Full Report - Subregional Office for East and North-East Asia - escap

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ECONOMIC AND SOCIAL SURVEY OF ASIA AND THE PACIFIC 2013 Box 1.1. How has policy uncertainty in the euro zone and United States affected Asia and the Pacific? In the past few years, the world economy has been characterized not only by lower growth but also by increased economic uncertainty. Near-term economic prospects have become more unpredictable, with sharp upward and downward revisions in growth projections. Policy uncertainty in developed economies is the main factor behind this environment. Examples of issues that are triggering this unclear environment include divided negotiations on the fiscal cliff and debt ceiling in the United States, a possible breakup in the euro zone, and the timing and size of monetary injections by various monetary authorities. Uncertainty in advanced economies threatens global economic stability. Consumers delay their spending on durable goods and housing due to heightened job insecurity. Businesses are reluctant to expand operations given less predictable demand. Financial institutions also tighten lending standards as perceived default risks escalate. In addition, massive inflows and sudden reversals of foreign capital, particularly in the form of short-term portfolio investments, add volatility to domestic financial markets. The stalled growth in the United States in late 2012, underpinned by widespread concerns over the outcome of the fiscal cliff negotiations, emphasized the significance of economic uncertainty. a Economic uncertainty appears to have risen in Asia and the Pacific in recent years. The volatility b of daily stock market indices, a high-frequency variable that is very sensitive to changes in market sentiments, surged in 2008-2009 relative to the pre-crisis period (see figure A). This finding also remains generally true when measured over the longer period of 2008-2012, a period in which episodes of macroeconomic upswings and downswings occurred. Similarly in the real sectors, export-oriented economies, such as Malaysia, Republic of Korea, Thailand and Hong Kong, China registered more pronounced changes in inventories as a share of GDP during the crisis years of 2008-2009. Rapid destocking and restocking of inventories often indicate large mismatches between anticipated and actual shipment orders. Overall, fluctuations in the trade and domestic components of GDP have pushed up volatility in output growth in most regional economies (see figure B). Based on a counterfactual analysis, ESCAP finds that if advanced economies were exposed to lower policy uncertainty between 2008 and 2012 than actually observed, the annual output levels of Asia-Pacific economies would have been 3% higher on average (see panel A in figure C). Here, it is assumed that a less volatile macroeconomic environment benefits growth performance through 35 30 25 20 15 10 Figure A. Movements in regional stock markets have become more volatile 5 Malaysia Coefficient of variation of daily stock market indices Republic of Korea Philippines 2008 - 2009 2008 - 2012 2000 - 2007 Singapore Sri Lanka Hong Kong, China Taiwan Province of China Thailand Turkey Indonesia India China Viet Nam Russian Federation Growth volatility during 2008-12 Figure B. Output growth volatility also rose or remained high in many Asia-Pacific economies 120 100 80 60 40 Coefficient of variation of the absolute values of quarteron-quarter, seasonally-adjusted GDP growth THA IND KOR MYS PHL SGP TWN TUR HKG RUS IDN 20 20 40 60 80 100 120 Growth volatility during 2000-07 Source: ESCAP, based on data from CEIC Data Company Limited. Available from http://ceicdata.com/ (accessed on 15 March 2013). Source: ESCAP, based on data from CEIC Data Company Limited. Available from http://ceicdata.com/ (accessed on 15 March 2013). 18
THE STATE OF INCLUSIVE AND SUSTAINABLE DEVELOPMENT IN UNCERTAIN TIMES CHAPTER 1 Box 1.1. (continued) Figure C. Policy uncertainty markedly affected regional output levels over 2008-2012 but country proactive policies could moderate the impacts Panel A. Impact of reduced economic uncertainty emanating from developed economies 9 Mean: stronger confidence Mean: and stronger lower financial confidence risk and lower financial risk Mean: stronger 8confidence Mean: onlystronger confidence only 7 6 5 4 3 2 1 9 8 7 6 5 4 3 2 1 Panel B. Impact of reduced economic uncertainty resulting from an individual country’s proactive policies 9 Mean: stronger confidence Mean: and stronger lower financial confidence risk and lower financial risk Mean: stronger 8 confidence Mean: onlystronger confidence only 7 6 5 4 3 2 1 0 0 0 Philippines Hong Kong, China Turkey Russian Federation Malaysia Thailand Philippines Indonesia Hong Kong, China