UN: SUBDUED GROWTH IN ASIA-PACIFIC FOR 2013

Despite the modest growth, Asia and the Pacific still remains the most dynamic region globally.

By Kanaga Raja

Third World Network Features

The near-term economic performance of the Asia-Pacific region is likely to pick up in 2013 but will still be below its growth potential, with developing economies in this region projected to expand by 6% this year, up slightly from 5.6% in 2012, the UN Economic Commission for Asia and the Pacific (ESCAP) said on Thursday.

In its annual Economic and Social Survey of Asia and the Pacific, ESCAP said that steady, although sub-par, growth in the United States, and a rebound, though limited, in most major emerging economies, should help to increase global demand.

"Within the region, the effects of earlier policy easing and fiscal stimulus will also contribute to higher growth, but any improvement in prospects will be subdued," it stressed, noting that the expected rebound in 2013 is still below the trend of 7.8% in 2010-2011 and 8.6% during the pre-crisis period of 2002-2007.

The two regional giants, China and India, are expected to rebound somewhat from a slowdown in 2012. China is expected to grow by 8% in 2013, slightly up from 7.8% in 2012, while India is expected to recover from its relatively low 5% growth in 2012 to 6.4% in 2013.

In a preface to the Survey, Noeleen Heyzer, Executive Secretary of ESCAP,

said: "The Survey comes at a crossroad for Asia and the Pacific because of the tensions within the current development pattern of the region exposed by the ongoing crisis in the global economy, environmental fragilities, rapid demographic shifts and resource constraints."

"As much as the region anchors the global economy, it is still home to more than 800 million people living in extreme poverty, 563 million people undernourished and more than 1 billion workers in vulnerable employment, while income and social inequality and economic insecurity continue to increase in many countries," she added.

"The good news is that Asia and the Pacific has already started to rethink and reinvent itself. It is doing so by looking for new drivers of economic growth, closing development gaps and seeking to rebalance export-led growth with a greater reliance on domestic demand."

"It is also increasing spending on health, education, social protection and disaster management and it is addressing deficits in infrastructure and sustainability, including through low carbon and green economy policies. These efforts should be supported, enhanced and propagated throughout all countries in the region," she stressed.

The ESCAP region encompasses all the countries in the Asia-Pacific region including the Central Asian republics of Azerbaijan, Georgia, Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan. The developed economies in this region are Australia, Japan and New Zealand.

According to ESCAP, its analysis indicates that lower growth compared with recent years could become a "new normal" for many regional economies if present economic trends were to continue.

Under assumptions of the continuation of present economic trends, projected and pre-crisis growth rates would differ by about one percentage point per year. In particular, growth in developing Asia-Pacific economies is estimated to decelerate from 7.3% per year during the pre-crisis period of 2000-2007 to 6.4% during the period 2013-17.

As compared to the pre-crisis pace of 7.3% per year, the output level by end-2017 would be more than 10% lower based on the scenario of actual growth during the period 2008-2012 and projected growth of 6.4% during the period 2013-2017. In value terms, the estimated loss amounts to almost $1.3 trillion by end-2017.

A "new normal" of lower growth may occur in 27 out of 43 economies sampled in the region. In Armenia, Azerbaijan, the Islamic Republic of Iran and Samoa, future growth is projected at less than half of the pre-crisis pace, while Pakistan, the Republic of Korea, the Russian Federation and Singapore are also substantially affected.

Policies to create or strengthen alternative sources of growth should be viewed as a priority in order to prevent the onset of the new normal of lower growth, ESCAP said.

According to the Survey, strong headwinds persist. Factors that have been keeping growth in the Asia-Pacific region at sub-par levels were largely unchanged during recent quarters, highlighting lack of improvement in the overall environment.

Sluggish world trade volume, partly underpinned by a slowdown in China and India, and subdued commodity prices will continue to hold back growth in export-oriented economies in 2013. Even in economies largely driven by domestic demand, which proved to be rather resilient in 2012, employment and earnings growth in 2013 are likely to remain constrained.

"Macroeconomic management in these outperforming economies and in economies with relatively free capital movements will also be complicated by the recent liquidity injections in developed economies. These liquidity injections have already intensified capital flows and domestic currency volatility in some economies of the region. In general, the potential effects of volatile short-term capital flows warrant close surveillance."

ESCAP underlined that the key concern for the global economy remains the spillovers from the difficulties in the euro zone, with the euro zone slipping back into a double-dip recession in 2012. Despite a raft of policy measures over the past year supported by the European Union and the International Monetary Fund (IMF) to enhance the confidence of the financial markets, instability continues, as evidenced by periodic increases in spreads at debt auctions to unsustainable levels.

"Underlying the response of the financial markets is a fundamental uncertainty about the use of austerity as the primary response to reduce debt ratios. One concern is whether the level and duration of austerity being attempted will be politically and socially feasible. In recent months, there have been widespread protests by the populace in austerity-ridden economies with such upheavals only likely to grow as spending cuts and job losses continue."

"More fundamentally, it remains highly unlikely that the current austerity policies will achieve the purpose of bringing down debt-to-GDP ratios to proposed levels. This is because austerity is leading to sharper contractions in economic growth than expected by those designing such policies, causing both a slowdown in the reduction of debt as government revenues decrease, as well as leading to increases in the required reduction of debt to meet debt-to-GDP ratio targets given that GDP itself is contracting."

