International Conference on Global Economic Recovery: Asian Perspective (Plenary Statement)
25 October 2014
Developing Asia remains the fastest-growing region in the global economy, and has generated half of global economic growth between 2010 and 2014. At 5.5 per cent growth, the regional economy today is expanding more slowly than the 7.2 per cent average growth we saw in pre-crisis years1 . But this is still well above world output growth at 2.6 per cent. The persistent growth differential between the region and the rest of the world has resulted in the doubling of developing Asia's share in the world economy since 2000 to around one-fourth of global output today.
Economic performance in the region has relied heavily on foreign trade in the past, but since the 2008 crisis there has been a significant slowdown of foreign demand, particularly from developed countries. Exports from Developing Asia to developed markets virtually stagnated in 2012 and 2013, compared to pre-crisis trade growth, which was nearly twice as fast as that of the economy as a whole. This slowdown has also weighed on intra-regional trade volumes, given the sizable trade in intermediary goods across the global value chains that tie the region together.
Resiliency in the region has thus relied instead on strong domestic markets, stimulated by active countercyclical policies. Looking forward, the main question is whether these policies will fade out or, instead, whether they represent the beginning of a long-term rebalancing of growth drivers, giving a larger part to domestic and regional markets.
A growth strategy that increasingly relies on domestic and regional markets faces a number of challenges. An important one is the risk that new growth drivers may deteriorate trade balances, if the structure of supply does not adapt rapidly enough to the new demand pattern.
In most countries in the region, investment rates represent 25 per cent of GDP or more. It is important that this investment is oriented towards infrastructure needs, urbanization requirements and to help adapt the supply structure to the changing demand structure. On the demand side, policymakers should pay attention that expanding consumption credit does not lead to asset bubbles, but instead is based on genuine income expansion due to improving employment and real wages.
Some positive indications in this respect are increases in real wages in a number of countries, together with some improvements in income distribution, especially in South-East Asia and, since 2009, in China. Specific incomes or employment policies may support these trends, like for instance the National Rural Employment Guarantee Scheme in India.
On the other hand, rapid expansion of domestic credit to the private sector -- as in parts of South-East Asia and India -- may create financial fragility, especially if those credits are directly or indirectly related to external capital inflows. For some time, this configuration may allow for rapid economic growth; but it may also be associated to increasing trade imbalances and recreate some of the conditions that led to the 1997 Asian crisis.
Sustainable and inclusive growth can hardly result from spontaneous forces, especially when they require structural change. The reorientation of development strategies should consider several points:
First, increasing fiscal space should support public or private consumption and investment, and seek to orient them according to economic and social priorities. In most Developing Asian countries, tax revenues (in per cent of GDP) are well below the average level of other developing regions. The United Nations2 estimates that, given public spending needs for social protection, environmental protection, and infrastructure, the gap between desired levels of tax collection and actual tax revenues amounts to more than 5 per cent of GDP in some countries in the region. More effort needs to be made to increase tax effort in these countries.
Second, coping with rising inequalities should remain a priority. Some South-East Asian countries have reduced income inequality, and may be embracing a 'growth with equity' development strategy. In parallel, let me also encourage governments to further consider a range of policy interventions, such as increasing spending on social protection, promoting youth employability and addressing the urgent need for greater and more sustainable formal sector employment.
Third, mitigating the risks of further capital volatility is important. In particular, there is the need for policymakers to manage capital movements on a permanent basis to prevent excessive inflows or outflows and select those inflows that are beneficial to the economy. These would complement some of the precautionary measures that have already been implemented by several Asian developing countries. In the same vein, it is important to strengthen further regional cooperation on the monetary and financial spheres.
Fourth, countries can enhance regional economic cooperation and partnerships to spread more effectively the benefits of public policies across borders. If domestic markets are to play a larger role than before the global crisis, it is important that most trade partners follow supportive policies simultaneously to generate positive spillovers among them and avoid regional imbalances.
Ladies and Gentlemen,
Asia has demonstrated enormous economic leadership over the past decade, and has led the way in reducing poverty, creating employment and stimulating opportunity for investors the world over. As policymakers change course to re-ignite the global economy's growth engine, we all look to Asia for further leadership in this regard. Shifting to new drivers of domestic and regional growth are an important step in this direction, and can help the entire world economy embrace a more inclusive and sustainable future.
Thank you for your kind attention.
1From 2000 to 2008
2ESCAP
