Structural challenges may derail Asean+3 growth, AMRO warns

Structural challenges may derail Asean+3 growth, AMRO warns
Hoe Ee Khor, chief economist at Asean+3 Macroeconomic Research Office, at a seminar during the 52nd ADB Annual Meeting in Nadi, Fiji
Hoe Ee Khor, chief economist at Asean+3 Macroeconomic Research Office, at a seminar during the 52nd ADB Annual Meeting in Nadi, Fiji
Published 2 May 2019
Khine Kyaw Myanmar Eleven Nadi Fiji

 

 

STRUCTURAL challenges poses risks to the aspirations of countries in East Asia to move up the income ladder, according to top executives of the Asean+3 Macroeconomic Research Office (AMRO).

Junhong Chang, the director of AMRO, said these challenges could impinge on the potential growth and prosperity of countries in the so-called Asean+3 grouping, if the issues are not addressed decisively.

The grouping brings together the 10 Asean states plus China, Japan and South Korea. Many of these countries are seeking to achieve high-income or upper-middle income status in the near future.

At a seminar during the Asian Development Bank’s (ADB) annual meeting, underway in Fiji till Sunday, Chang said the region is still confronted with daunting medium- and long-term structural challenges. She stressed the importance of three key challenges – productivity, investment and regional financial architecture.

 “The key challenge at this juncture is that Asean+3 economies need to transition to the new economy,” she said. “This adds urgency to the task of addressing the structural constraints the region is facing.”

The AMRO chief urged policymakers and experts to find ways to move progressively beyond the “manufacturing for exports” strategy, embracing the new technological revolution.

While total-factor productivity accounted for about 1.5 percentage points of the approximately 7 per cent annual growth of the region between 2002 and 2007, its contribution dropped sharply in the 2011 to 2017 period.

“This trend has to be addressed urgently – at a time when the fourth industrial revolution and the new economy are transforming the workplace and changing the technological and skill intensity of products,” she said.

Despite some signs of a pick-up in recent years, investments remain well below what is needed to fulfil growth potential in the region. 

Chang set a good example in infrastructure, saying: “It is clear that investment shortfalls have led to an infrastructure gap and undermined the capacity for growth.” 

A few Asean+3 economies could face stresses from financial market turbulence as financial markets are characterised by volatile capital flows, she warned.

“The question is what we can do as a region to improve the resilience of developing economies to volatility shocks. A big part of this surely must be about developing and strengthening the regional financial architecture,” she said.

Chang suggested developing and deepening capital markets to recycle ample savings within the region, and strengthening the regional financial safety net.

For the next phase of economic development, the region needs to redouble its efforts to enhance capacity and cross-border connectivity in order to ensure a successful transition to the new economy, she said.

Hoe Ee Khor, chief economist at AMRO, said manufacturing and services would be transformed by the fourth industrial revolution. He urged finding out what types of capacity and connectivity are needed in the new economy.

“Going forward, they will require higher levels of technology, expertise and connectivity to deliver customised goods and services,” he said.

The organisation yesterday released its new annual flagship report on Asean+3 economies. Despite heightened global risks and stronger external headwinds, the region is expected to remain resilient, growing at only a slightly slower pace until 2020, the report says.

“While regional growth is softening from 5.3 per cent last year to 5.1 this year and 5.0 next year, the longer-term economic fundamentals remain intact,” said Khor.

“Regional policymakers should stand ready to use available policy space to ease monetary and fiscal policies to mitigate downside risks and support the economy, if external conditions were to worsen.” 

He urged the region to prioritise longer-term policies, with a focus on building capacity and connectivity to leverage on the fourth industrial revolution and sustain growth in the new economy. 

According to the economist, rapid economic growth in the region will generate new infrastructure demand.

“Transition to the technology-heavy and services-driven new economy could accentuate strains arising from conventional gaps the region is facing,” he said.

He urged that developing economies invest in human capital and leverage on the complementarities in the region.