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

THE STATE OF INCLUSIVE AND SUSTAINABLE DEVELOPMENT IN UNCERTAIN TIMES CHAPTER 1
Policymakers should be concerned
with the composition of debt-financed
spending rather than the aggregate
level of such debt
It is also important to examine whether higher debt-
GDP ratios are a result of past failure to collect
enough revenues despite decades of higher growth
and/or due to unproductive expenditure. If this is
the case, then policymakers need to reprioritize
public programmes and improve efficiency of public
expenditure as well as take steps to improve revenue
collection by broadening the tax base and enhancing
the efficiency of tax administration. If tax revenues
are earmarked for socially desirable expenditure, there
will be incentives for tax payments. In this context,
the recent experience of the “Tax for Development”
campaign implemented in Bangladesh is very
encouraging; the tax-to-GDP ratio in Bangladesh has
risen from approximately 9% to approximately 13%.
Similarly, it is not clear that monetary policies should
not be eased even in a climate of relatively high
inflation if such policy easing is supportive of growth.
If such easing is undertaken in an environment in
which other structural barriers that hamper the
returns to investment, such as energy shortages,
are removed, the cheaper price of credit can spur
the activities of the private sector. Reducing the cost
of credit by expansionary monetary policy will not
necessarily lead to increased inflation if it is ensured
that credits are directed through regulatory measures
to productive investments, especially to agriculture
and not to speculative investments in assets.
Indeed, the relationship of inflation with growth is
found to be non-linear in numerous large crosscountry
studies (Chowdhury and Islam, 2012b). It
becomes negative only beyond moderate rates of
inflation, ranging from 13% to 17%. Historical evidence
based on the experiences of Indonesia and the
Republic of Korea during their rapid transformation
also reveals that such moderate inflation rates do
not harm growth; nor do they dampen poverty
reduction.
The above observation is critical for forward-looking
macroeconomics for monetary policy to balance
stabilization and developmental needs. It is pertinent
to point out here that the IMFs Article of Agreement
acknowledges the developmental role of monetary
policy. For example, the preamble of Article IV (i)
states, “each member shall: endeavor to direct its
economic and financial policies toward the objective
of fostering orderly economic growth with reasonable
price stability, with due regard to its circumstances”
(IMF, 2011).
Regional cooperation for addressing
infrastructure deficits
A key underlying need in order to increase the
inclusive and sustainable nature of growth is to
address the yawning infrastructure gaps for many
economies in the region, which, according to an
ADB study in 2009, are estimated to be in the
order of $800 billion per annum. 19 Recent analysis
by the World Bank estimates the annual need for
infrastructure in East Asia and the Pacific at $407
billion, with the current spending on infrastructure
far below the requirement, standing at around $200
billion (Brereton-Fukai, 2013). In addition, Asia and
the Pacific needs to spend approximately $290
billion on specific regional infrastructure projects in
transport and energy that are in the pipeline. If the
required investment toward pan-regional connectivity
is made in transport, communications, and energy
infrastructure during the period 2010–2020, the real
income of developing Asia during that period and
beyond could reach $13 trillion (ADB and ADBI,
2009). The infrastructure financing gap in the region
has recently become a concern for the Group of
Twenty (G20), with countries pledging to give the
issue attention during the grouping’s deliberations
during 2013 (Brereton-Fukai, 2013).
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