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“Asia and Europe in Times of Global Changes”Asia-Europe Economic ForumBerlin, May 2014
How to achieve sustainable growth in Asia
Jorge Sicilia SerranoChief Economist, BBVA
2
Emerging Asia to dominate world growth in following decades: key for global stabilityExpected contribution to global growth in the next ten years (%)Source: BBVA Research, IMF
Western
Europe
7.2%
Africa
5.7%
Eastern Europe6.2%
Latin America
6.9%
North America
12.5%
Middle East
4.1%
Japan1.7%
Oceania1.1%
Asia
exJapan
54.7%
3
Trade liberalization and global value chains as relevant supportive growth drivers
South-South trade flows by regions (USD bn) (2012)Source: BBVA Research, IMF/DOTS
573
217
354
12
0
52
Intra Trade
Exports
Imports
37
28
69
24
111
99
12
35
60
44
Total
South-South
Trade:
2.92 trn
EM AsiaAfrica M.East EM Europe Latam
4
Development transition is heterogeneous among Asian countries…
Income transition between 2010 and 2020(GDP per capita in natural logs)Source: BBVA Research , Haver
From 1,000 to 8,000 USD per capita
Up to 22,000 USD per capita
More than 22,000 USD per capita
7,0
7,5
8,0
8,5
9,0
9,5
10,0
10,5
11,0
7,0 7,5 8,0 8,5 9,0 9,5 10,0 10,5 11,0
2020
2010
Korea
China
PolandRussia/Chile
Bangl. Pakistan
Nigeria
Philipp.
India
VietnamIndonesia
Egypt
Ukraine
Argent./MalaysiaTurkey
MexicoBrazil/Peru
Thail./Colomb./S.Africa
Low-income Mid.-income High income
High income
Mid.-income
Japan
5
…and so must be growth strategies: each income transition entails different challenges and risks
Demographics, urbanization, high
investment returns, Basic Manufacturing low wages
Middle
incomeTertiarisation, Manufacturing
diversification & sophistication, increasing middle classes, financial
deepening
Factor accumulation moderation, wages rise, need of higher education, technological skills and
infrastructure
Highincome
Diversification, sophistication, complexity, innovation, welfare systems
Population aging, fiscal sustainability, increasing inequality, excessive
leverage
2,000-8,000 PPP-adj. USD
Bangladesh, Pakistan, Vietnam, India, Philippines, Indonesia
10,000-21,000 PPP-adj. USD
China, Thailand, Malaysia
>22,000 PPP-adj. USD
Korea, Japan, Taiwan, Hong Kong, Singapore
Drivers
RisksMacro and institutional,
social unrest, poverty, basic services, increasing
inequality
Low
income
6
Asia must search for new growth sources…
Avoiding bottlenecks
Infrastructure needs
Financial deepening
Reshuffling production
Human capital Technology
Institutional framework
Even though the pace is not homogenous, population premium is fading away across the board of Asia…
7
…and avoid hurdles such as “excessive” inequality
A certain degree of
inequality is good,…
…but excessive
inequality is bad
Foster competition
Risk-taking
First demand for new products
Social mobility (poverty trap)
Access to financing
Economies of scale
Informal economy
Social and political unrest
Fiscal expenditure preferences
8
0
10
20
30
40
50
60
70
Ukraine
Egypt
Pakistan
Korea
Indonesia
Bangladesh
India
Poland
Vietnam
Turkey
Thailand
Russia
China
Philippines
Malaysia
Argentina
Mexico
Nigeria
Peru
Chile
Brazil
Colombia
S.Africa
1990 2010The Kuznets curve
Gini index in the 90s and 00s*Source: BBVA Research, WB, OECD
Read more at: “Inclusive growth in emerging markets? Rapid poverty reduction but increasing inequality”http://www.bbvaresearch.com/KETD/fbin/mult/130107_EW_EAGLEs_Inclusive_Growth_tcm348-364126.pdf?ts=1292013
*As continuous data for the Gini index is not available, averages are computed around the starting (1986-1990) and ending point (2006-2010)
Increase of inequality
Inequality is a by-product of rapid growth at early stages of development
9
20
25
30
35
40
45
50
6,5 7,0 7,5 8,0 8,5 9,0 9,5 10,0 10,5 11,0
Should we expect further inequality increases in Asia as development continues?
