Info Service on Finance and Development (May 17/02)
11 May 2017
Third World Network
United Nations: Developing Asia-Pacific economies to grow
at 5% this year
Published SUNS #8456 dated 5 May 2017
Geneva, 4 May (Kanaga Raja) - The developing economies in Asia-Pacific
region are projected to see average economic growth rising to 5 per
cent in 2017 and 5.1 per cent in 2018, compared to 4.9 per cent in
2016, a UN report has said.
In its Economic and Social Survey of Asia and the Pacific 2017, released
this week, the UN Economic and Social Commission for Asia and the
Pacific (ESCAP) said this growth is underpinned by stable economic
conditions in China, where higher value-added sectors are gradually
replacing excess capacity sectors as the driver of output, employment
and export growth.
The developing economies of Asia-Pacific encompass all the countries
in the region except Australia, Japan and New Zealand.
In its first chapter providing a macroeconomic assessment of the region,
the Survey makes a case for a proactive role for fiscal policy and
supporting structural reforms not only to enhance economic potential
but also to strengthen social protection and improve resource efficiency.
"As we enter the second year of the 2030 Agenda, economic growth
in Asia-Pacific economies is steady but modest amid prolonged weak
external demand and rising trade protectionism. Future economic growth
will need to rely more on productivity gains, compared to factor accumulation,"
said ESCAP Executive Secretary Dr Shamshad Akhtar, in a press release.
"Sustained productivity gains, in turn, will require effective
institutions and better governance, in both public and private spheres,"
"In addition to ensuring sustained and robust economic growth,
policymakers will need to address social and environmental challenges
in order to improve the quality of this growth."
According to the ESCAP report, the region's developing economies now
account for a third of the world's output, only slightly less than
the combined share of the developed economies in North America and
"If the region continues to outpace global economic growth at
the current pace, it would account for more than half of global output
For the Asia-Pacific region to realize its full potential, however,
it cannot rely simply on past strategies and patterns of economic
For future growth, the region will need to rely more on broad-based
productivity gains, which in turn will require effective institutions
and governance in both the public and the private spheres.
Following a strong post-crisis rebound in 2010, economic growth in
the Asia-Pacific region has been moderate in recent years compared
with its historical trend.
The region's export-oriented economic growth strategy is under pressure
amid prolonged weakness in external demand and global trade.
China is both a transmitter and a source of the current economic slowdown,
given its role as a hub in global value chains and its rebalancing
towards consumption and services.
ESCAP said the recent slowdown is also due to large terms of trade
losses among net commodity exporters, such as the Russian Federation.
Fortunately, both China and net commodity exporters had sufficient
fiscal space to respond to such shocks. In particular, China's fiscal
stance has been very expansionary, with large budgetary and non-budgetary
support provided for the economy.
India also regained its economic growth momentum on the back of reform
initiatives and the beneficial impacts of low global oil prices.
"Taken together, the Asia-Pacific region's economic performance,
although modest compared with its recent past, is commendable when
viewed against the backdrop of a struggling global economy."
The Survey noted that in 2016, economic conditions in the region began
to stabilize, with better-than-expected performance exhibited by China
and a recovery under way in net commodity-exporting countries.
However, growth slowed considerably in Turkey due to the political
situation and to a lesser extent in India due to the impacts of de-monetization.
Taken together, average economic growth in developing Asia-Pacific
economies is estimated to have been 4.9 per cent in 2016, largely
stable compared with that of the previous year, without a further
Across the region, economic growth is expected to be slightly more
broad-based in 2017 in terms of demand-side components.
Leading indicators, such as manufacturing PMIs (Purchasing Managers'
Indexes) and the latest export and import data, point to a mild economic
recovery, particularly on the investment side.
However, such a recovery is unlikely to be a firm rebound given that
the factors which held back domestic demand remain largely unresolved
even as rising trade protectionism effectively offsets potential recovery
in external demand.
Average economic growth in the developing Asia-Pacific region is projected
to rise to 5 per cent in 2017 and 5.1 per cent in 2018, underpinned
by stable economic conditions in China, where higher value-added sectors
are gradually replacing excess capacity sectors as the driver of output,
employment and export growth.