"If the contractionary impact of austerity measures continues, eventually the countries in debt crisis will default or will have to unilaterally change their terms of debt repayment. In that case, these countries may not continue to be accepted as members of the euro zone. If such a worst-case scenario of a disorderly debt default or countries exiting the euro zone were to play out, the impact on the global economy as well as on Asia and the Pacific may be severe," ESCAP cautioned.

The negotiations on resolving the fiscal programme of the United States in coming years, through numerous inter-related legislative deadlines such as the "fiscal cliff", the budget sequester, the continuation of government funding and the raising of the debt ceiling, have created additional difficulties for Asia-Pacific economies, ESCAP said.

The problems stem from not only the actual impacts of these decisions on spending and growth in the United States but also from the uncertainty created by a series of partial measures to deal with the issues which have served to delay final resolution. The lack of clarity regarding the economy's medium-term fiscal policy position is tied to legislative deadlock, resulting in a series of short-term pacts and extended uncertainty on global financial markets in response to concerns about the health of the United States economy.

This uncertainty has affected the region through periodic episodes of short-term capital outflows from Asia-Pacific markets, and the persistent climate of economic policy uncertainty in both the euro zone and the United States is estimated by it to have reduced GDP in the Asia-Pacific region by 3% below what it would have been otherwise, ESCAP added.

"This equates to total loss in GDP of $870 billion. However, the analysis shows that governments in the region could fortify their economies against the impact of such economic uncertainty by implementing pro-active policies. This could on average, moderate the negative effects on GDP for countries by around 75%. With regard to employment, pro-active policies could save large number of jobs, up to 2.6 million workers just in the case of China."

ESCAP also emphasised that macroeconomic stability of economies in the region is being imperiled by the fresh wave of global short-term capital coming to its shores spurred by expansionary monetary policies in the developed economies.

In September 2012, the US Federal Reserve announced the resumption of an aggressive asset purchasing programme to the value of $40 billion per month in mortgage-backed securities, with the intention of lowering long-term interest rates, spurring economic activity and creating jobs.

This original value was further boosted in December 2012, adding an additional $45 billion a month in purchases of Treasury bills. Unlike previous quantitative easing measures, this new programme of $85 billion in monthly asset purchases is open-ended and set to continue until there is a significant improvement in labour market conditions.

The European Central Bank, the Bank of Japan and many other advanced economies' central banks have also undertaken variants of QE (quantitative

easing) and other forms of unconventional monetary policy.

Furthermore, in early 2013, Japan outlined plans to start a monthly purchase plan of $145 billion in assets from the start of 2014 to boost growth and combat deflation.

"Expansionary monetary policies in the developed world are once again leading to difficulties for macro-economic management in the region. This is due to the logical decisions of financial investors to reallocate their funds from the depressed bond markets in the developed world to currency and asset markets in the region," said ESCAP, adding that the comparative attraction of this region remains largely unchanged since the previous two rounds of QE earlier in the Great Recession of 2008-2009.

"The impact on capital flows to Asia-Pacific economies during the two earlier rounds of QE was severe, and there is little reason to suspect that the outcome will be any different this time around."

According to ESCAP, despite the moderation in growth in the region as compared to previous robust rates, Asia and the Pacific still remains the most dynamic region globally and exerts increasing influence on other developing regions. The region is forecast to grow in 2013 at a rate far more rapid than not only the developed regions of the world, but also compared to other developing regions.

However, ESCAP said the overall risks for the growth forecasts in 2013 remain tilted to the downside. A key downside risk is a sharper-than-expected economic slump in Europe. Although the region's direct financial exposure to banks in the euro zone is not sizeable, systemic risks could rise further under this scenario.

"Fiscal policy uncertainty in the United States, commodity price hikes due to heightened global financial liquidity and continued geo-political risk in oil-producing areas, and possible food price hikes due to droughts in major food-producing countries pose additional risks."

Within the region, the pace of growth deceleration in China and its implications for the direction of domestic policy, such as through rebalancing the economy's sources of growth and property market corrections, as well as a return of economic dynamism in India, are important.

On the upside, there is room for macroeconomic policy responses to counteract the strong and persistent headwinds in most economies. Better policy coordination in developed economies and well-directed policy stimulus in China and other export-oriented economies would reduce economic uncertainty, and potentially push growth in the Asia-Pacific region above the baseline.

"Enhanced regional cooperation in finance, trade, infrastructure investment, food and energy security and labour migration matters can also play a crucial role in ensuring sustained and inclusive development."

The generalised slowdown across the region in 2012 raises the concern that, beyond the problems emanating from the developed world, there are shortcomings even within domestic economies in terms of the developmental strategies being pursued. Among others, these include unsustainable resource use rates, growing inequality, declines in public infrastructure investment, especially in agriculture, and low government revenues.

"The structural solution to invigorating the domestic drivers of growth for the economies in the region lies in making the development process more inclusive and sustainable," said ESCAP, noting that countries are increasingly giving prominence to social protection measures.

"Fortunately, many economies in the region are well-placed to undertake the measures required through the use of well-targeted fiscal and monetary policies directed to productive and social sectors of the economy with high-employment intensity." – Third World Network Features.

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About the author: Kanaga Raja is the Editor of the South-North Development Monitor (SUNS) in Geneva, Switzerland

The above is an edited version of an article which appeared in the SUNS #7570, 22 April 2013.

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