As the Asia-Pacific continues to power the global economy, we must ensure that growth is sustainable
Shamshad Akhtar says growth in the world’s most economically dynamic region is threatened by debt, energy costs and protectionism, but can be maintained through better government policies, especially on taxation, plus coordination with the private sector and between regional governments
The Asia-Pacific region remains the engine of the global economy, powering trade, investment and jobs. Two-thirds of the region’s economies grew faster in 2017 than the previous year and this is expected to continue in 2018. The region’s challenge now is ensuring this growth is robust, sustainable and mobilised to provide more development financing. It is certainly an opportunity to accelerate towards achieving the 2030 Agenda for Sustainable Development.
Recent figures estimate economic growth across the region at 5.8 per cent in 2017, compared with 5.4 per cent in 2016. Robust domestic consumption and recovering investment and trade contributed to the 2017 growth trajectory and underpin a stable outlook.
Risks and challenges remain. Rising private and corporate debt, particularly in China and Southeast Asia, low or declining foreign exchange reserves in a few South Asian economies and trends in oil prices are among the chief concerns. Policy simulation for 18 countries suggests that a US$10 rise in the price of oil per barrel could dampen GDP growth by 0.14 to 0.4 per cent, widen external current account deficits by 0.5 to 1.0 percentage points and build inflationary pressures in oil-importing economies. Oil exporters, however, would be positively affected.
These challenges come against the backdrop of looming trade protectionism. Inward-looking trade policies create uncertainty and entail widespread risks to the region’s exports, plus their backbone industries and labour markets. While prospects for the least developed countries in the region are close to 7 per cent, concerns persist given their inherent vulnerabilities to terms-of-trade shocks or exposure to natural disasters.
The key questions are how we can collectively take advantage of the solid pace of economic expansion to facilitate and improve economies’ long-term prospects and mobilise development finance, and whether multilateral institutions like the World Trade Organisation members can resolve the global gridlock on international trade.
Economic and financial stability and access to international markets will be critical for effective pursuit of the 2030 agenda. Regional economies, whose tax potential remains untapped, need to lift domestic resource mobilisation and prudently manage fiscal affairs. Unleashing their financial resource potential must be accompanied by renewed efforts to leverage private capital and deploy innovative financing mechanisms.
The investment needed to make economies resilient, inclusive and sustainable amounts to US$2.5 trillion per year on average for developing countries worldwide. In the Asia-Pacific, investment requirements are also substantial but so are potential resources. The combined value of international reserves, market capitalisation of listed companies and assets held by financial institutions, insurance companies and funds is estimated at some US$56 trillion. Effectively channelling these resources to finance sustainable development is a key regional challenge.
The need for supplementary financial resources will remain. Public finances are frequently undermined by a narrow tax base, distorted taxation structures, weak tax administrations and ineffective public expenditure management. This creates problems for sustainable development, even if national planning organisations embrace and integrate a sustainable development agenda into their forward-looking plans.
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Despite a vibrant business sector, the lack of enabling policies, legal and regulatory frameworks and large informal sectors deter sustainability and financing. The external assistance benefiting some countries is insufficient to meet sustainable development investment requirements, a problem often compounded by low inbound foreign direct investment.
Capital markets in many countries are underdeveloped and bond markets remain in their infancy. Fiscal pre-emption of banking resources is quite common. For emerging countries which have successfully tapped international capital markets, a tightening of global financial conditions means borrowing costs are rising.
The Economic and Social Commission for Asia and the Pacific (ESCAP)’s flagship report, Economic and Social Survey of Asia and the Pacific 2018, launched this week, calls for stronger political will and for governments to strengthen tax administrations and expand tax bases.
If the quality of tax policy and administrations in the Asia-Pacific economies matches developed economies, the incremental revenue impact could be as high as 3 to 4 per cent of GDP in major economies such as China, India and Indonesia, and steeper in developing countries. Broadening the tax base by rationalising tax incentives for foreign direct investment and introducing a carbon tax could generate almost US$60 billion in annual tax revenue.
But government action must be complemented by the private sector to effectively pursue sustainable development. The right policy environment could encourage private investment by institutional investors in long-term infrastructure projects. Structural reforms should focus on developing a policy environment and institutional setting that smooth the way for public-private partnerships, stable macroeconomic conditions, relatively developed financial markets and responsive legal and regulatory frameworks.
Finally, while much mobilisation of development finance will depend on national policies, regional cooperation is vital. Coordinated policy actions are needed to reduce tax incentives for foreign direct investment and to introduce a carbon tax. For many least-developed countries, external sources of finance remain critical.
In many cases, successful resource mobilisation strategies in one country are conditional on closer regional cooperation. Our analysis can support the planning and cooperation needed to effectively mobilise finance for sustained, inclusive and sustainable economic growth.
Shamshad Akhtar is UN undersecretary general and executive secretary of Economic and Social Commission for Asia and the Pacific (ESCAP)