerging economies, should help to increase global demand.

Within the region, the effects of earlier policy easing and fiscal stimulus will also contribute to higher growth, but any improvement in prospects will be subdued. Leading indicators for industrial activity in major developing Asia-Pacific economies, such as consumer confidence in China, business sentiment in Europe and new orders in the United States, provide mixed signals. Moreover, the expected rebound in 2013 is still below the trend of 7.8% in 2010-2011 and 8.6% during the pre-crisis period of 2002-2007.

ESCAP analysis indicates that lower growth compared with recent years could become a "new normal" for many regional economies if present economic trends were to continue. The output loss could be significant for the region as a whole at almost $1.3 trillion by end-2017. A "new normal" of lower growth may result in 27 out of 43 of economies sampled in the region. Policies to create or strengthen alternative sources of growth should be viewed as a priority in order to prevent the onset of the new normal of lower growth.

Strong headwinds persist. Factors that have been keeping growth in the Asia-Pacific region at subpar levels were largely unchanged during recent quarters, highlighting lack of improvement in the overall environment. Sluggish world trade volume, partly underpinned by a slowdown in China and India, and subdued commodity prices will continue to hold back growth in export-oriented economies in 2013. Even in economies largely driven by domestic demand, which proved to be rather resilient in 2012, employment and earnings growth in 2013 are likely to remain constrained. Macroeconomic management in these outperforming economies and in economies with relatively free capital movements will also be complicated by the recent liquidity injections in developed economies. These liquidity injections have already intensified capital flows and domestic currency volatility in some economies of the region.

In general, the potential effects of volatile short-term capital flows warrant close surveillance. China and India are expected to rebound somewhat after a sharp slowdown in 2012. China is forecast to grow by 8% in 2013, slightly higher than 7.8% in 2012, but 0.8 of percentage point lower than the 2012 forecast provided in the Economic and Social Survey of Asia and the Pacific 2012 (ESCAP, 2012b) released in May. Growth in India in 2012 was notably lower than previously forecast, but the economy is projected to recover moderately to 6.4% in 2013.

Enhanced regional cooperation in finance, trade, infrastructure investment, food and energy security and labour migration matters can also play a crucial role in ensuring sustained and inclusive development.

Improved, although still tepid, global trade should help to support growth in export-led economies in East and North-East Asia and South-East Asia. For example, growth in Hong Kong, China, the Republic of Korea and Singapore is projected at around 2.3-3.5% in 2013, up from 1.4-2% in 2012. Meanwhile, growth in North and Central Asia is likely to remain stable, benefiting from elevated global energy prices and sustained growth in the Russian Federation. Renewed growth in India and healthy domestic demand should help to push up growth in South and South-West Asia. In contrast, developing Pacific island economies are likely to continue to face sluggish growth. As a group, Pacific island economies growth is projected to decelerate in 2013 due to a sharp, energy sector led slowdown in Papua New Guinea which is by far the largest Pacific island economy. However, demand from Australia and New Zealand should remain reasonably strong.

Despite the moderation in growth in the region as compared to previous robust rates, Asia and the Pacific still remains the most dynamic region globally and exerts increasing influence on other developing regions. The region is forecast to grow in 2013 at a rate far more rapid than not only the developed regions of the world, but also compared to other developing regions. The growing economic weight of the Asia-Pacific region has led to increasing interaction with other developing regions, most notably Africa and Latin America.

However, in this regard, there remains significant unfulfilled potential. ESCAP analysis indicates that global South-South exports could increase by an additional $194 billion during 2013-2014, if trade costs of low-performing developing countries could converge by one-fifth towards the levels of high performing developing countries through greater South-South cooperation in trade facilitation and logistics services and infrastructure development.

Modest inflation forecast for 2013: The inflation forecast is generally modest in 2013, with prices projected to increase by 5.1% in the region. Although inflation is not poised to rise sharply, it is important to note that prices are high, causing severe hardship to the poorest and most vulnerable sectors of society in many economies. Furthermore, while overall inflation may not rise for many economies, the key food and fuel sectors may face price pressure due to global supply concerns. The overall moderate outlook for inflation is due to growth remaining relatively weak, resulting in reduced domestic demand-pull factors and inflationary expectations. The inflation outlook is conducive for loosening monetary policy, but such an approach needs to be accompanied by active macroprudential policies and capital controls to prevent external-led pressures on asset prices. Moreover, monetary or credit expansion should be carefully designed to support SMEs, agricultural production and environmentally friendly industries.

