Financing for Development in Asia and the Pacific: Opportunities and Challenges
Dr. Shamshad Akhtar,Under-Secretary-General of the United Nations &
Executive Secretary ofThe Economic and Social Commission for Asia and
the Pacific
Dialogue of the Executive Secretaries of the Regional Commissions
with the UN General Assembly Second Committee
Monday, 23 October 2017
Asia-Pacific financing landscape • Asia‐Pacific is well‐placed to finance Agenda 2030 despite its large
financing requirement• Strong economic growth and fiscal position together with high savings
rate provide an enabling environment to finance sustainable development goals
• Some countries fare well on tax front, but by and large tax/GDP remain underexploited and tax policies do not incentivize reduction of inequalities or effective incentivize
• High trade integration and increasing intra‐regional trade and investment are catalysts for inclusive economic growth and sustainable development
• Despite immense opportunities, challenges remain:• The existence of non‐trade barriers remain the trade obstacles • Low tax rate and large informal economy put constraints to domestic
resource mobilization• Rising Asian middle class implies greater tension on public services and
infrastructure needs• Greater risk of financial instability with increasing level of corporate
and household debts
Asia‐Pacific sustainable development financing needs
Source: ESCAP (2015): Financing for Transformation: from agenda to action on sustainable development in Asia and the Pacific. and ADB (2017) ‐meeting Asia's infrastructure needs
Total: Up to $2.5 trillion a year
Economic & Social investment needs per year:
$500 ‐ $800 billion• Payment for safety nets• Old age pension• Income security to all
persons with disabilities• Universal access to health
and education• Modern energy access for
all
Infrastructure investment needs per year:
$1.6 ‐ $1.7 trillion• Energy• Transport• Telecommunications• Water & Sanitation
Strong and sustained economic growth
Real GDP growth: Developing Asia and the Pacific and advanced economies and the World
Source: ESCAP forecast and UN‐DESA, WESP several issues
Developing Asia‐Pacific economies are growing twice as fast as the world and the region now accounts for more than 30% of world GDP
Good fiscal positions in most countries: manageabledebt levels compared to GDP and tax revenues
Source: IMF, Fiscal Monitor database and International Financial Statistics database; and WorldBank, World Development Indicators database.
General government debt, compared with GDP and tax revenues
Sharp corporate debt increase risk financial and economic stabilityCorporate debt exposure in China has led to growing concern over private debt sustainability. Although at less significant level, other economies like Russian Federation and Turkey also experienced large growth in total corporate debt after the 2007‐08 crisis.
0.0
20.0
40.0
60.0
80.0
100.0
120.0
140.0
160.0
180.0
2008
Q1
2009
Q1
2010
Q1
2011
Q1
2012
Q1
2013
Q1
2014
Q1
2015
Q1
2016
Q1
2017
Q1
Credit to Non‐financial corporations (% of GDP)Indonesia
Turkey
RussianFederation
India
China
Emergingmarkets(aggregate)Advancedeconomies(aggregate)
Source: ESCAP based on IMF data
Accumulating household debt is another potential risk factorIn some emerging market countries of the region, accumulating household debt could also be a potential risk factor.
0
20
40
60
80
100
120
Sri Lanka
Philipp
ines
Kazakhstan
India
Indo
nesia
Russian Fede
ratio
n
Mon
golia
Turkey
China
Singapore
Thailand
Malaysia
Korea (the
Reu
blic of)
Household debt % of GDP (2016)
Source: ESCAP based on IMF data
Region pool of domestic savings is large
Savings rate in many Asia‐Pacific countries are among the highest in the world, averaging over 40 percent of GDP as compared to 22 percent in the EU and 19 percent in the United States
0
10
20
30
40
50
60Gross domestic savings % of GDP
Source: ESCAP based on data from World Bank, WDI.Note: Data shown is for latest year available 2015‐2016
Tax revenue levels in developing Asia
Tax revenues (excluding social contributions) in developing East, South‐East and South Asia average 14.2% of GDP, which is lower than other developing regions and fall behind the OECD level of 25.1% of GDP.
Tax revenue excluding social contributions
Source: ESCAP based on IMF GFS and various sources
0.0
5.0
10.0
15.0
20.0
25.0
30.0
‐5.0
0.0
5.0
10.0
15.0
20.0
25.0
30.0
Timor‐Leste
Afghanistan
Myanm
ar
Banglade
sh
Pakistan
Iran, Islamic Rep
.
