How to achieve sustainable growth in Asia

“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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