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.
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
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.
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
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
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
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
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
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,
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
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).