28 Feb 2017
The Economic and Social Survey for Asia and the Pacific 2016: Year-End Update
By United Nations ESCAP – Economic and Social Commission for Asia and the Pacific
Economic conditions stabilized in the Asia-Pacific region in the second half of 2016. Resilient domestic demand and policy support have resulted in the region’s developing economies growing at a steady pace of just below 5 per cent annually despite a sluggish global economy and weak trade growth. Indeed, with developed economies losing some of their recovery momentum, the region’s high and steady growth rate, led by China and India, has arguably been an anchor of stability for the struggling global economy. The outlook for 2017 is broadly positive based on China’s rebalancing-led moderation being offset by an expected return to positive economic growth in the Russian Federation, sustained high economic growth in South Asia supported by moderate inflation, and increased public investment in South-East Asia and the Pacific.
Stable economic conditions provide an opportunity to make progress on the productivity and inclusiveness fronts, particularly in the context of implementing the 2030 Agenda for Sustainable Development. While the region continues to lead global economic growth, output expansion from globalization and technology has not been translated into commensurate increases in decent jobs in a number of countries. Relatively slow employment growth and a persistently high share of vulnerable employment have contributed to rising income inequality. As the region undergoes further structural transformation, efforts to lift productivity and innovation should be matched by measures to enhance worker skills and social protection. Moreover, appropriate policies should ensure that productivity gains derived from technological progress are passed on to workers through higher real wages.
Despite recent stability, the likely impact of some risks for the near-term economic outlook should not be underestimated. Bouts of financial volatility can re-emerge given the uncertain external environment, including policy uncertainties in major economies in the wake of the forthcoming installation of a new administration in the United States of America on 20 January 2017 and the negotiations in Europe related to the planned exit of the United Kingdom of Great Britain and Northern Ireland from the European Union (referred to as Brexit), and vulnerabilities on the domestic front, such as in corporate and bank balance sheets. External demand is likely to remain weak, and there is concern that prolonged weakness in global trade could be a drag on productivity growth and the integration of developing countries into global and regional value chains. Trade protectionist measures and sentiments, which are already on the rise, may increase further, harming export-oriented Asian economies and negatively affecting private investment.
While low inflation and an easing in financial market conditions have allowed monetary authorities to lower policy rates, a prudent stance is needed given the partial recovery in global oil prices and high private debt and currency exposure in some economies. To propel investment, improve efficiency in the allocation of investment resources and ensure financial stability, banking supervision and regulation along with macroprudential frameworks should be strengthened. In this vein, deleveraging and restructuring efforts in countries such as China and India should contribute to enhanced financial stability and higher productivity.
Fiscal policy can and should play a proactive role in supporting domestic demand and in meeting long-term development priorities. While ensuring long-term fiscal sustainability, there has to be greater emphasis on the quality and composition of public expenditures, rather than simply on aggregate budget deficits and public debt levels. Public infrastructure outlays are deemed particularly effective in supporting domestic demand and addressing structural bottlenecks in the current environment of weak external demand, weak private investment, low borrowing costs and benign inflationary pressures. Improving public financial management, reforming State-owned enterprises and enhancing tax revenues could considerably strengthen fiscal positions on a sustainable basis.
Tax policy can also be particularly effective in nurturing a more balanced society with less extreme inequalities. The population-weighted Gini coefficient, based on household income estimates, has increased by almost 30 per cent in the region between 1990 and 2014. Rising inequality has triggered broad concern and social debate, and promoting inclusive development has become a key priority of countries’ national development strategies. Taxes, and in particular progressive personal income tax, can be a main policy tool for direct redistribution of income and wealth in a society. Taxes can also provide critical public revenues for financing public investments in health care and education, as well as for funding social protection and welfare schemes.
Better economic governance, as reflected, among other things, in the effectiveness and integrity of public institutions is a fundamental element in managing structural transformations, undertaking progressive tax reforms and moving towards a sustainable development path. Effective economic governance can go a long way in enhancing investment that is currently weak; in promoting productivity and innovation that underpins sustained economic growth; and in accelerating poverty reduction and mitigating inequalities, including through progressive tax reforms, that needs consistent policy attention. The role of better and more effective governance in improving development outcomes, especially through public resource management and financial markets, will be explored in detail in the forthcoming issue of the Economic and Social Survey for Asia and the Pacific for 2017.
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