Sri Lanka
Indo
nesia
Cambo
dia
Bhutan
Azerbaijan
Malaysia
Philipp
ines
Lao PD
R
Nep
al
Kyrgyz Rep
ublic
Tajikistan
Turkey
Uzbekistan
OEC
D
2013 2013 2015 2013 2014 2009 2013 2014 2015 2014 2014 2014 2015 2014 2015 2015 2015 2014 2014 2014
Per
cent
of G
DP
Other
Taxes onproperty
Income taxes:individuals
Income taxes:corporate
Taxes oninternationaltrade
Taxes on goods& services
Total taxrevenue
Tax revenue levels in fragile statesSeven fragile states have tax‐to‐GDP ratios below or close to 10%. Fourteen countries have tax‐to‐GDP ratios below or close to 15%, including four non‐fragile statess: Indonesia, Bhutan, Azerbaijan, and Malaysia
0.0
5.0
10.0
15.0
20.0
25.0
30.0
Timor‐Leste
Afghanistan
Myanm
ar
Banglade
sh
Pakistan
Iran, Islamic Rep
.
Sri Lanka
Indo
nesia
Cambo
dia
Bhutan
Azerbaijan
Malaysia
Philipp
ines
Lao PD
R
Nep
al
Kyrgyz Rep
ublic
Tajikistan
Turkey
Uzbekistan
OEC
D
2013 2013 2015 2013 2014 2009 2013 2014 2015 2014 2014 2014 2015 2014 2015 2015 2015 2014 2014 2014
Total tax revenue
Source: ESCAP based on IMF GFS and various sources
Indirect and corporate taxes still dominate
Personal Income taxes, and property/wealth taxes remain small. Corporate income tax revenue averages 3.9% of GDP, and social contributions account for a large part of total tax revenues in China, Islamic Republic of Iran, Mongolia, Russian Federation, Uzbekistan, among others.
Developing Asia‐Pacific
Taxes on goods & services Taxes on international trade
Income taxes: corporate Income taxes: individuals
Taxes on payroll & workforce Taxes on property
Social contributions
OECD countries
Taxes on goods & services Taxes on international trade
Income taxes: corporate Income taxes: individuals
Taxes on payroll & workforce Taxes on property
Social contributions
Source: ESCAP based on IMF GFS
Shadow Economy makes tax revenue mobilization more challenging
The presence of large informal sector is main obstacle for tax revenue mobilization. It not only erodes overall tax base but also creates pressure on tax authorities to provide undesirable reduced rates or exemptions to formal sector firms as incentive for them to stay formal and tax registered.
Rep. of
, China
China
Source: IMF, Government Finance Statistics; Hassan and Schneider (2016)
Tapping resources a challenge in presence of large informal sector
Source: Hassan and Schneider (2016)
In the least developed countries of the region (highlighted in red), the shadow economy is a major obstacle for effective taxation.
0
10
20
30
40
50
60
70
80
90
China
Iran (Islamic…
Maldives
Sri Lanka
Indo
nesia
India
Mon
golia
Viet Nam Fiji
Turkey
Bhutan
Papu
a New
…
Pakistan
Malaysia
Philipp
ines
Timor‐Leste
Banglade
sh
Kyrgyz Rep
ublic
Russian…
Nep
al
Geo
rgia
Kazakhstan
Cambo
dia
Tajikistan
Solomon
Island
s
Thailand
Lao PD
R
Informal sector as % of GDP
World average 35.4%
Developed country average 19.9%
Access to financial services is high in East Asia and is gaining momentum in South Asia
Source: World Bank. 2015. The Little Data Book on Financial Inclusion 2015
SME access to credit in Asia and the Pacific varies much across countries
0 5 10 15 20 25 30 35 40
AfghanistanBangladesh
ChinaFiji
GeorgiaIndia
IndonesiaRepublic of Korea
MalaysiaMongoliaMyanmarPakistan
Russian FederationSamoa
ThailandTurkey
SME bank loans as percentage of the GDP
Source: IFC Enterprise Finance Gap Database. Data for 2014
Higher trade integration relatively to financial integration
East and South‐East Asia are on par with developed regions in trade and investment integration, but fall short in monetary and financial integration. Central Asia, South Asia and the Pacific remain far behind in sub‐regional integration levels
0.62 0.65
0.31
0.5
0.68
0.22
0.41 0.