According to the Survey, projected moderation in China reflects mostly
ongoing efforts to deleverage and restructure the economy, which could
boost growth in the medium term.
In India, a gradual recovery from an estimated 7.1 per cent growth
rate in 2016 is projected, as re-monetization will restore consumption,
but a revival in investment will take longer given unresolved problems
in the banking sector.
A slightly improved growth outlook for the rest of the region is due
to a recovery in net commodity-exporting economies and public investment
in some of the net commodity-importing economies.
Among developed Asia-Pacific economies, growth in Japan is projected
to strengthen in line with improved labour market conditions.
Despite the broadly positive economic outlook for 2017 and 2018, the
likely impact of some risks for the near-term economic outlook should
not be underestimated, the report cautioned.
With a significant increase in global policy uncertainty in recent
months, the risks to the outlook are tilted to the downside.
The most significant risk is trade protectionism. Recent shifts in
United States policy over trade, currency, immigration and other areas
could have large potential impacts on the region, including for China's
goods exports and India's services exports.
Possible further shifts in United States policy, together with Brexit
and upcoming elections in various European countries, have also resulted
in heightened global uncertainty, which in itself undermines investment
in the region.
"Any foregone trade and investment in turn could hurt employment
prospects and act as a drag on productivity growth in the years to
Based on simulations, average economic growth in developing Asia-Pacific
economies in 2017 could be up to 1.2 percentage points slower than
the baseline projections if an increase in trade protectionism and
global economic uncertainty is steeper than anticipated.
All this comes at a time of potential tightening of global financial
conditions, which could effectively bring to an end the region's cycle
of monetary easing, said the Survey.
Capital outflow pressures, which increased in the wake of the United
States election before subsiding recently, are likely to re-emerge
with the announcement by the United States of fiscal stimulus and
lead to further depreciation of regional currencies against the United
This outcome is expected to be accompanied by bouts of financial volatility,
arising from any deviations of actual policy from market expectations.
The United States raised its federal funds rate in March 2017 for
the second time since the United States election in November 2016
and only the third time in a decade. The median expectation is that
there will be two more rate increases in 2017.
There is also a chance that sovereign yields in Europe could rise
on the back of more expansionary fiscal stances and that the European
Central Bank (ECB) may not extend its quantitative easing beyond 2017.
"Countries in the region with large current account deficits
and high short-term external debt are particularly vulnerable."
On the upside, said the Survey, regional exports could benefit from
stronger external demand and currency- induced competitiveness, but
any boost is likely to be limited by trade protectionist measures.
Currency depreciation could also further limit monetary policy space,
not least due to its inflationary impact.
Within the region, China's role as originator and transmitter of shocks
has increased in recent years. Real or perceived economic instability
in China could lead to bouts of financial volatility in the region,
as witnessed in early 2016.
In view of the fact that several regional economies are competing
with China in global value chains, depreciation of the renminbi puts
pressure on other regional currencies to also depreciate.
On the upside, if China's economic performance is stronger than expected,
as in 2016, there could be positive trade spillovers.
In the medium term, strengthening domestic and regional demand will
be critical in the face of a tough external environment.
In this regard, China's rebalancing and opening augurs well for the
region, said the Survey. The Belt and Road Initiative could provide
renewed momentum for regional connectivity and intra-regional trade,
while China's capital account liberalization could dramatically increase
the pool of long-term financing available for investment in the region.
"The future of regional demand also depends largely on whether
South Asia realizes its full potential, for which regional economic
cooperation and integration could critically complement domestic efforts."
According to the Survey, monetary policy stances in the region have
recently shifted from "accommodative" to "neutral"
as upside risks to inflation increased.
In the first three months of 2017, policy interest rates were on hold
in India, Indonesia and the Philippines, while short-term interest
rates increased in China, in contrast to the previous two years when
policy rates were lowered consecutively or kept at record low levels
in these economies plus others such as Pakistan, the Republic of Korea
Average inflation in developing Asia-Pacific economies is projected
to rise from 3.6 per cent in 2016 to 3.8 per cent in 2017 and 2018.
While global commodity prices have largely stabilized since 2016,
they remain a source of upside or downside risk depending on whether
a country is a net commodity exporter or importer.