GDP per capita (constant PPP-adjusted USD) and GINI index* (1980-today)Source: BBVA Research, UN
*Estimations and forecasts using data from the World Bank
Malaysia
China
Indonesia
Philippines
ThailandVietnam
Bangladesh
Pakistan
India
GDP per capita (natural logs)
GINI index More developed countries have today higher
inequality levels, although they have recently stabilized or even
declined
A positive relation over time between income per capita and inequality hold for the big 3 economies but not for the rest
Idiosyncratic factors play a crucial role both in
cross-country differences and dynamics over time
10
20
25
30
35
40
45
50
6,5 7,0 7,5 8,0 8,5 9,0 9,5 10,0 10,5 11,0
Korea’s experience shows that upward trends of inequality can be reverted at some point,…
GDP per capita (constant PPP-adjusted USD) and GINI index in Korea* (1953-1997)Source: BBVA Research, UNU-WIDER
*Data and estimations from different surveys
Korea
Quadratic
adjustment
Malaysia(today)
China
Indonesia
Philippines
Thailand
Vietnam
Bangladesh
Pakistan
India
GDP per capita (natural logs)
GINI index
11
20
25
30
35
40
45
50
6,5 7,0 7,5 8,0 8,5 9,0 9,5 10,0 10,5 11,0
….but there is also evidence that the expected inverted “U” can turn into a “N-shaped” curve
GDP per capita (constant PPP-adjusted USD) and GINI index for selected regions and periodsSource: BBVA Research, UNU-WIDER, OECD
*Estimations using different surveys
Korea(1953-1997)
GDP per capita (natural logs)
GINI index
China(1980-today)
G7 averagebefore taxes &
transfers(mid70s-late00s)
G7 averageafter taxes & transfers
(mid70s-late00s)
From an inverted “U” to a
“N-shaped” curve?
• Globalization:
• International trade
rationale: higher relative
wages of skilled workers
in richer countries
[Could South Asia and
Africa exert the same
pressure on East Asia in
the future?]
• Technological progress (skill-
biased)
• Labor market deregulation
and decreasing union density
(less bargaining power)
12
However, redistribution policies could help to soften inequalities in emerging economies
GINI index in OECD countries before and after taxes & transfers (late 00s)Source: OECD
0,20
0,25
0,30
0,35
0,40
0,45
0,50
0,55
0,20 0,25 0,30 0,35 0,40 0,45 0,50 0,55
GINI before taxes and
transfers
GINI after taxes
and transfers
Chile
Mexico
Korea
Turkey
US
13
For this purpose, Asian countries need to strengthen fiscal revenues
0
5
10
15
20
25
30
35
40
45
Ukraine
G7
Poland
Russia
Argentina
Brazil
Turkey
Nigeria
Vietnam
S.Africa
Colombia
Chile
Korea
Thailand
China
Mexico
Egypt
Malaysia
Peru
Taiwan
India
Indonesia
Philippines
Pakistan
Bangladesh
Fiscal revenues (% of 2011 GDP)Source: IMF
-Higher fiscal revenues would allow to widen social protection-Linked to informality-Allocation of expenses could be also improved (e.g. targeted subsidies and transfers)
Asian countries
-Redistribution to soften inequalities today, but also to reduce inequality of opportunities and increase chances of income mobility in the future (e.g. through education)
14
Need to develop the welfare system: education
012345678910Primary
SecondaryTertiary
South Asia East Asia LatAm
Poland DEVELOPED
0
1
2
3
4
5
6
7
8
9
10
Korea
Poland
Argentina
Chile
Mexico
Brazil
Thailand
Malaysia
S.Africa
Colombia
Peru
Vietnam
Indonesia
Philippines
India
Bangladesh
Turkey
Russia
Ukraine
Primary
Secondary
Tertiary
Public expenditure by education level(thousands of PPP-adj. USD per student) (2006-2010)Source: BBVA Research, WB, IMF
Advanced
economies (lines)
15
Need to develop the welfare system: health
0
1
2
3
4
5
6
7
8
9
10
11
12
13
OECD
WORLD
S.Africa
Brazil
Argentina
Chile
Colombia
Ukraine
Poland
Vietnam
Korea
Turkey
Mexico
Nigeria
Russia
Peru
Egypt
China
Malaysia
India
Thailand
Philippines
Bangladesh
Indonesia
Pakistan
Private
Public
0
1
2
3
4
5
6
7
8
9
10
11
12
13
1991-1995 1996-2000 2001-2005 2006-2010
South Asia East Asia LatAm
Em.Europe Africa OECD
WORLD
Health expenditure(% GDP)Source: BBVA Research, WB 2006-2010
Asian countries
16
Need to develop the welfare system: social protectionNumber of branches covered in at least one program of social security* **Source: ILO (2010)