46
0.350.38 0.42
0.21
0.28
0.26
0.15
0.27 0.28
0.06
0.23
0.12
0.09
0.17
0.07
0.01
0.11
0.08
0.01
0.11
0.09
0.01
COMPOSITE INTEGRATION INDEX TRADE & INVESTMENT MONETARY & F INANCE
North America East Asia Europe South‐East Asia Asia‐PacificSouth America Pacific and Oceania Africa South Asia Central Asia
Source: ESCAP based on Madhur (2016), based on Naeher (2015).
Intraregional trade a source of strength and is increasing
Intraregional merchandise imports and exports increased in all Asia‐Pacific sub‐regions between 1990 and 2015. North and Central Asia registered the highest growth in both intraregional imports and exports in this period.
Source: ESCAP (2016); IMF (2017).
Non-tariff barriers contributing to trade obstacles
Non‐tariff barriers remain the main obstacles for trade and investment in the region.
134165 164
225257
325358
412
273
309 302
347
311
401
355
0
50
100
150
200
250
300
350
400
450
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Newly‐initiated Technical Barriers to Tradein the Asia‐Pacific region
Source: ESCAP based on UNCTAD data.
Large Inward FDI Flows
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
0
100
200
300
400
500
600
2006 2008 2010 2012 2014 2016
Billion
s
Asia‐Pacific FDI inflows
Asia‐Pacific share in world FDI inflows
Asia‐Pacific receives a significant amount of FDI inflows (over $500 billion) or one third of world inflows
Source: ESCAP calculation based on UNCTAD data
Top 10 FDI inflows in Asia and the Pacific (2016)
0 50 100 150
China Hong Kong, China
Singapore Australia
India Russian Federation
Viet Nam Turkey Japan
Republic of Korea
Billions
Large Outward FDI flows
0%
10%
20%
30%
40%
50%
0
100
200
300
400
500
600
700
Billion
s
Asia‐Pacific FDI outflows
Asia‐Pacific share in world FDI outflows
Source: ESCAP’s calculation based on UNCTAD data
The Asia‐Pacific region also contribute to close to $500 billion of FDI outflows, which also represents around a 1/3 of global FDI outflows
Top 10 FDI outflows from Asia and the Pacific (2016)
0 100 200
China
Japan
Hong Kong, China
Republic of Korea
Russian Federation
Singapore
Thailand
Australia
Malaysia
India
Growing Importance of Intraregional FDI
Source: ESCAP Asia‐Pacific Trade and Investment Report 2016
Intraregional greenfield FDI flows btw selected economies, and total intraregional inflows/outflows to and from those economies, 2013‐2015
Intraregional greenfield FDI flows are gradually replacing those from the traditional big investors in Europe
• The share of intraregional greenfield FDI inflows in total greenfield FDI inflows to the Asia‐Pacific region has continuously increased during the past few years, accounting for 52% in 2015
• While FDI inflows to China are slowing down, more FDI is directed towards economies in ASEAN instead
Asia‐Pacific a leader in investment liberalization
0
2
4
6
8
10
12
Liberalizing Deliberalizing
Source: ESCAP’s calculation based on the UNCTAD Investment Policy Monitor Database, 2016
Investment policy changes in Asia‐Pacific countries, 2015
Asia‐Pacific countries lead with investment liberalization and promotion policies accounting for almost half of such measures adopted in 2015
Remittances remain stable as percentage of GDP
Personal remittances received by Asia‐Pacific countries grew from $157 billion to $192 billion between 2011 and 2015. However, total remittances received as percent of GDP largely remained unchanged in the five years.
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
100
110
120
130
140
150
160
170
180
190
200
2011 2012 2013 2014 2015
Personal remittances received
Total volume % of GDP
US$ billion % of GDP
Source: ESCAP based on UNCTAD data
Remittances could be vital for LDCs and SIDS
Remittances are of vital importance in development financing for least developed and small island states in the region.
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
Nep
al
Tonga
Tajikistan
Samoa
Armen
ia
Marshall Isla
nds
Tuvalu
Geo
rgia
Philipp
ines
Sri Lanka
Kirib
ati
Banglade
sh
Microne
sia (Fed
erated
States o
f)
Pakistan Fiji
Myanm
ar
Personal remittances received (% of GDP)
Source: ESCAP based on UNCTAD data
Infrastructure Gaps in Asia and the Pacific
Low‐income developing countries
Over the last 15 years, AP countries have spent around 5.5% of GDP on infrastructure. From 2016‐2030, it is estimated this level should increase to 7.4% BUT requirements much larger in a number of countries.
