Financing an Inclusive and Green Future
66th Commission Session, ESCAP
17 May 2010, Incheon, Republic of Korea
Ladies and Gentlemen,
We are in 2010 and the region faces new policy challenges in the short and medium term as it leads the world economy in recovery from the worst recession in living memory.
In this presentation, I will highlight key policy challenges and how ESCAP’s work in different areas could assist our member governments in addressing them. In doing so I will draw upon two latest publications of ESCAP prepared for the 66th Session namely the Economic and Social Survey of Asia and the Pacific 2010 and Financing an Inclusive and Green Future: A supportive financial system and green growth for achieving the MDGs in Asia and the Pacific, incorporating the theme study prepared as per the Resolution 65/1. I believe that the region can turn challenges into opportunities in the coming years for building more balanced, inclusive and sustainable economies that will also be the growth poles and an anchor of stability for the world economy.
Improving Economic Outlook and Policy Challenges
Since we met last April at the 65th Session of the Commission, the economic outlook of the Asia-Pacific region has improved with a V-shaped recovery supported by massive fiscal stimulus packages. ESCAP’s latest Economic and Social Survey projects a 7.0% growth in 2010 of the Asia-Pacific developing economies, led by China growing at 9.5% and India, at 8.3%. However, the recovery is fragile besides further uncertainties created by the European debt crisis. Furthermore, rising inflation in a number of countries especially in food prices, growing asset bubbles and appreciating exchange rates in a weak growth environment require a tough balancing act on fiscal and monetary policies and will make 2010 a year of complex policy making. While some monetary tightening may be inevitable to restrain inflation, as a number of central banks have begun doing, policy makers may be cautious about withdrawing fiscal stimulus policies lest the recovery process is disrupted.
There is also a need for moderating huge short-term capital flows in the emerging markets resulting from a massive expansion of liquidity in the advanced countries in the wake of the crisis. These inflows are leading to booming real estate as well as stocks and currency futures and are also putting upward pressures on exchange rates which can threaten export recovery. Therefore, capital controls can be considered, where necessary, to moderate short term capital flows in the emerging markets.
Beyond these short-term challenges, a serious consideration has to be given to the prospects of sustaining the recovery beyond the fiscal stimulus packages. It is not possible to return to ‘growth as usual’ and ‘trade as usual’ scenario given global macroeconomic imbalances and the unwinding of debt-fuelled consumption. ESCAP’s analysis also suggests that a return to the business as usual scenario is unlikely and even with a recovery, growth of imports of the western economies may not revive to the pre-crisis trends. This clearly means that Asia-Pacific region has to develop new sources of demand that would make up for the shortfall in the advanced economies like the US.
Poverty, MDG Gaps and New Sources of Growth
This is where the recent analysis of ESCAP becomes relevant. The latest regional MDG report prepared by ESCAP/ADB and UNDP finds that the Asia-Pacific region as a whole has made remarkable progress towards achieving the MDGs. Rapid economic growth has helped lift millions of people out of poverty. However, most of the countries of the region are still off track on many crucial indicators, including child and maternal mortality. The economic crisis has put at risk the achievement of the MDGs and has pushed an estimated 21 million people into poverty during 2008-09. The High-level Review on the Brussels Programme of Action for LDCs for the Decade 2001-2010 conducted by ESCAP in Dhaka in January 2010, as presented here this morning by the honourable Prime Minister of Bangladesh showed that the LDCs continue to suffer from multiple development challenges, and as a whole encounter greater difficulties in making sufficient progress in achieving the MDG targets by 2015. Similarly the regional review of the Mauritius Strategy for implementation in the Pacific conducted by ESCAP in Vanuatu in February 2010, as presented this morning by the Honourable Prime Minister of Vanuatu highlights how the small island countries in the Pacific are at the frontline of the climate change impacts in addition to the food, fuel and financial crisis.
The theme study finds that eleven Asia-Pacific countries are likely to miss the income-poverty target of MDGs. This would imply that in 2015 there will be 88 million more people still in poverty in these off track countries in addition to those who would be in poverty even with the achievement of the goals. On the whole in the region there are close to a billion people living in poverty currently. The theme study points out that the rate of poverty reduction can be accelerated significantly by ensuring that inequalities do not worsen with the growth process or if the growth of household consumption increases faster than it has been in the region. If we can do that through more inclusive development policies, the poverty goal would appear to be within reach in many countries.
Excellencies, ladies and gentlemen: Poverty and other development gaps provide a considerable head room for generating additional aggregate demand for sustaining Asia-Pacific region’s growth. The theme study finds that for closing the MDG gaps (other than poverty), the region would require additional resources of the order of US$ 636 billion over the 2010-2015. For the region as a whole, the costs may not seem daunting, but for individual countries they can be steep– over 20% of the GDP for some of the LDCs. The Survey also points to the wide gaps in infrastructure development that need to be closed between more advanced countries in the region and the poorer countries typically the LDCs, landlocked and small island economies. It is clear that we have enormous potential of enhancing consumption and investments in the region that would not only help to make up for the shortfall of demand in the west but will also make the growth process much more balanced.
