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Asian Development Outlook 2014 Fiscal Policy for Inclusive Growth Juzhong Zhuang Deputy Chief Economist Asian Development Bank 31 March 2014 EMBARGOED UNTIL 9:30 AM Manila/Hong Kong, China/Singapore time Tuesday, 1 April 2014 The views expressed in this document are those of the author and do not necessarily reflect the views and policies of the Asian Development Bank, or its Board of Governors, or the governments they represent.

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Key messages • Steady growth forecast for developing Asia: 6.2% in 2014 and 6.4% in 2015, up from 6.1% in 2013 • Growth supported by improved outlook of advanced economies, but offset somewhat by moderation in PRC’s growth • Risks receding, but there are a few areas to watch • Fiscal response needed to tackle widening inequality

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Economic outlook

4


Developing Asia extends steady growth‌ GDP growth

% 10

9.2

8 6

7.4 6.0

6.1

6.1

6.2

6.4

2012

2013

2014f

2015f

4 2 0 2009

2010

2011

f: forecast

5


…supported by improved outlook of advanced economies 2014 ADO 2014 projection

2015 ADO 2014 projection

2012

2013

Actual

Estimate

1.3

1.0

1.9

2.2

United States

2.8

1.9

2.8

3.0

Euro area

-0.7

-0.4

1.0

1.4

Japan

1.4

1.5

1.3

1.3

GDP growth (%)

Major industrial economies

6


Subregional performance varies 2013

2014f

2015f

4.8

5.3

5.8

Central Asia

6.5

6.5

6.5

India

4.9

5.5

6.0

Azerbaijan

5.8

5.0

4.8

Pakistan

3.6

3.4

3.9

Kazakhstan

6.0

6.0

6.4

Sri Lanka

7.3

7.5

7.5

6.7

6.7

6.7

5.0

5.0

5.4

China, People’s Rep. of

7.7

7.5

7.4

Indonesia

5.8

5.7

6.0

Hong Kong, China

2.9

3.5

3.6

Malaysia

4.7

5.1

5.0

Korea, Rep. of

2.8

3.7

3.8

Philippines

7.2

6.4

6.7

Taipei,China

2.1

2.7

3.2

Singapore

4.1

3.9

4.1

4.8

5.4

13.3

Thailand

2.9

2.9

4.5

Fiji

3.6

2.8

3.0

Viet Nam

5.4

5.6

5.8

Papua New Guinea

5.1

6.0

21.0

South Asia

Southeast Asia

2013 2014f 2015f

East Asia

The Pacific

f: forecast

7


PRC’s growth will moderate… GDP growth

%

As authorities

12 10.4 10

9.3

9.2

7.7

8

7.7

7.5

7.4

6 4 2

• Focus on quality of growth • Control credit growth, tackle shadow banking, and local government debt • Reduce overcapacity

0 2009

2010

2011

2012

2013

2014f

2015f

8


…while India’s picks up GDP growth

% 10

Growth to be supported by

9.3 8.6

8 6.7 6 4.5

4.9

5.5

6.0

– Measures to address current account and fiscal deficits – Government actions to expedite project approval – Improved global outlook

4 2

But constrained by

0

– Infrastructure bottlenecks – Regulatory barriers

2009

2010

2011

2012

2013

2014f

2015f

9


Country-specific factors driving Southeast Asia growth GDP growth

% 8

7.2

7 6 5

5.0 5.0

5.4

6.4

5.8 5.7 6.0 4.7

6.7

5.1 5.0

4.5

4

2.9 2.9

3 2 1 0 Southeast Asia

Indonesia 2013

Malaysia 2014f

Philippines

Thailand

2015f

10


Global commodity prices remain soft‌ Agricultural price indexes

Price of Brent crude $/barrel

2010=100 160

160

150

140

140

120

130

100

120

80

110 100

60

90

40

80

20

70 Jan Apr Jul 2012 Beverages Grains

Oct

Jan Apr 2013 Food Other food

Jul

Oct

Jan 2014 Edible oils Raw materials

0

Annual average

Spot

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‌keeping inflation in check Inflation