4.8% 4.3%
Source: ESCAP research (work‐in‐progress) / Asia‐Pacific countries only
Emerging markets Advanced economies
10.9%
6.2%
Gap
(2005‐2015) (2016‐2030) (2005‐2015) (2016‐2030) (2005‐2015) (2016‐2030)
5.4%6.3%
Scaling‐up private investment in infrastructure is critical
0102030405060708090
$billion
Energy Information and communication technology (ICT) Transport Water and sewerage
Source: World Bank’s PPI Database
To address infrastructure gaps, it is estimated that private investments should increase from around $50 billion a year to as high as $250 billion
Private Participation in Infrastructure in Asia‐Pacific Developing Countries
ADB (2017) ‐meeting Asia's infrastructure needs
Meeting infrastructure needs requires combined strategiesInfra Needs = 7.4% of G
DP
Spen
ding
= 5.5 % of G
DP
Infra GAP
Improving Expenditure Efficiency
Further involving the private sector
Up to 40% of savings
Mobilizing domestic resources
• Streamlined project delivery
• Better selection / prioritization
• Improved infra management
• Strong and stable political commitment
• Conducive legal & regulatory Frameworks
• Strengthened institutional capacity
• Supportive financial mechanisms
• Reformed tax policies
• Enhanced tax administration
Growing demand from rising middle‐class will enhance service gaps but also contribute to economy
140 million of people are joining the middle class annually
88 % of new entrants from Asia (mainly India and China ) – geographical shift from Europe / North America to Asia‐Pacific, the latter could represent 2/3 of the global middle‐class by 2030
A growing middle class means:• Greater expectation for public
services (e.g. healthcare, pensions), possibly creating tensions on public finance
• Increased demand for shared prosperity from globalization
0.3540.733
3.492
0
1
2
3
4
NorthAmerica
Europe Asia‐Pacific
Billion
2015 2030Source: Brookings – Working Paper 100 (February 2017)
Number of people in the middle‐class
Progressive tax and fiscal policies can play a significant role in addressing the widening income gaps in Asia and the Pacific
‐50
‐40
‐30
‐20
‐10
0
10
20
Pakistan
(199
6, 201
0)
Viet Nam
(199
2, 201
2)
China
(199
3, 201
0)
Sri Lanka
(199
5, 201
2)
Lao PD
R(199
2, 201
2)
Indo
nesia
(199
3, 201
0)
Banglade
sh(199
1, 201
0)
India
(199
3, 201
1)
percen
t change
Growth of consumption share since early 1990s(5 quintiles & top/bottom 10%)
bottom10%
Q1
Q2
Q3
Q4
Q5
top10%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
Mexico
Turkey
Japan
United States
Latvia
New
Zealand
Australia
Italy
Spain
Slovak Rep
ublic
Germany
Nethe
rland
s
Portugal
Czech Re
public
Austria
Denm
ark
Finland
Ireland
Percentage reduction in Gini due to tax and transfers in OECD (2014)
Taxes and transfers on average help reduce income inequality by a thrid in OECD
Source: ESCAP based on OECD and WDI
Bottom income groups were further marginalized in the past two decades.
Public finance policies will need to be adjusted –enhancing tax bases, tax progressivity to deal with growing inequalities and expanding social safety net
Asia‐Pacific falls far behind in progressive taxation and proactive public spending to address inequality.
Source: ESCAP based on IMF GFS and Estrada et al (2014).
Developing Asia‐Pacific OECD
Personal income tax 2% 8.80%
Property tax 0.50% 1.90%
Social contributions 3.20% 9.10%
Public education 3% 5.30%
Public healthcare 2.40% 8.10%
Social protection 6.20% 20.00%
Looking ahead: To implement the 2030 Agenda
• Encourage more private sector participation and channeling of the region’s large savings to finance the 2030 Agenda
• Sustain the level of trade and investment integration in the region, while improving financial integration through regional cooperation
• Support tax policies that take into account economic, social and environmental considerations and increase tax morale
• Ensure combined strategies to meet infrastructure needs• Promote more financial inclusion through proper design of regulations,
business models and lending infrastructure, market‐friendly government support and Fin Tech
• Leverage on ESCAP inter‐governmental platform to identify specific entry points for ESCAP engagement in collaboration with UN country team
• Establish FfD‐related working groups in Asia and the Pacific, covering three focused areas of infrastructure financing, tax policies and financial inclusion