*There are 8 branches considered: sickness, maternity, old age, invalidity, survivors, family allowances, employment injury and unemployment**Number 4 covers 4 or less branches
17
Growth bottlenecks also harm chances for income mobility: lack of infrastructures
1
2
3
4
5
6
7
Bangladesh
Nigeria
Pakistan
Vietnam
India
Philippines
Indonesia
Egypt
China
Thailand
Colombia
S.Africa
Peru
Brazil
Iran
Kazakhstan
Mexico
Turkey
Malaysia
Russia
Argentina
Chile
Poland
S.Arabia
Qatar
Italy
Korea
France
Japan
UK
Germ
any
Taiwan
Canada
US
HK
Singapore
Low-income Middle-income H-I G7
Quality of overall infrastructure (1-7) in EAGLEs, Nest and G7 countries (2013-2014)Source: BBVA Research, WEF
Emerging Asian countries
Developed Asian countries
H-I = High-Income emerging economies
Asia has relatively good infrastructures according to the development of countries
18
0
25
50
75
100
125
150
175
200
225
7,5 8,0 8,5 9,0 9,5 10,0 10,5 11,0 11,5
Credit to private sector (%GDP)
GDP per capita (natural logs)
EmergingDevelopedAsiaTrend (all countries)
Growth bottlenecks also harm chances for income mobility: financial constraints
Credit to the private sector and GDP per capita (2013)Source: BBVA Research, IMF
Note: the trend represents long-term relation between GDP per capita and the ratio of credit regardless of other variables which play a
relevant in our model; the size of the bubbles are proportional to the absolute value of GDP
Singapore
Japan
Korea
China
Malaysia
Thailand
Pakistan
IndiaBangladesh
Credit seem to be more a concern than a bottleneck in Asia, although some segments
could be excluded even under excessive leverage
19
Conclusions
• Keeping sustainable development in Asia is crucial for global economic stability (even more in future decades).
• As population premium softens, the region should search for new sources of growth, although development levels are quite heterogeneous and so are needs and challenges.
• For instance, high inequality in middle-income countries (China, Thailand and Malaysia) may damage growth if social protection and redistribution policies are not well developed.
• Higher fiscal revenues are needed for these purposes, as well as avoiding bottlenecks such as the lack of infrastructures and financial constraints.
• However, the experience of OECD countries show that welfare systems also have limits tackling inequality under current trade, institutional and technological trends.
Thank you!
21
Annex: population premium is fading away across the board of Asia (although at a different pace)
Working age population (annual average growth) (1980-2040)Source: UN
-1,5
-1,0
-0,5
0,0
0,5
1,0
1,5
2,0
2,5
3,0
1980
1985
1990
1995
2000
2005
2010
2015
2020
2025
2030
2035
2040
WORLD
G7
Eastern Europe
Emg.Asia
LatAm
-1,5
-1,0
-0,5
0,0
0,5
1,0
1,5
2,0
2,5
3,0
3,5
4,0
1980
1985
1990
1995
2000
2005
2010
2015
2020
2025
2030
2035
2040
Regions Countries in Asia
PhilippinesPakistanç
MalaysiaIndia
Bangladeshç
IndonesiaVietnamç
Thailand
ChinaKorea
22
Annex: population premium is fading away across the board of Asia (although at a different pace)Population pyramids in selected Asian countries (2013)Source: BBVA Research, UN
China Thailand
India The Philippines
6 5 4 3 2 1 0 1 2 3 4 5 6
0-4
10-14
20-24
30-34
40-44
50-54
60-64
70-74
80-84
90-94
100+ Female Male
6 5 4 3 2 1 0 1 2 3 4 5 6
0-4
10-14
20-24
30-34
40-44
50-54
60-64
70-74
80-84
90-94
100+ MaleFemale
6 5 4 3 2 1 0 1 2 3 4 5 6
0-4
10-14
20-24
30-34
40-44
50-54
60-64
70-74
80-84
90-94
100+ Female Male
6 5 4 3 2 1 0 1 2 3 4 5 6
0-4
10-14
20-24
30-34
40-44
50-54
60-64
70-74
80-84
90-94
100+Female Male
23
Annex: A certain degree of inequality is good, but excessive inequality is bad
• …to foster competition and effort among workforce, as well as risk-
taking behavior, increasing
education, productivity and hence
progress and welfare
• In poor economies, inequality also
helps to build up demand for certain
goods that require a minimum
purchasing power (e.g. cars).
…for several reasons:• Uneven distributions reduce the likelihood of social
mobility and the chances of getting out of the poverty
trap. This is even truer for inequality of opportunities,
especially on education.
