More challenging global environment ahead for Asia Pacific region

A recent publication by ESCAP – Economic and Social Survey of Asia and the Pacific 2011: Year-end update: Steering Asia-Pacific – the situation for 2012 – analyses the economic situations, the challenges and options available for the countries in the region.

The Asia Pacific region was able to withstand the global recession to some level due to some pickup in developed economies and the growth of intra regional trade and continued and robust demand in several economies in the region itself.

However, the report indicates that the region will face a more challenging global environment in the near future. With the continued recession in developed economies, this region’s financial markets will be affected through heightened risk aversion and higher risk premiums which may spill over to the real economy as higher capital costs.

With the low interest rates in the euro zone together with the narrowing but still significant interest rate differential with the Asia Pacific region, the assets market and the currencies in the region will continue to attract foreign investors.

But this could also result in a build up of asset market bubbles, exchange rate appreciation and inflationary pressures. Inflation in the region has also been caused by higher food and oil prices due to the financialisation of commodity markets.

Increase in protectionist measures in the developed countries is another risk to look out for warns the report.

The report mentions two key aspects driving the degree of exposure of economies in the region – the extent to which the export sector is important as opposed to domestic demand and the scope and depth of intraregional trade that can be channelled to the economies with large domestic demand and investment.

Economies with the smallest impact on growth from the slowdown in the developed economies will be countries such as India and Indonesia which have large domestic sectors and less reliance on exports as drivers of growth.

The increasing importance of intraregional trade in tandem with domestic demand in the region is recommended as the most critical medium term policy approach in order to adjust to the shifting global balance of growth although it will be insufficient in the short term.

However, intra regional trade also has its problems. China’s status as the most important market for many countries in the region may not last long as China is gradually moving towards a more domestic demand led economy and the import content of consumption goods is comparatively low.

Although India and Indonesia, the other large economies offer more consumption led economies, their income levels are currently lower than that of China. In 2012, growth in a number of countries where domestic demand is important is forecast.

Although the current global climate will hinder growth in many countries in the region, the report indicates scope for growth through government policy. Measures already adopted by various countries in the region such as tax reduction, cash assistance for low income households and increases in infrastructure spending are among the options suggested for fiscal policy. Also suggested are targeted one- off subsidies such as cash vouchers and cash handouts.

As a medium term measure to shift towards domestic and regional demand, the report suggests measures favourable to future growth drivers without much impact on the current ones, such as continuing the process of establishing social protection systems such as public provision of health and unemployment insurance, pensions and enhanced public spending on health care and education.

In economies where investment is low, spending on infrastructure in their own countries as well as their neighbours where such investments bring benefits are suggested. This would bring indirect results by increasing intra regional trade and integration. The removal of impediments to intra regional investments was one of the commitments by SAARC leaders at their 2011 Summit as a part of their overarching objective of increasing inter-country linkages.

Another important policy suggested is the support to develop the agriculture sector. Apart from the moral imperative to reduce poverty, increasing agricultural growth and thereby the rural incomes will also increase domestic and regional consumption. The region needs a knowledge intensive green revolution that will reverse the relative neglect of the agriculture sector in public policy management and overseas aid priorities over recent decades.

Public resources should be shifted from subsidising consumption to boosting agriculture. Sustained national programmes of agricultural research, public education and better designed rural extension plans, international development partnerships and South-South cooperation are suggested for implementing such policies.

(Manel de Silva holds an Honours Degree in Political Science from the University of Ceylon, Peradeniya and has engaged in professional training in Commercial Diplomacy at ITC and GATT. She has served as a trade diplomat in several Sri Lankan Missions overseas and was the first female Head of the Department of Commerce as Director General of Commerce.)