Challenges and Opportunities for Asia-Pacific Economies
President Mkapa, Chairperson of the South Centre Board;
Dr. Supachai, Secretary-General, UNCTAD,
Dr. Rob Davies, Minister of Trade and Industry, South Africa,
Mr. Martin Khor, Executive Director of the South Centre,
Distinguished members of the South Centre Board,
Ladies and Gentlemen,
I am pleased to have this opportunity to share with you some thoughts on the changes taking place in the world economy, and the challenges that they pose for Asia-Pacific countries as they emerge as the centre of gravity of the world economy.
I will argue that focusing on inclusive development, and deepening regional cooperation, will be critical in realizing the Asian Century, while leading to a more balanced and sustainable pattern of development.
The continuing turmoil in the global economy, especially in the Eurozone economies and in the United States, has created a number of policy challenges for Asia-Pacific economies. Recessionary conditions in the advanced economies have led to a sharp reduction in growth rates of demand for the region’s exports – leading in turn to the slow down of regional economies.
In 2012, the Asia-Pacific growth poles, namely China and India, recorded their slowest growth rates in a decade, even though still-robust by global standards. In the short- and medium-term, the challenge is to create alternative sources of demand, as it is now clear that burdened by huge debts and global imbalances, the advanced economies of the West are no longer able to play the role of engines of growth for the Asia-Pacific region that they have played in the past.
The other key challenge associated with the financial crisis is coping with the ‘new normal’ of high volatility of exchange rates, commodity prices and financial markets. A heavy recourse to liquidity expansion or quantitative easing in the advanced economies is leading to a surge of volatile short-term capital flows. The inflationary pressures amid this slow-down are constraining the policy space necessary to pursue expansionary fiscal and monetary policies, even as risks of Eurozone break-up and US fiscal cliff or debt-ceiling continue to plague the world economy.
Rising prices, especially of food and fuel, are particularly hurting the poor and the vulnerable – and are rolling back hard-won development gains in terms of poverty reduction. ESCAP has estimated that rising food prices in Asia-Pacific economies since late-2010 may have led to as many as 46 million people remaining in poverty. These challenges require responses at national, regional and global levels. Let me now focus on some policy responses by Asia-Pacific economies to these challenges.
The fundamental challenge for the Asia-Pacific economies, in the medium-term, will be to find alternative engines for sustaining growth in the aftermath of the financial crisis, as the advanced economies are not able to play the role of engines of growth.
ESCAP has argued, over the past few years, that developmental challenges such as poverty and wide disparities in social and physical infrastructure, can be turned into opportunities for sustaining growth in the future. Our ‘bottom billion’ people, if lifted out of poverty and enabled to join the mainstream of the region’s consumers, could help to sustain Asia-Pacific growth for decades to come.
This will require faster progress to close development gaps through broad-based investments in education, health services, social protection and basic infrastructure, which will facilitate access to decent and productive employment, as well as to business opportunities for all social groups, besides generating new aggregate demand to sustain growth and inclusive development.
Therefore, an important priority for the governments of the region is to enhance fiscal space through expanding sources of revenue, and by reengineering public expenditure programmes to focus on job-creation, expanding social services and social transfers, to ensure trickle-down of growth, as we argued in the ESCAP study ‘Financing an inclusive and green future’. A number of governments are currently moving towards employment insurance schemes, such as Malaysia and the Philippines, while India is expanding its highly regarded National Rural Employment Guarantee scheme. It is clear that public expenditure on social services is not to be seen as a social welfare programme, but rather as critical investments that governments can make in sustaining growth itself.
In order to curb instability resulting from highly volatile short-term capital flows, ESCAP has also supported the use of capital controls. Over the past few years, a number of Asia-Pacific countries, including the Republic of Korea, Thailand and Indonesia, have employed some of these measures, helping to improve the quality of these capital flows. Now, even the IMF supports the use of such capital account management tools, and Asia-Pacific economies should feel free to consider them and to devise appropriate controls to deal with their specific contexts.
At the regional level, there is much that can be done to strengthen the collective resilience of the region to crises. An important regional initiative is the Chiang Mai Initiative Multilateralization, which covers the ASEAN+3 countries by providing member countries with short-term liquidity support from a US$240 billion pool. It could be extended to rest of the region, to effectively serve as a regional lender-of-last-resort, and by expanding the size of the pool to serve the larger region.
In the area of infrastructure financing, while subregional and bond funds have been established, there is a need for a large-scale regional lending facility, to catalyze infrastructure investments across the region. The Asia-Pacific region needs over $800 billion annually to close regional infrastructure gaps. If new resources can be provided for infrastructure financing, it can also supplement the aggregate demand generation for sustaining growth.
The region has huge foreign exchange reserves and private savings that are invested outside the region because of rather underdeveloped regional financial architecture. ESCAP is currently elaborating on the ways and means designed to better deploy regional savings, including excess foreign exchange reserves and private savings, for productive purposes and for closing infrastructure gaps by further developing the regional financial architecture.
In addition to regional financial cooperation, Asia-Pacific economies can and are doing much to harness their synergies for mutual benefit. Capabilities and resources vary across countries, giving rise to complementarities and opportunities for mutually beneficial exchanges, which could be unlocked by enhancing regional economic integration.
