“Asia and Europe in Times of Global Changes”
Asia-Europe Economic Forum
Berlin, May 2014
How to achieve
sustainable growth...
2
Emerging Asia to dominate world growth in
following decades: key for global stability
Expected contribution to global gr...
3
Trade liberalization and global value chains as
relevant supportive growth drivers
South-South trade flows by regions (U...
4
Development transition is heterogeneous
among Asian countries…
Income transition between 2010 and 2020
(GDP per capita i...
5
…and so must be growth strategies: each
income transition entails different challenges
and risks
Demographics,
urbanizat...
6
Asia must search for new growth sources…
Avoiding
bottlenecks
Infrastructure
needs
Financial
deepening
Reshuffling
produ...
7
…and avoid hurdles such as “excessive”
inequality
A certain degree of
inequality is good,…
…but excessive
inequality is ...
8
0
10
20
30
40
50
60
70
Ukraine
Egypt
Pakistan
Korea
Indonesia
Bangladesh
India
Poland
Vietnam
Turkey
Thailand
Russia
Chi...
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...
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 inequali...
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...
12
However, redistribution policies could help to
soften inequalities in emerging economies
GINI index in OECD countries b...
13
For this purpose, Asian countries need to
strengthen fiscal revenues
0
5
10
15
20
25
30
35
40
45
Ukraine
G7
Poland
Russ...
14
Need to develop the welfare system:
education
0
1
2
3
4
5
6
7
8
9
10
Primary
SecondaryTertiary
South Asia East Asia Lat...
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
C...
16
Need to develop the welfare system: social
protection
Number of branches covered in at least one program of social secu...
17
Growth bottlenecks also harm chances for
income mobility: lack of infrastructures
1
2
3
4
5
6
7
Bangladesh
Nigeria
Paki...
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
Credittoprivatesector(%GDP)
GDP per capita (...
19
Conclusions
• Keeping sustainable development in Asia is crucial for global
economic stability (even more in future dec...
Thank you!
21
Annex: population premium is fading away
across the board of Asia (although at a different
pace)
Working age population...
22
Annex: population premium is fading away
across the board of Asia (although at a different
pace)
Population pyramids in...
23
Annex: A certain degree of inequality is good,
but excessive inequality is bad
• …to foster competition and effort
amon...
24
Annex: A certain degree of inequality is good,
but excessive inequality is bad (some literature
references)
“Inequality...
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 econ...
26
Annex: Details of some social protection
programs
0
5
10
15
20
25
30
35
Korea
Poland
China
G7
Thailand
Ukraine
Chile
Ru...
27
Annex: Chinese government concerned about
inequality (Third Plenum Reforms)
• Larger fiscal room to increase
redistribu...
DISCLAIMER
This document has been prepared by BBVA Research Department, it is provided for information purposes only and
e...
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How to achieve sustainable growth in Asia

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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.

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How to achieve sustainable growth in Asia

  1. 1. “Asia and Europe in Times of Global Changes” Asia-Europe Economic Forum Berlin, May 2014 How to achieve sustainable growth in Asia Jorge Sicilia Serrano Chief Economist, BBVA
  2. 2. 2 Emerging Asia to dominate world growth in following decades: key for global stability Expected contribution to global growth in the next ten years (%) Source: BBVA Research, IMF Western Europe 7.2% Africa 5.7% Eastern Europe 6.2% Latin America 6.9% North America 12.5% Middle East 4.1% Japan 1.7% Oceania 1.1% Asia exJapan 54.7%
  3. 3. 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. 4. 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 Poland Russia/Chile Bangl. Pakistan Nigeria Philipp. India Vietnam Indonesia Egypt Ukraine Argent./Malaysia Turkey Mexico Brazil/Peru Thail./Colomb./S.Africa Low-income Mid.-income High income High income Mid.-income Japan
  5. 5. 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 income Tertiarisation, Manufacturing diversification & sophistication, increasing middle classes, financial deepening Factor accumulation moderation, wages rise, need of higher education, technological skills and infrastructure High income 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 Risks Macro and institutional, social unrest, poverty, basic services, increasing inequality Low income
  6. 6. 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. 7. 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. 8. 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. 9. 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 Thailand Vietnam 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. 10. 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. 11. 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 periods Source: BBVA Research, UNU-WIDER, OECD *Estimations using different surveys Korea (1953-1997) GDP per capita (natural logs) GINI index China (1980-today) G7 average before taxes & transfers (mid70s-late00s) G7 average after 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. 12. 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 GINIaftertaxes andtransfers Chile Mexico Korea Turkey US
  13. 13. 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. 14. 14 Need to develop the welfare system: education 0 1 2 3 4 5 6 7 8 9 10 Primary 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. 15. 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. 16. 16 Need to develop the welfare system: social protection Number 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. 17. 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 Germany 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. 18. 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 Credittoprivatesector(%GDP) GDP per capita (natural logs) Emerging Developed Asia Trend (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 India Bangladesh Credit seem to be more a concern than a bottleneck in Asia, although some segments could be excluded even under excessive leverage
  19. 19. 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.
  20. 20. Thank you!
  21. 21. 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 Philippines Pakistan ç Malaysia India Bangladesh ç Indonesia Vietnam ç Thailand China Korea
  22. 22. 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. 23. 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. 24. 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. 25. 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 economies after 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. 26. 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 Germany 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 Germany 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. 27. 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?
  28. 28. DISCLAIMER This document has been prepared by BBVA Research Department, it is provided for information purposes only and expresses data, opinions or estimations regarding the date of issue of the report, prepared by BBVA or obtained from or based on sources we consider to be reliable, and have not been independently verified by BBVA. Therefore, BBVA offers no warranty, either express or implicit, regarding its accuracy, integrity or correctness. Estimations this document may contain have been undertaken according to generally accepted methodologies and should be considered as forecasts or projections. Results obtained in the past, either positive or negative, are no guarantee of future performance. This document and its contents are subject to changes without prior notice depending on variables such as the economic context or market fluctuations. BBVA is not responsible for updating these contents or for giving notice of such changes. BBVA accepts no liability for any loss, direct or indirect, that may result from the use of this document or its contents. This document and its contents do not constitute an offer, invitation or solicitation to purchase, divest or enter into any interest in financial assets or instruments. Neither shall this document nor its contents form the basis of any contract, commitment or decision of any kind. In regard to investment in financial assets related to economic variables this document may cover, readers should be aware that under no circumstances should they base their investment decisions in the information contained in this document. Those persons or entities offering investment products to these potential investors are legally required to provide the information needed for them to take an appropriate investment decision. The content of this document is protected by intellectual property laws. It is forbidden its reproduction, transformation, distribution, public communication, making available, extraction, reuse, forwarding or use of any nature by any means or process, except in cases where it is legally permitted or expressly authorized by BBVA.
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