Where could the resources come from to close these gaps? The theme study explored both domestic and international sources. An analysis of government budgets in 21 countries suggests that the share of government spending on MDG priorities such as health and education, social protection has increased only in a few countries since the adoption of Millennium Declaration. More resources for MDG spending can be found through reorienting the public expenditure, through public-private partnerships, through augmenting the government revenue by widening the tax base and by making fiscal incentives development-friendly [such as incentives for employment generation in the corporate tax laws, through ecological tax reforms and other such policies].
Besides overseas development assistance that is critical for MDG financing in many developing especially least developed countries, South-South cooperation is becoming an important channel of resources and technical assistance for many countries. Significant magnitude of such assistance is originating now in countries in the region such as China, India, Thailand, among others. Intra-regional FDI flows are also increasing in importance with the rise of new sources in the region such as China, India, Russian Federation, Malaysia, among others.
We have to also explore new sources of funding global public goods such as MDGs. In that context, initiatives such as such as green tourism tax in Maldives have considerable potential. There is also a discussion on a global financial transaction tax that could moderate the volatility of short term capital flows while generating billions of dollars of revenue. Even a small tax of 0.1% on global foreign exchange transactions could yield revenues of about $640 billion annually. While it would be most optimal at the international level, a beginning could be made at a regional-level in Asia-Pacific region as a stepping stone to a global tax, in case a global consensus takes long time to evolve.
Finally, lack of a well developed regional financial architecture has been a reason why the region’s central banks have invested their growing savings and foreign exchange reserves in the United States treasury bills thus perpetuating the global macroeconomic imbalances by funding excess consumption in the US. The recent multilateralization of the Chiang-Mai Initiative is an important step but is limited to management of liquidity crises. With combined reserves of nearly $ 5 trillions, the region now has the ability to develop a more ambitious regional cooperative architecture that could not only help prevent and manage crises but also assist in closing the development gaps and unleash the potential aggregate demand in the region’s lesser developed regions. ESCAP can assist the member countries in elaborating the elements of a stable and development-friendly regional financial architecture.
Enhancing Financial Inclusion
Excellencies, Ladies and Gentlemen: Beyond mobilizing funds, we must ensure that financial services reach out to the millions of ‘unbanked’ poor providing them with the opportunities and security of a well functioning financial system. In most of the countries of the region, less than half of the population has access to formal financial services. Tackling these barriers to access by the bottom half requires innovation in bringing financial services to the poor, investment in human resources and technology within the banking system. Different types of financial institutions e.g. commercial banks, microfinance institutions, development financial institutions, post offices and other public networks- have a role to play to serve the poor, each with their own strengths. In addition, widening the range of financial services to the poor is essential covering “five-micros”: micro-savings, micro-credit, micro-repayments, micro-remittances and micro-insurance.
Excellencies, ladies and gentlemen: Let me now turn to other aspects of the regional policy agenda for creating new engines for fostering inclusive and sustainable growth that we have articulated in the Survey. These include social protection, agricultural and rural development, green innovations.
Strengthening social protection
We need to attach a high importance to strengthening social protection. If poor households can rely on systems of social protection in times of adversity they will be able to maintain food intake and continue to use education and health services. Just as important, in normal times they will have less need to maintain precautionary savings and can use more of their income for consumption to meet their needs. Developing countries of the region have a very high proportion of their work force in the informal sector with minimal legal protection and social security. The Asia-Pacific region now has a number of examples of ambitious social security programmes. Thailand has a universal health-care programme. India has the National Rural Employment Guarantee Act (NREGA) which provides a guaranteed 100 days of employment each year to adult members of rural households. Indonesia and the Philippines provide conditional cash transfers to poor households for their energy, food, health and educational needs. These interventions need to sustain a trajectory moving from poverty to human security.
Promoting agriculture and rural development by fostering a new green revolution
As the majority of poor people live in the rural areas and derive most of their income from agriculture they are likely to benefit from agricultural growth. We now need a new more knowledge-intensive green revolution that combines advances in science and agricultural engineering with the region’s unique traditional knowledge to make agriculture more environmentally resilient. International partnerships and South-South cooperation can also help foster such a green revolution while also addressing concerns for food security.