If global oil prices overshoot baseline projections of $55 per barrel,
net importers of oil in the region would face higher inflation but
net exporters would see faster economic recovery.
Despite the OPEC production limitation agreement, large inventories
and the availability of shale oil in the United States have so far
limited further price rises.
In any case, the boost from low inflation and supportive monetary
stances has been smaller than expected. For instance, countries which
underwent disinflation or reduced their interest rate did not necessarily
see output growth accelerate in the following year.
Possible reasons include relatively weak growth in real wages and
farm incomes on the consumption side and uncertainty and excess capacity
on the investment side.
In some countries, private sector debt overhang was also a major factor.
In particular, private investment has not been forthcoming in many
The Survey said that the recent up-tick in inflation, though mostly
due to non-domestic demand factors, such as oil prices and exchange
rate depreciation, calls for caution. Likely currency depreciation
could further limit monetary policy space, not least due to its inflationary
Nevertheless, raising policy rates would be difficult as well. For
instance, leveraged households and firms could find that debt service
costs will rise and refinancing become more difficult, thus increasing
financial stability risks.
Economies are therefore advised to maintain the status quo in terms
of policy interest rates.
At the same time, they should consider strengthening the management
of capital flows and macroprudential measures to mitigate the adverse
effects of exchange rate depreciation and to ensure financial stability.
According to ESCAP, a potential source of financial instability in
the near future may be worries about excessive indebtedness. In 2016,
global total debt stood at record levels of $152 trillion or 225 per
cent of global GDP.
Furthermore, a specific vulnerability of debt accumulation is that,
although issuance of local currency bonds has increased, considerable
volumes of debt have been issued in hard currency, mostly the United
The interest rate hikes in the United States, together with the strong
dollar, could spark a trend reversal.
ROLE OF FISCAL POLICY
The Survey underscored that fiscal policy could further play an active
role in stabilizing the economy and supporting development priorities,
but its effectiveness depends critically on good governance.
Fiscal policy stances in the region have been broadly counter-cyclical
and expansionary in recent years. China implemented large infrastructure
projects and tax breaks; India adjusted its medium-term fiscal consolidation
path to accommodate higher current expenditures; and the Republic
of Korea and Thailand engaged in various stimulus measures.
However, net commodity exporters have taken a more cautious approach
in view of the terms-of-trade losses that have affected public finances.
"Ensuring fiscal sustainability requires tax reforms and effective
debt management, keeping in mind the potential positive spillovers
of social and infrastructure investments on the economy," said
the Survey. In assessing fiscal sustainability, countries could consider
the potential positive spillovers of social and infrastructure investments
on the economy.
If the spillovers are sufficiently large, for instance due to the
"crowding in" of private investment, the public debt to
GDP ratio could be stable over the long term.
To achieve economic health, countries often need to make changes in
the basic structure of their economies.
Structural reforms are measures that are aimed at raising productivity
by improving the technical efficiency of markets and institutional
structures, or by reducing impediments to the efficient allocation
These range from measures as diverse as reforms on banking supervision
and laws on property rights to changes in tariff rates or rules on
hiring and firing.
"Keeping in mind the broad objectives of productivity growth,
equity and environmental sustainability, countries need to decide
which reforms are most critical in the specific country context and
whether several reforms could be bundled or sequenced."
In the past, structural adjustment programmes in crisis-affected developing
countries often took "one-size-fits- all" and "big
An alternative approach is less ambitious, consisting of sequential
targeting of binding constraint. A potential advantage of this approach
is that early wins could create political support for reforms over
time, and that the sense of ownership will increase, which could also
allow time for countries to "learn to reform".
This situation is in contrast to the Washington Consensus and its
augmented version, which tends to be prescribed from the outside and
suffer from redundancy or the lack of a well-defined list of priorities.
The region's own experience, including that of China, seems to support
the sequential targeting approach, said ESCAP.
Moreover, the region's own experience also highlights the important
role of the State in structural reforms.
The Government provides an enabling environment of policies, institutions
and public services that helps factor and product markets to work
efficiently, which in turn enables private sector-led growth to take
ESCAP also said that in view of the fact that social protection coverage
in Asia and the Pacific is still relatively low and that there are
important gaps in both the depth and breadth of social assistance
for the working-age population, a series of policies needs to be considered.