In the Asia-Pacific region, ASEAN has led the process of economic integration among its 10 member countries, and is moving towards the formation of the ASEAN Economic Community by 2015. In other subregions, groupings like SAARC, BIMSTEC, the Economic Cooperation Organization, and the Pacific Islands Forum, besides numerous bilateral free trade agreements, are promoting regional cooperation and integration.
One lesson that emerges from the experiences of different regions, including ASEAN, with regionalism, is its potential in leading to balanced and equitable development, with poorer economies benefiting more in terms of creation of productive capacities from the process of industrial restructuring involved in it, as a recent ESCAP study Growing Together: Economic Integration for an Inclusive and Sustainable Asia-Pacific Century has documented.
The Asia-Pacific region has a number of advantages that should help it to accelerate economic integration. Besides shared history and culture, economies in the region are also characterized by complementarities arising from their very different levels of development, endowments of natural resources, capital, and workforces. But the most important factor for the success of regional economic integration is the presence of large and growing markets.
The emergence of vast middle classes, with growing incomes and purchasing power in the most dynamic Asia-Pacific economies, is leading to the creation of the world’s largest markets for a growing range of products and services, from mobile telephones to motor cars to jet aircraft.
Given these complementarities, intraregional trade has expanded sharply specially since the turn of the century. The pattern of complementarities suggests that, while there are opportunities for mutually beneficial trade within the subregions, there are bigger opportunities between the subregions. This contrasts with the approach adopted by the Asia-Pacific region, which has essentially been led by subregional groupings like ASEAN, SAARC, ECO.
Asia-Pacific needs to build on these subregional and bilateral initiatives, to develop a broader framework for regional economic integration while strengthening subregional economic integration. The objective should be to create an arrangement that is inclusive in terms of country coverage, comprehensive in terms of sectoral coverage and should provide flexibilities and special and differential treatment to poorer countries.
An important initiative in this direction is the Regional Comprehensive Economic Partnership (RCEP), launched in Phonm Penh on 20 November last year, which seeks to bring together the ASEAN+6 (Japan, China, Republic of Korea, India, Australia and New Zealand) countries in a single trade and economic cooperation agreement. At ESCAP, we believe that RCEP could serve as a nucleus of an incipient Asia-Pacific integrated market, and could be extended to other countries over time.
To best unlock the potential of regional cooperation and integration, the region also will also need seamless regional connectivity. Asia-Pacific countries are still better connected with the advanced countries of the West, than with most of their own regional neighbors. ESCAP has, over the years, facilitated connectivity through international agreements on the Asian Highway and the Trans-Asian Railway, and is now promoting a vision of an international, integrated, intermodal transport and logistics system. Similarly, considering the uneven distribution of energy resources across the region, the region needs to develop Asian Energy Highways in the form of regional pipelines for transport of gas and oil and power grids to strengthen energy security.
Finally, an important element of the regional policy agenda is to provide a coordinated regional response to shared vulnerabilities. Beyond the most obvious of these, such as food and energy security, are natural disasters, pressures on natural resources, and shrinking carbon space.
Asia will need to invest in joint research to develop new development pathways that are low on carbon but high on prosperity, poverty reduction, and on human security. This could be fostered through new regional centers of excellence, set to find fresh solutions to persistent problems through research, innovation and technological development and unleash the creativity and entrepreneurship of people.
ESCAP is assisting the region in moving ahead on this policy agenda. In May 2012 at the 68th Commission Session, the ESCAP member States have, through a resolution, requested ESCAP to support the convening of a ministerial conference on regional economic integration in late-2013, to consider the proposals made in the ESCAP study Growing Together, and to take steps towards implementing them as they address the impact of financial crisis.
This is reminiscent of the ministerial conference on regional economic cooperation convened by ESCAP fifty years ago, which was known as ECAFE then, where the member States resolved to set up the Asian Development Bank to assist them in their pursuit of development.
Finally, there is the long-pending agenda of reform of international financial architecture, which has to be addressed in order to avoid future financial crises. One of these reforms concerns a gradual move towards a Special Drawing Rights (SDR) based system of global reserve currency. The other is to address the democracy deficit in the governance of international financial institutions. A number of issues of reforms have been discussed in the G20, such as curbing excessive risk-taking in the financial sector, regulation of shadow banking, and regulating speculative activity in the commodities markets. It is time that G20 moved towards implementation of an international financial transactions tax, that may help to moderate the volatility of capital flows while generating substantial resources to fund global public goods, such as poverty eradication, achievement of the MDGs, and climate change mitigation in poor countries. The eight Asia-Pacific members of the G20 need to work with those from other emerging regions to build coherence and consensus on these issues to forge a global economy that is more resilient and founded on principles of social equity and inclusion, shared prosperity and sustainability.
Let me close by reiterating that the Asia-Pacific region emerged from the global financial crisis as a growth-driver and anchor of stability of the global economy. It now has the historic opportunity to rebalance its economic structure in favour of itself, to sustain its dynamism with strengthened connectivity and balanced regional development and make the twenty-first century a truly Asia-Pacific century. In this journey, ESCAP, as the most inclusive intergovernmental platform for the region, will be assisting our member States to move ahead on the policy agenda for deepening regional economic integration which will assist in catapulting the Asia-Pacific region to become the fixed centre of gravity of the world economy.
I thank you.