Economic and Social Survey for Asia and the Pacific 2017 -- Effective governance key to improving the quality of Asia-Pacific economic growth

The Asia-Pacific region’s high and steady economic growth has been an anchor of stability for the struggling world economy in recent years. Developing economies of the region now account for almost a third of global GDP, slightly less than the combined output of the developed economies of North America and Western Europe.

If the region continues to grow at the current pace, it would account for more than a half of world economic output by the year 2050. With its increasing importance, the role of traditional ‘success factors’ such as education, high investment and savings rates, reliance on world markets through exports, is likely to evolve as well. Future economic growth will need to rely more on productivity gains which, in turn, require effective institutions and better governance, in both public and private spheres.

Importantly, the policy focus will have to be more on the quality of economic growth, to cater for social and environmental aspects as well. Decades of rapid Asia-Pacific economic growth have come at a high cost to people and the planet in the form of rising inequalities and environmental degradation.

The bulk of countries in the region still have significant poverty levels, with a heavy concentration of wealth at the top. The majority of its population is not yet “middle class” but rather “transitional class”, and therefore vulnerable to falling back into poverty. Wide income inequality undermines social cohesion, and hurts long-term economic growth by reinforcing inequality of opportunities.

On average, developing Asia-Pacific economies use twice as many resources per dollar of GDP than the rest of the world. Environmental degradation and carbon emissions, not captured in GDP, undermine the sustainability of economies and affect inter-generational equity.

This is why, in the second year of the adoption by world leaders of the transformative 2030 Agenda for Sustainable Development, ESCAP is calling for a sharper focus on the quality of regional economic growth by addressing simultaneously, the economic, social and environmental challenges that are at the core of the 2030 Agenda.

The ESCAP flagship report, Economic and Social Survey of Asia and the Pacific 2017 (Survey 2017) launched today advocates effective governance as critical for the quality of economic growth. Specifically, it identifies fiscal management as the transmission mechanism through which governance can support achievement of the 2030 Agenda.

The role of governance in effective mobilization and efficient allocation of fiscal resources provides for productive investments in infrastructure, social protection and resource efficiency. The quality of governance affects the composition and efficiency of public expenditure and the tax morale. Moreover, effective governance can reduce intra-regional development gaps by enabling poorer countries to benefit more from regional economic cooperation and integration.

Fiscal policy can tackle inequality, both in the short-term, through redistributive policies and provision of social protection, and in the medium and long run, by reducing inequality of opportunity. The quality of governance is vital for ensuring fiscal sustainability through comprehensive tax reforms and effective debt management.

Governance quality is also crucial for undertaking successful productivity-enhancing structural reforms to complement fiscal policy. Given the diversity of economies in the region, a sequential targeting of the binding constraints to productivity is a more prudent approach than a ‘one-size-fits-all’ and ‘big bang’ approach.

Effective governance can reduce the burden of non-communicable diseases in the Pacific, promote economic diversification in North and Central Asia and creation of decent jobs in South and South-West Asia, reduce development gaps in South-East Asia and accelerate ecological innovation in East and North-East Asia.

How societies invest, innovate, and ensure that no one is left behind is largely dependent on the quality of governance, and by how much trust and confidence people have in their institutions. Governance is crucial for effective resource mobilization, public expenditure efficiency and structural reform. When institutions are weak, inequalities tend to increase and the pace of poverty reduction declines. The quality of governance is also important for environmental outcomes, as reflected, for instance, in the capacity to make and apply environmental rules and safeguards.

As countries in Asia and the Pacific continue to undergo large structural transformations, the region is on the cusp of providing global leadership towards a more holistic and transformative development. Effective governance will play an increasingly important role in ensuring that region’s tryst with its future is not hampered by growth that is not inclusive and sustainable in the long-run.