Downside risks: Overall risks for the growth forecasts in 2013 remain tilted to the downside. A key downside risk is a sharper-than-expected economic slump in Europe. Although the region's direct financial exposure to banks in the euro zone is not sizeable, systemic risks could rise further under this scenario. Fiscal policy uncertainty in the United States, commodity price hikes due to heightened global financial liquidity and continued geo-political risk in oil-producing areas, and possible food price hikes due to droughts in major food-producing countries pose additional risks. Within the region, the pace of growth deceleration in China and its implications for the direction of domestic policy, such as through rebalancing the economy's sources of growth and property market corrections, as well as a return of economic dynamism in India, are important. On the upside, there is room for macroeconomic policy responses to counteract the strong and persistent headwinds in most economies.

Better policy coordination in developed economies and well-directed policy stimulus in China and other export-oriented economies would reduce economic uncertainty, and potentially push growth in the Asia-Pacific region above the baseline. Enhanced regional cooperation in finance, trade, infrastructure investment, food and energy security and labour migration matters can also play a crucial role in ensuring sustained and inclusive development.

Structural Impediments to Continued Progress

The generalized slowdown across the region in 2012 raises the concern that, beyond the problems emanating from the developed world, there are shortcomings even within domestic economies in terms of the developmental strategies being pursued.

Among others, these include unsustainable resource use rates, growing inequality, declines in public infrastructure investment, especially in agriculture, and low government revenues. These structural impediments exacerbate risk and vulnerability related to food, energy and commodity price increases, as well as to economic instability and slowdown. The need to focus on removing structural barriers to allow domestic demand to contribute more effectively to development is heightened further by the expectation that the export channel to the developed world will be less important for an extended period.

Growing inequality is threatening shared prosperity and constraining domestic markets: Sustained output growth has halved the mean poverty headcount (the proportion of people living on less than $1.25 per day) in Asia and the Pacific from 52% to 19% between 1990 and 2010 (ESCAP, ADB and UNDP, 2013). However, declines in poverty in the region have been accompanied by greater levels of inequality, with the population-weighted mean Gini coefficient for the entire region increasing from 33.5% in the 1990s to 37.5% in the latest available year. Only 16 out of 30 countries that enjoyed positive mean annual growth over the long run exhibited lower income inequality. Notably, inequality has increased in the East and North East Asia, North and Central Asia, and Southeast Asia subregions, with the increase varying across the subregions.

The above findings by ESCAP are in line with other recent studies, such as that of the Asian Development Bank (ADB) (ADB, 2012a), which finds that inequality widened in many countries of the region in the past two decades. According to the ADB study, inequality widened in 11 of the 28 economies with comparable data, including the three most populous countries, and in the drivers of the region's rapid growth—China, India, and Indonesia. From the early 1990s to the late 2000s, the Gini coefficient worsened from 32% to 44% in China, from 31% to 37% in India, and from 29% to 39% in Indonesia.

Inequality is important because of its negative impact on development outcomes, as seen by discounting levels of development achievement by a factor proportional to the extent of inequality (Sen, 1976) and (UNDP, 2011). For example, per capita GDP declines from $2,208 to $1,391 (in 2005 PPP) in India when adjusted for inequality. In the case of Malaysia, the decline is from $12,526 to $6,738. Inequality also reduces the poverty reduction impact of economic growth. Poverty declines at a faster rate for a given growth rate of GDP if inequality declines at the same time than when inequality does not change or rises.

Results from the updated ESCAP Social Development Index first presented in the Survey 2012 (ESCAP, 2012b) clearly highlight the importance of reducing income and social inequalities for increasing equitable, inclusive and sustainable development in the region. The ESCAP Social Development Index combines the education and life expectancy components of the Human Development Index.

Using data for 25 Asia-Pacific countries in 2011, each dimension's average value can be discounted according to the country's level of inequality in education and life expectancy. This indicates that the discount is particularly high in emerging economies, such as China, India, Indonesia and Turkey, where this inequality-adjusted social development index shows an average potential loss of more than 20%.

