Even as a survey report by ESCAP said that despite emerging challenges, the Asia-Pacific region’s economic outlook is broadly stable, the next phase should be driven by broad-based productivity gains through higher, targeted fiscal spending and agricultural growth
The world economy is in disarray and increasing productivity is a herculean task”, said the UN’s Economic and Social Commission for Asia and the Pacific in its annual report ‘Economic and Social Survey for Asia and the Pacific 2016’. The report criticises the tax system and calls for having a fair tax regime key to stop the flight of capital from the region including India, an indirect reference to the Panama papers.
Asia is the most vulnerable as annual average growth of productivity of developing nations has declined to below one per cent during 2008-2014, against 2.8 per cent in 2000-2007.
The panacea is in rural and agricultural development a step India is appreciated to have taken. It is critical to shift the focus in many areas from farm-based economy to services. Without basics, services cannot lead to the growth of economies. The report warns that the region must not ignore the fundamentals of economics of primary areas like farms and manufacturing.
The survey estimates that a modest increase in agricultural productivity can lift an additional 110 million people out of poverty by 2030. But it also warns that it is not an easy task. It requires improvements in knowledge and skills. Besides, as the population increases, absorption of large pools of surplus labour in the rural sector becomes critical.
It also finds that the people’s purchasing capacity has dwindled. Disparity has increased and growth is slowing down. Steady growth in real wages is critical to tackle poverty and inequality, as well as to support domestic demand. If these are addressed, the goal for productivity growth can be achieved.
A slow growth is likely to further impact the next phase of Asia-Pacific economic growth. India and the sub-continent seems to be in a better position, but ESCAP warns against any further easing of the monetary policy. This is a gentle way of saying that interest rates should not be lowered as it hits the poor and the vulnerable population, who earns less as deposit rates are slashed.
The report also hints that easing of policies makes public deposits in banks and other financial institutions, a soft target for big sharks, who treat the poor man’s savings as easy money and soft target.
The productivity slowdown accounts for almost a fifth of the recent economic slowdown, from an average of 9.4 per cent during 2005-2007 to an estimated 4.6 per cent growth in 2015. ESCAP underscores that this is a concern because sustained and resilient economic and productivity growth, backed by balanced economic, social and environmental development, is a prerequisite for successful implementation of the 2030 sustainable development agenda.
The slowdown, as per ESCAP analysis, is likely to make it difficult to achieve the 2030 sustainable development goals. In reality, the UN could not achieve its 2015 Millennium Development Goal. It was only re-packaged as 2030 Sustainable Development Goals. Now that too seems beyond the reach.
The survey notes that progress in reducing poverty is slowing and inequalities are rising in many regions. Though statistically poverty in India has reduced, there is circumspection as the disparity has increased and has caused severe problems not only for the poor but also for the middle class.
An expanding middle class and rapid urbanisation are posing complex economic, social, environmental and governance challenges. If these are not addressed, there are apprehensions that the middle class, the engine of growth, may lose its economic strength and may even slip below the poverty line.
The region also faces increased financial volatility and capital outflows, which have limited space for monetary policy manoeuvring, despite low overall inflation. This is possibly linked to taxes, the ESCAP hints.
Several countries are also experiencing a private debt over-hang after rapid increases in household and corporate leverage in recent years an indirect reference to the the ever increasing non-performing assets of banks in India and growing burden across the region.
The solution is not in exports, ESCAP argues. The global meltdown will make it difficult to sell goods abroad as the purchasing power has reached critical stages. It says that if the region has to shift to domestic demand and place greater focus on productivity along with commensurate increases in real wages. Stagnating wages and not real low prices are hitting the people, particularly the poor. It obliquely hints at the problems faced by the middle class. It is also losing economic gains and overall costs are rising and life is becoming difficult.
According to ESCAP, a productivity-driven, wage-led approach will enable countries to increase their aggregate supply and demand, thereby enhancing the well-being of the people.
To boost productivity, the survey recommends a cross-sectoral and integrated approach. It notes that several countries in the region are de-industrialising too early in their development, by shifting from agriculture-based economies to ones in which services play a dominant role.
With more than half of the region’s population living in rural areas, and four out of 10 workers engaged in agriculture, efforts should be made to boost agricultural productivity and foster rural industrialisation and urban-rural linkages.
The survey calls for continued rebalancing towards domestic and regional demand, as prospects for export-led growth remain subdued. A confluence of macroeconomic risks including shifts in global financial and commodities cycles has also increased uncertainty.
It says, “Fiscal initiatives should be underpinned by sustained reforms towards an efficient and fair tax system that delivers the necessary revenues and promotes equity.” Given the Asia-Pacific region’s diversity, the survey also highlights specific policy issues, such as improving female labour participation in the Indian sub-continent; enhancing resilience to natural disasters in the Pacific; dealing with population ageing challenges in the East and the Northeast Asia; economic diversification and services sector development in North and Central Asia; as well as tax policy and administration reforms in Southeast Asia.
The Survey highlights that despite emerging challenges, the region’s economic outlook is broadly stable and forecasts a moderate pickup in economic growth in developing Asia and the Pacific to 4.8 per cent in 2016 and five per cent in 2017.
But the next phase of Asia-Pacific economic growth has to be driven by broad-based productivity gains, through higher, targeted fiscal spending, enhanced skills, better infrastructure, and improved agricultural productivity.