• The income distribution is very relevant in defining
access to financing, assets and consumption-saving
patterns, which all have a macroeconomic impact (e.g.
the effects of inequality on China´s low consumption
share and its implications ).
• For middle income countries a more equal distribution
favors economies of scale for certain industries
• Effects of inequality accumulate through the life-cycle.
In order to smooth consumption, poor people could
have incentives to move to the informal economy,
especially when social protection is low as in many
emerging markets.
• A high degree of inequality could lead to social and
political tensions with the potential to eventually turn
into unrest and seriously damaging future growth.
A certain degree of
inequality is good,…
…but excessive inequality is bad
24
Annex: A certain degree of inequality is good, but excessive inequality is bad (some literature references)
“Inequality and growth revisited”, Robert J. Barro, ADB
Working Paper, 2008
“Inequality and growth: the neglected time dimension”,
Halter, Oechslin and Zweimüller, Journal of Economic Growth,
2014
“Redistribution, inequality, and growth”, Ostry, Berg and Tsangarides, IMF Staff Discussion Note, 2014
“A cross-country-growth framework
reveals a negative effect from
income inequality on economic
growth, holding fixed a familiar set
of other explanatory variables”
“This effect […] diminishes as per
capita GDP rises and may be positive
for the richest countries”
“[…] higher inequality helps growth in
the short term but may be harmful
over longer periods of time”
“The growth-promoting effects arise
from purely economic mechanisms
(convex saving functions, capital
market imperfections, innovation
incentives [relatively fast]”
“The growth-reducing effects […]
involve the political process, the
change of institutions, the rise of
socio-political movements or […]
changes in the educational
attainment of population [with a
substantial lag]”
“[…] inequality continues to be a
robust and powerful [negative]
determinant both of the pace of
medium-term growth and of the
duration of growth spells, even
controlling for the size of
redistributive transfers”
“[…] there is surprisingly little
evidence for the growth-destroying
effects of fiscal redistribution at
macroeconomic level. […] the overall
effect […] may be roughly growth-
neutral”
25
Annex: From an inverted “U” to a “N-shaped” curve
From an inverted “U” to a “N-shaped” curve?
GINI index in the G7 economiesafter taxes & transfers“An overview of growing income inequality in
OECD countries: main findings” (OECD, 2011)
http://www.oecd.org/els/soc/49499779.pdf
Some suggested explanations:
• Globalization:
• International trade rationale: higher
relative wages of skilled workers in
richer countries [Could South Asia
and Africa exert the same pressure
on East Asia in the future?]
• Technological progress (skill-biased)
• Labor market deregulation and
decreasing union density (less bargaining
power)
26
Annex: Details of some social protection programs
0
5
10
15
20
25
30
35
Korea
Poland
China
G7
Thailand
Ukraine
Chile
Russia
Vietnam
Brazil
Mexico
Turkey
Indonesia
Argentina
Colombia
Peru
Bangladesh
Malaysia
Egypt
India
Philippines
Pakistan
S.Africa
Nigeria
2010-2050 change 2010
Old-age pension beneficiaries(% population above retirement age)Source: BBVA Research, ILO
Share of population aged 65 years and over in 2010 and 2050(% total population)Source: BBVA Research, UN
Unemployment effective coverage(% total unemployed)Source: BBVA Research, ILO
Asian countries
0
10
20
30
40
50
60
70
80
90
100
Germ
any
Taiwan
France
UK
Canada
US
Korea
Ukraine
Italy
Japan
Russia
Chile
Poland
Thailand
China
Turkey
S.Africa
Argentina
Mexico
Brazil
Indonesia
Peru
Nigeria
Bangladesh
Malaysia
Pakistan
Philippines
Vietnam
0
10
20
30
40
50
60
70
80
90
100
Germ
any
France
S.Africa
Ukraine
US
Turkey
Poland
Brazil
Italy
Argentina
Japan
Chile
Malaysia
China
Korea
Vietnam
Pakistan
India
Peru
Indonesia
Thailand
Mexico
Colombia
Bangladesh
Philippines
27
Annex: Chinese government concerned about inequality (Third Plenum Reforms)
• Larger fiscal room to increase redistribution
• Higher share of households’ income
• Higher banking competition (financial access to increase?)
• Urban social coverage for rural migrants• Living conditions to improve for low
income population
• Wealth and collateral assets for rural population
Potential impact on inequality (channels)
• Larger fiscal room to increase redistribution
• Lower prices to benefit more low income population
• Good for growth, good for employment
• Is further trade liberalization going to have negative effects on inequality as in the G7?
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