Inequality of opportunity was also found to be common across the region, particularly in physical assets, such as capital and land, human capital, such as education and health, market access, such as labour and finance, and other public services, such as electricity, water and sanitation. In South-East Asia, for instance, there is a worrisome lack of access to education for income-poor families, with the incidence of education deprivation being 34 times worse in the Lao People's Democratic Republic for the poorest quintile than the richest quintile and seven times worse in Thailand (UNICEF, 2011b). In South Asia undernutrition among children decreased only slightly, from 64% in 1995 to 60% in 2009 for the poorest 20% of the population as opposed to a large decrease from 37% to 26% among the richest 20% during the same period (ADB, 2012b). Significant disparities in access to social services within countries are also stratified by area of residence and by gender.

Lack of progressivity in tax structure and insufficient public provisioning contributing to inequality: Inequality in the region has been exacerbated by the failure of fiscal policy to play its distributional role through making the tax structure more progressive and providing for increased expenditure in the public provisioning of essential services, including social protection. Many economies in the region have failed to raise sufficient tax revenue despite rapid growth, as demonstrated by their low and stagnant tax-to-GDP ratios. The stagnant tax-to-GDP ratios when the economy was growing indicate lack of sufficient progressivity of the tax structure.

In fact, the Asia-Pacific economies as a group have the lowest tax burden of any developing region in the world (Park, 2012). The dependence of the region's economies on direct income taxes as opposed to indirect value-added taxes is lower than many countries and far below that of the OECD economies as a whole (Park, 2012). Declines in formal employment and the consequent rise in vulnerable employment are also contributing to the growing inequality through the falling share of wages in GDP. There is a clear negative relationship between the tax burden of countries in the region and their levels of inequality.

The negative relationship is more pronounced between public social expenditure and levels of inequality. In spite of significant progress in recent years in a number of countries, including through extending provision of basic health-care access and income support to poor workers and households, Asia-Pacific countries still exhibit significant shortcomings in their social protection regimes. Public social security expenditure remains low at less than 2% of GDP in one-half of the countries where data are available. In addition, only 30% of persons above the retirement age in Asia and the Pacific receive a pension on average, while only 10% of the unemployed receive any benefits (ILO, 2010c) and (Bonnet, Saget and Weber, 2012).

Vulnerable employment is a persisting issue within the Asia-Pacific region. Despite high rates of economic growth in East Asia, more than half (50.8%) of the region's workforce maintains vulnerable employment status. Such figures are significantly worse in South Asia where vulnerable employment is more than 78% (ILO, 2011a). Vulnerability of employment and inequality are both inimical to domestic demand. As shown above, inequality and vulnerability have been exacerbated by the failure of governments to raise tax revenue through a progressive tax structure. This has constrained their ability to spend on basic social services, including social protection. Progressive taxation and social protection measures not only reduce inequality, but also lessen vulnerability by acting as automatic stabilizers. The low tax revenue restricts governments' fiscal space and hence their ability to boost domestic demand when needed.

Therefore, reform of the tax structure, including raising efficiency in tax administration and widening of the tax base are of utmost urgency for most Asia-Pacific countries, especially when they have to find domestic drivers of growth in the face of diminished prospects for exports.

Low tax revenues constrain ability for countercyclical response and public investment: The Asia-Pacific region suffers from large infrastructure deficits, although there are significant variations among countries. China has near universal access to the electricity network compared with access for only 40% of the population in India. Least developed countries of the region, such as Afghanistan, Cambodia and Myanmar have the largest infrastructure deficits.

Even relatively developed Asia Pacific countries suffer from infrastructure shortage as compared to advanced countries. For example, per capita electricity consumption in OECD countries is around 10,000kWh, whereas in Indonesia, it is 600kWh, and outside the island of Java, less than 400 kWh.

Only 12% of the country's population has access to piped water. Infrastructure deficit is clearly an impediment to growth, especially in South Asia and the Pacific islands. Investment Climate Assessment surveys of firms in South Asia shows that lack of infrastructure is a "major" or "severe" obstacle to business expansion, ranging from approximately 33% in India to about 80% in Bangladesh. Power is the most critical bottleneck, with transportation a close second. Traffic congestion has become a common feature in most Asian cities; its costs can be as high as percentage points of GDP. For example, Indonesia is losing about 1.2% of its GDP yearly due to severe traffic jams (Indonesia, 2010), while traffic congestion in Bangkok is responsible for a loss of 2.1% of GDP of Thailand (Willoughby, 2000).

In 2008, the annual road congestion costs in the Republic of Korea reached 26.9 trillion Korean won (approximately $23.8 billion), more than 2.6% of the country's GDP (Korea Transport Institute, 2010). 

Source: UN


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  July 2013
No. 67