% 8 5.9

6

5-year moving average

4.4

3.7

4 2

3.4

3.6

3.7

2014f

2015f

1.4

0 2009

2010

2011

2012

2013

f: forecast

12


Current account surplus has flattened Current account % of GDP 6

People's Republic of China

4.9

5 4

Developing Asia

4.0

4.0 3.4

3 2

2.3

2.0 1.9

1.8

2011

2012

2.1 2.1

1.9 2.0

1.9 1.9

2013

2014f

2015f

1 0 2009

2010

f: forecast

13


Risks to the outlook • Risks have lessened, but a number of areas to watch: – Shock to global financial markets from shift in US monetary policy – Weaker than expected recovery in advanced economies – Deeper than anticipated slowdown in PRC’s growth

These are manageable

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Countries with weaker fundamentals are more vulnerable to shocks Exchange rate depreciation (-) or appreciation (+) (23 May-30 Aug 2013) Current account balance (% of GDP, 2013 Q1) % 5

1.7

3.7

3.5

2.7 0

0 -5

-3.9

-2.7 -7.7

-10 -15

-6.4

-7

-12.5 -15.4

-20 IND

INO

KOR

MAL

PHI

THA

IND=India; INO=Indonesia; KOR=Rep. of Korea; MAL=Malaysia; PHI=Philippines; THA=Thailand 15


Fiscal policy for inclusive growth

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Widening inequality calls for government response Increase in Gini coefficient, economies with rising inequality, 1990s - 2000s Indonesia PRC Lao PDR Georgia Bangladesh India Korea, Rep. of Sri Lanka Mongolia Taipei,China Singapore Tajikistan 0

2

4

6

8

10

Gini coefficient measured in 0-100, where 0 means perfect equality and 100 means perfect inequality. 17


Asia has scope to spend more on equity-promoting programs‌ Public spending on education, health, and social protection, 2010 % of GDP 25 20.0

20 15

12.0

10 5

8.1 5.5 2.9

5.3 2.4

3.9

6.2

0 Education Developing Asia

Health care Latin America and the Caribbean

Social protection OECD

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…but structural issues will erode Asia’s current fiscal space… Gross government debt, selected economies, 2012

Current and projected public spending on health

India Pakistan Malaysia Lao PDR Viet Nam Myanmar Thailand Philippines Armenia Republic of Korea Hong Kong, China Nepal Georgia Cambodia PRC Indonesia Kazakhstan

Developing Asia

2.4

Central Asia

2.2

OECD = 108.7 WLD = 80.8 LA = 52.0

0

40 80 % of GDP

1.0 1.9 1.7

South Asia Southeast Asia The Pacific 0

120

DA=Developing Asia; LA=Latin America; WLD=World

2010

4.5

3.0

East Asia

DA = 36.0

7.3

9.7

3.6 3.6 4.5

5 % of GDP

10

2050, projected

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…so Asia must also strengthen the revenue side for fiscal sustainability Composition of tax revenues and social contributions, 2010 % of GDP 30

28.3

25

8.5

20 15 10 5 0

3.0 6.3 7.6 2.9 OECD

Social contributions 25.4 4.8 1.7 13.0 2.3 3.7

19.8 3.0 1.6 10.1 1.7 3.5

Latin America & Developing Asia Caribbean

Property Indirect Personal income Corporate Tax revenues and social contributions

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A wide range of options should be explored • Broaden base for personal income tax and VAT • Increase use of corrective taxes and nontax revenues • Introduce progressive taxes on property, capital gains, and inheritance • Improve collection and tax administration through ICT

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Planning for inclusive fiscal policy • Medium-Term Fiscal Framework to incorporate inclusive growth into fiscal policy – Annual review of inclusive government programs – Align concrete medium-term targets with means to finance them to ensure fiscal sustainability

• More and better fiscal data for evidencebased policy making

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Key messages • Steady growth forecast for developing Asia: 6.2% in 2014 and 6.4% in 2015, up from 6.1% in 2013 • Growth supported by improved outlook of advanced economies, but offset somewhat by moderation in PRC’s growth • Risks receding, but there are a few areas to watch • Fiscal response needed to tackle widening inequality

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Presentation of the Report: “Asian Development Outlook 2014” of