Economic and financial stability in Asia is critical as we embark on the new 2030 Agenda for Sustainable Development – a universal and ambitious blueprint that expands the horizons of policymaking to implement the 17 new Sustainable Development Goals, reduce the region’s collective environmental footprint and secure the resources necessary to build the future we want.
The Asia-Pacific region remains uniquely positioned to deliver on these promises, given its growth record and potential, resource base, achievements of the Millennium Development Goals, as well as its innovation and dynamism. As the region leads on the 2030 Agenda, however, it has to tackle not only the long term challenges posed by its immense population, (60 percent of the global population) and its significant contribution to global greenhouse gas emissions (53 per cent), but must also gear itself for high and sustainable economic growth, backed by efforts to enhance economic and financial resilience.
The Year-end Update of the Economic and Social Survey of Asia and the Pacific 2015, published by the Economic and Social Commission for Asia and the Pacific (ESCAP), identifies an emerging slowdown in the region’s economic growth, which has implications for Asia and the Pacific’s continued ability to drive the global economic recovery. Economic growth in the region is expected to plateau at about 5 per cent in 2016. 2015 saw only 4.5 per cent growth, compared to markedly better average growth of 9.4 per cent in the pre-crisis period between 2005 and 2007.
Even though signs of recovery are emerging in developed economies, the global recovery remains weak with some new emerging challenges and risks. At the same time, the economic growth momentum in Asia and the Pacific has slowed. Deceleration in growth does not augur well for the implementation of the 2030 Agenda, which is why effective diagnostics are the primary focus of the ESCAP update.
Four key factors have impacted regional economic performance, which will also have a significant global impact:
First, the continued weak recovery and sluggish demand in developed economies is driving the economic slowdown being observed across Asia, but especially in China.
Second, for the right reasons, China’s endeavours to rebalance its economy through the stimulation of domestic consumption have, combined with restrained investment, particularly by its state-owned enterprises, had a large impact. Due to the size of its economy and its role in intraregional trade and investment, China’s slowdown has a major direct impact on growth in the economies of developing Asia and the Pacific.
Third, the Chinese economic slowdown is also impacting equity and currency markets, in China as well as across the region and beyond, having implications for wider economic and financial stability. We remain hopeful that this is essentially a financial market correction and that China’s economic fundamentals remain strong. Nevertheless, China does face substantial challenges to the sustainability of its growth, such as high inequalities, rapid accumulation of private debt and serious pollution issues.
Fourth, domestic demand in the region has slowed, therefore Asia-Pacific economies will need to prioritize the reinvigoration of both domestic and regional demand to revive growth and support sustainable development, through infrastructure investment that will generate jobs, increase the financial resources of governments and improve the overall development outcomes of Asia and the Pacific.
One way to boost domestic demand is to tap the fiscal space that is contingent on tax and other reforms. Especially in view of the 2030 Agenda, governments will need to increase or re-prioritize expenditures. In 2015, a number of economies undertook significant fiscal spending programmes, including in China, the Republic of Korea, Fiji, the Philippines, the Russian Federation and Thailand. Fiscal policy can tackle cyclical and long-term challenges, and relieve pressure on monetary policy, provided that tax revenues are strengthened.
In many developing economies there is also further potential for stronger domestic demand due to favourable population dynamics, rapid urbanization and a growing middle class. However, despite its potential to contribute to growth in the region, domestic demand in several economies has not seen robust growth. High household debt is one factor holding back domestic consumption in, for instance, Malaysia and Thailand. Rapid increases in private debt in these economies call for vigilance, especially as financing costs are likely to increase in the region. In other economies, such as the Russian Federation and Indonesia, elevated levels of inflation and currency depreciation are also having an negative impact on consumption.
One way to strengthen growth is to focus on improving regional productivity, which has been falling since 2008, and making it more inclusive. In doing so, it is also particularly important for the benefits of improved productivity to be more equitably shared with workers, by translating these into real wage increases. This would contribute to strengthening domestic and regional demand. Economic growth supported by increases in real wages is more resilient than growth backed by the accumulation of debt.
The author is an Under-Secretary-General of the United Nations and Executive Secretary of the Economic and Social Commission for Asia and the Pacific (ESCAP). She has been the UN’s Sherpa for the G20 and previously served as Governor of the Central Bank of Pakistan and Vice President of the MENA Region of the World Bank.