Asia-Pacific must unlock fiscal space to drive growth

Creating fiscal space for countercyclical spending can help developing countries implement G-20 global growth compact.

Dr Shamshad Akhtar August 06, 2014

Asia-Pacific countries continue to drive the global economy. The region has demonstrated great resilience during the economic and financial crisis, contributing about 70 per cent of world growth from 2008-2011.

Yet, regional growth is now in a challenging phase. Growth dynamics are being influenced by the anaemic recovery in the developed world given weak implementation of policy responses. Yet, overcoming domestic structural impediments is also vital. Widespread poverty, rising inequality, social inequity and environmental degradation are hurdles to be cleared before the region can set itself on the fast track to high growth which is stable and inclusive.

The Economic and Social Commission for Asia and the Pacific’s (ESCAP) research highlights new evidence on the nature of these challenges. On the external front, the ongoing normalisation of monetary policy by the US Federal Reserve poses continuing challenges for developing Asia-Pacific, but these can be mitigated by stronger macro-prudential policies and flexible exchange rate management.

On the domestic side, growth will not cater to more jobs if countries do not implement labour market programmes that effectively align and strengthen education, training and skills with the requirements of employers. Without adequate social protection systems, quality education, better access to credit and land, as well as stronger labour market institutions, developing countries will be unable to tackle high and rising inequality.

Demands for social protection remain unmet. Almost half the countries in the region spend less than two per cent of GDP on social protection, covering only about 40 per cent of the population. Environmental degradation is already taking a toll on growth, as evidenced by the estimated environmental cost to India of almost six per cent of annual GDP.

Unlocking fiscal space calls for strengthening of tax revenues. In several countries in the region, tax-to-GDP ratios are near single digits. By way of comparison, this ratio ranges from 25 to 35 per cent or more in developed countries.

The good news is that tax-to-GDP ratios can be raised. In many Asia-Pacific countries, the gap between potential and actual tax collection is more than five per cent of GDP. Closing existing tax gaps in 16 developing Asia-Pacific economies could increase revenues by more than $300 billion.

As domestic tax revenues are also affected by policies in other countries, greater regional cooperation and strengthening of national tax administration can help boost revenues by curbing tax avoidance and evasion, among others. Asia-Pacific developing countries accounted for more than 60 per cent of the $5.9 trillion of global illicit capital outflows between 2001 and 2010.

An Asia-Pacific tax forum, to coordinate regional action on these concerns is therefore, an idea whose time has come. As the largest and most inclusive intergovernmental forum for Asia-Pacific countries, ESCAP is well-positioned to host to such a body.

Creating the fiscal space for productive and countercyclical spending can help developing countries in the region move towards implementing the G-20 global growth compact adopted last year. This is needed to accelerate progress towards the United Nations Millennium Development Goals.

Published in The Express Tribune, August 7th, 2014.

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