Asia-Pacific developing nations must unlock fiscal space to sustain growth dynamism

ESCAP flagship publication outlines ways to mobilize resources for sustainable development

Asia-Pacific developing economies are experiencing yet another year of subdued growth, the United Nations said here today, calling for quick action on the removal of domestic structural constraints and the unlocking of fiscal space to help stimulate growth and support social development.

Structural constraints, such as infrastructure and development deficits, along with external challenges, are keeping the region from realizing its economic potential, according to the Economic and Social Survey of Asia and the Pacific 2014, the annual flagship publication of the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP).

Developing countries in the region are forecast to grow at an average of 5.8 per cent in 2014, up from 5.6 per cent last year. This marks the third successive year of growth below 6 per cent. By comparison, growth averaged 9.5 per cent in the pre-crisis years of 2005-2007 and over 7 per cent in 2010 and 2011.

“The constrained domestic growth prospects of the region have underlined the importance of productive countercyclical public spending to support inclusive growth and sustainable development,” United Nations Under-Secretary-General and ESCAP Executive Secretary Dr. Shamshad Akhtar said.

Trade-driven East and North-East Asia is expected to grow moderately at 4.1 per cent in 2014 against 4.2 per cent last year. Subdued global commodities demand is forecast to lower North and Central Asian growth to 1.3 per cent from 2.1 per cent in 2013. Despite geographical challenges, Pacific island developing economies are projected to grow at 4.9 per cent against 4.0 per cent last year. Growth in South and South-West Asia is forecast at 4.7 per cent in 2014 from 3.9 per cent last year. South-East Asia’s economy is set to grow slower at 4.6 per cent from 4.9 per cent last year.

Dr. Akhtar emphasized that developing economies in Asia and the Pacific are experiencing subdued growth for different reasons, including economic rebalancing and sustainability considerations in China, monetary tightening to fight capital flight and inflation in India and Indonesia, and the impact of geopolitical instability on the Russian Federation.

China, India, Indonesia and the Russian Federation are projected to grow at 7.5, 5.5, 5.4 and 0.3 per cent, respectively, in 2014, compared to 7.7, 4.7, 5.8 and 1.3 per cent, respectively, in 2013. The group of 12 least developed countries (LDCs) in the region are forecast to grow at 5.6 per cent in 2014 – slower than the developing Asia-Pacific average.

Inflation in developing Asia-Pacific countries as a whole is projected at 4.8 per cent in 2014 against 5.0 per cent last year, but will be a concern for some large developing economies including Bangladesh, India, Indonesia, Kazakhstan and Pakistan.

Launching Survey 2014 in Bangkok, Dr. Akhtar stressed the urgency for bridging gaps in infrastructure and development in the region and addressing environmental degradation in order to promote higher, well-balanced and sustainable growth. Another priority for ensuring the sustainability of growth is to better address climate change through improved climate finance.

ESCAP estimates an annual infrastructure development funding requirement of $800-$900 billion in the region. At the same time, more than 60 per cent of Asia-Pacific people lack social protection coverage. An estimated 63.1 per cent of women and 56 per cent of men in the region faced employment vulnerabilities in 2013 and youth unemployment is three times the adult rate.

External challenges

Asia-Pacific countries are coping with the fallout of monetary and trade policies in the developed world. The withdrawal of quantitative easing by the United States has jolted regional financial markets. Survey 2014 estimates further financial market volatility, expected from the continued normalization of monetary policy in the United States, could cut annual growth by between 0.7 to 0.9 per cent in India, Indonesia, Malaysia, the Russian Federation, Thailand and Turkey.

Trade-restrictive measures in advanced economies outside the region may also have deprived Asia-Pacific developing countries of $255 billion in goods export opportunities between 2009 and 2013, translating into a cumulative decline of more than 1.6 per cent of regional economic output, the ESCAP analysis reveals.

Rising inequality

The growing disparity in incomes and access to social opportunities is a dampener on economic dynamism in Asia-Pacific developing countries, says Survey 2014. The estimates indicate that the poorest 20 per cent of people in 40 Asia-Pacific countries account for less than 10 per cent of national income. The net wealth of about 49,000 ultra-wealthy individuals in the region – with at least $30 million in assets – is 17 times the combined GDP of Asia-Pacific least developed countries.

Mobilizing finances for sustainable growth

Given high public debt levels and declining international development assistance, Survey 2014 outlines a blueprint for mobilizing resources for required productive government spending, focused on strengthening tax revenues, which fall far short of potential in most Asia-Pacific countries. This tax gap is more than 5 per cent of GDP in some countries, rising as high as 12.5 per cent of GDP in others. Closing existing tax gaps in 16 Asia-Pacific developing economies would increase total revenues in excess of $300 billion, boosting tax revenues by more than 70 per cent in some countries, ESCAP estimates in Survey 2014 show.

ESCAP recommends broadening the tax base and rationalizing rates; tackling tax evasion and tax fraud; making tax administration efficient; careful sequencing of tax reforms; and better regional cooperation.

ESCAP also proposes the establishment of an Asia-Pacific Tax Forum of experts and officials which it would coordinate, to monitor tax legislation and regulations across the region, help develop regional best-practice, and address issues ranging from avoiding tax competition for foreign investment, to double taxation, and preventing the illicit transfer of funds.

“The 2014 Survey makes a valuable contribution to the development discourse underway in the Asia-Pacific region and beyond. It provides fresh data, new perspectives and policy guidance on issues which are critical to fostering more inclusive and sustainable development,” the ESCAP Executive Secretary said.

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