Promoting Green Growth and environment-friendly innovations
Mr Chairman, Asian and Pacific countries are facing immense challenges in sustaining previous levels of economic growth as natural resources dwindle. Demand for energy, water and other natural resources is expected to continue to grow rapidly, yet the basic needs of millions of people remain unmet. The Asia-Pacific region can no longer hope to “grow first and clean up later”. Green Growth emphasizes environmentally sustainable consumption and production that foster low-carbon, socially inclusive development. Investing in the sustainable use of resources and in providing clean energy, safe water, and adequate sanitation can realize double dividends in terms of economic growth, poverty reduction, and environmental sustainability – including in climate change mitigation and adaptation. Many countries in Asia and the Pacific are already successfully integrating environmental sustainability into their socio-economic development strategies. Several countries have also turned the financial and economic crisis into an opportunity for green growth by incorporating green elements into their economic stimulus packages. While many initiatives are underway, it is clear that there is no ‘one-size-fits-all’ approach, and that countries will need to tailor green growth to their own priorities. ESCAP secretariat with the support of the Government of the Republic of Korea is developing a low carbon, green growth roadmap for East Asia, which will assist member countries in integrating development and climate challenges. At the Asia-Pacific Business Forum that ESCAP organized last month in China, governments and business leaders discussed policies and strategies to create markets and to grasp the huge business opportunities of low carbon goods and services.
Enhancing eco-efficiency of resource use will need to be promoted consciously through a strategic industrial policy approach and through incentives and smart regulations. Continuous investment, both private and public in this economic development path is critical to build on the capabilities that a number of Asia-Pacific developing countries are acquiring and to strengthen their economic competitiveness in the world market, where greener technologies and goods are rapidly expanding their shares. Richer countries can invest in developing new systems. But for developing countries an important condition for ensuring environmental sustainability is their access to existing greener technologies and finance. The United Nations Framework Convention on Climate Change (UNFCCC) provides for the commitment of developed countries to support developing countries, through the transfer of technology and finance according to the principle of common but differentiated responsibilities. Governments will also need to consider policies that channel private sector capital into investments in green technologies although public financing will play a crucial role, especially in the short run.
Evolving a regional framework for cooperative action
Finally, Mr. Chairman, with some of the world’s largest and fastest-growing economies, Asia and the Pacific can become an even greater economic powerhouse if it develops a more integrated regional market. Thus far, for historical and political, the region has been better connected with Europe and North America than it has been with itself. In this context if Asia-Pacific countries can accelerate progress on two current overlapping proposals. The first is the East Asia Free Trade Agreement (EAFTA) which brings together the ASEAN+3 grouping. The second is the Comprehensive Economic Partnership of East Asia (CEPEA) of the East Asia Summit (EAS) whose members include ASEAN+6. These proposals can serve as stepping stones to an even broader, unified Asia-Pacific market and an economic community. Furthermore, regional trade agreements (RTAs) should move beyond tariff reductions to broader and deeper economic partnership agreements. Dismantling non-tariff barriers and reducing delays at borders will not only facilitate trade and investments, it will also generate wider employment opportunities as small and medium-sized enterprises integrate more effectively in regional value chains.
Secondly, connecting countries through roads and railways is a pivotal element of regional integration, a reduction in development gaps, more balanced spatial development and improved access to social services. The Ministerial Conference on Public Private Partnerships for Infrastructure Development and Infrastructure Asia 2010 held in Jakarta last month inaugurated by Honourable President Susilo Banbang Yudhoyono of Indonesia considered ways and means to promote public private partnerships to foster infrastructure investments.
In future the region will need an integrated, multimodal transport system. For this purpose, it can, for example, build intermodal transfer points, also known as dry ports, where goods, containers or vehicles can be transhipped using the most efficient mode of transport – along with facilities for product grading, packaging, inspections and the processing of trade documentation. The areas surrounding dry ports can then emerge as growth poles, bringing new investment and employment opportunities to impoverished hinterlands while reducing the pressure on coastal areas. Building on its Asian Highway and Trans Asian Railway Networks, the ESCAP secretariat is now helping the region develop a network of dry ports while improving trade and transport facilitation such as through paperless trade and single window clearance. ESCAP, along with the Asian Development Bank and Economic Research Institute for Asean and East Asia (ERIA), is also assisting ASEAN in developing a connectivity master plan. Expanding markets and business opportunities and creating a more unified economic space will depend crucially on better intraregional ICT connectivity to accelerate cross-border information and communication flows. One of the main tasks will be to offer greater international bandwidth – particularly for the landlocked developing countries and the Pacific island developing countries. As well as boosting economic development such connectivity can also be used to establish systems for emergency early warnings and disaster response.
Mr. Chairman, in this statement, I have outlined the regional policy challenges that will be confronted by our region in the months and years ahead. Asia and the Pacific now has an historic opportunity to forge ahead on an inclusive and sustainable development agenda with regional cooperation. ESCAP as the regional arm of the United Nations, and the all-inclusive forum for Asia and the Pacific, stands ready to provide the analysis, and facilitate the policy consensus, for this collective journey.
We have been honoured by the extraordinary support you, our Member States, have given to our efforts and we continue to stand ready to fulfill your highest expectations in the year ahead.
I thank you very much for your attention.