Taiwan Province of Chian Turkey Singapore Russian Federation Japan Malaysia Republic of Korea Thailand Australia Indonesia India Taiwan Province of Chian China Singapore Japan Republic of Korea Australia India China Philippines Turkey Hong Kong, China Thailand Indonesia Japan Philippines Russian Federation Turkey Australia Hong Kong, China India Thailand Republic of Korea Indonesia Malaysia Japan Taiwan Province of Chian Russian Federation Singapore Australia China India Republic of Korea Malaysia Taiwan Province of Chian Singapore Estimated increases in the output level relative to the actual levels (%) Source: ESCAP, based on the Oxford Global Economic Model. Note: The vertical lines show the ranges of the impact in any given year between 2008 and 2012. at least two channels: stronger market confidence and lower bond market distress. c In the Philippines, Turkey, and Hong Kong, China, the estimated impact in any given year during the period 2008-2012 could be up to 7-9% of total output. These estimates are sizeable, considering that the assumed magnitude of improvement in market confidence and bond market distress is relatively modest. Meanwhile, the analysis also shows that the impact is slightly more modest if increased economic certainty helps to support market confidence, but does not reduce perceived risks in the financial sector (represented by unfilled markers in panel A). ESCAP analysis, however, indicates that proactive fiscal and supportive financial policies could on average offset 75% of the impacts of policy uncertainty stemming from the developed world. The proactive government policies include: automatic stabilizers that sustain household consumption amid shocks, such as unemployment benefits for workers and agricultural price support and insurance for small farms d ; active macroeconomic policies to restore confidence, such as targeted cash transfers and bank deposit insurances; building and maintaining ample fiscal space; and structural and medium-term policies, such as a shift towards countercyclical fiscal policies and deepening domestic financial markets. e The second scenario assumes country-level policy responses which result in stronger market optimism f and lower financial risks for the particular Asia-Pacific economies that implement such policies. Panel B in figure C shows the positive impact on GDP for each country through the application of proactive fiscal and financial policies. The magnitude of the output loss arising from policy uncertainty in the advanced economies can be moderated by an average of 75%. This reduction in the adverse impact of policy uncertainty can offer significant relief to citizens in terms of preserving jobs. In China, for example, proactive 19
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Page 7 and 8: PREFACE The Economic and Social Sur
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MACROECONOMIC PERFORMANCE AND POLIC
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DEVELOPMENTAL MACROECONOMICS: THE C
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Turkey Hong Kong, China Tajikistan
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INVESTING IN INCLUSIVE AND SUSTAINA
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Percentage of GDP INVESTING IN INCL
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❚ ❚ ✕❚ INVESTING IN INCLUSI
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207 REFERENCES
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REFERENCES REFERENCES Abdyrasulova
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REFERENCES (2012a). The debate on e
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REFERENCES (2012). World Energy Out
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REFERENCES Ma, K-H (2008). Assessme
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REFERENCES (2011b). Child Poverty i
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REFERENCES United Nations, Economic
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STATISTICAL ANNEX STATISTICAL ANNEX
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STATISTICAL ANNEX Table 2. Poverty
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STATISTICAL ANNEX Table 4. Resource
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STATISTICAL ANNEX Technical notes T
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STATISTICAL ANNEX Source: Barro, Ro
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STATISTICAL ANNEX estimates based o
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This publication may be obtained fr
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READERSHIP SURVEY The Macroeconomic
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Half a decade since the onset of th
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