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Asian economy in disarray: ESCAP Tax reforms, shift to rural sector must; rate cuts no

 

The world economy is in disarray and increasing productivity is a herculean task, says the UN s Economic and Social Commission for Asia and the Pacific (ESCAP) said in its annual report Economic and Social Survey for Asia and the Pacific 2016.

It criticizes the tax system and calls for having a fair tax regime – key to stopping flight of capital from the region including India, an indirect reference to Panama papers.

Asia is the most vulnerable as annual average growth of productivity of developing nations has declined to below one percent during 2008-2014 against 2.8 percent in 2000-2007.

The panacea is in rural and agricultural and rural development – a step India is appreciated to have taken. It is critical of shift in many areas from farm-based economy to services. Without the basics the services cannot lead the growth of economies. It warns that the region must not ignore the fundamentals of the economics of the primary areas like farms and manufacturing.

The Survey estimates that a modest increase in agricultural productivity could lift an additional 110 million people out of poverty by 2030. But it warns that it is not an easy task. It requires improvements in knowledge and skills. Besides, as the population increases, absorption of the large pools of surplus labour the rural sector becomes critical.

It also finds the people’s purchasing capacity has dwindled. Disparity has increased and growth is slowing down. Steady growth in real wages is critical for tackling poverty and inequality, as well as supporting domestic demand. If these are addressed the goal for productivity growth could be achieved.

The slow growth is likely to further impact the next phase of Asia-Pacific economic growth. India and the sub-continent seem to be in a better position but ESCAP warns against any further easing of monetary policy. This is gentle way of saying that interest rates should not lowered as it hits the poor and vulnerable population, who earn less as deposit rates are slashed.

It also hints that easing of policies make public deposits in banks and other financial institutions 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, ESCAP as per analysis, is likely to make achieving the 2030 sustainable development (SDG) target difficult. In reality, the UN could not achieve its Millennnium Development Goal (MDG) 2015. It was only repackaged as SDG 2030. Now that too seems beyond the reach.

The Survey notes that progress in reducing poverty is slowing and inequalities are rising in much of the region. Though statistically poverty in India has reduced, there is circumspection as the disparity has increased and caused severe problems not only for the poor even the middle class.

An expanding middle class and rapid urbanization are also posing complex economic, social, environmental and governance challenges. If these are not addressed properly there are apprehensions that the middle class, supposedly the engine of growth, may lose steam and may slip below the poverty line.

The region also faces increased financial volatility and capital outflows, which have limited the space for monetary policy manoeuvring, despite low overall inflation. This is possibly linked to the taxes, the ESCAP hints at.

Several countries are also experiencing a private debt overhang after rapid increases in household and corporate leverage in recent years – an indirect reference to the high NPAs (losses) of banks in India and growing such burden across the region.

The solution is not in exports, ESCAP says. The global meltdown would make it difficult to sell goods abroad as the purchasing power across have 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, hard. It obliquely hints at the problems the middle class are facing. It is also losing the economic gains and overall costs are rising and life is becoming difficult.

According to ESCAP, a productivity-driven, wage-led approach would enable countries to increase their aggregate supply and demand, thereby enhancing well-being.

To boost productivity, the Survey recommends a cross-sectoral and integrated approach. It notes that several countries in the region are de-industrializing 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 ten workers engaged in agriculture, efforts should instead be strengthened to boost agricultural productivity and foster rural industrialization 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.

“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 Indian sub-continent; enhancing resilience to natural disasters in the Pacific; dealing with population ageing challenges in East and North-East Asia; economic diversification and services sector development in North and Central Asia; as well as tax policy and administration reforms in South-East 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 5 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.

 

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