Boost domestic demand to revive growth: ESCAP

19 Jan '16

4 min read

The report highlights the challenges facing the region's central banks and financial regulators. While slower economic growth and lower inflation clearly favour further interest rate reductions, capital outflow and exchange rate considerations, together with financial stability concerns in some countries, call for prudence. The recent increase in interest rates in the US has created external pressure for capital outflows and may lead to a rise in domestic financing costs in the Asia-Pacific region. “This poses particular challenges for countries which have accumulated significant household and corporate debt through external financing and with significant exposure to the real estate sector,” Dr. Akhtar explained.

Given smaller maneuvering room for monetary policy, the report recommends a proactive fiscal policy stance which provides countercyclical support to the economy and strengthens the foundations for future growth and development. In particular, public expenditures on education, healthcare and infrastructure could strengthen productivity and help achieve the 2030 Agenda for Sustainable Development. “In order to create more fiscal space to invest in these critical areas, governments should reprioritize expenditures and enhance their efficiency while improving tax policy and administration”, said Dr. Akhtar. The report highlights some positive steps taken by countries in this direction, including the phasing out of inefficient and inequitable fuel subsidies.

The report notes that despite much progress having been achieved in poverty reduction, significant inequalities of incomes and opportunities remain in many economies of the region, hampering the achievement of broader development goals. Dr. Akhtar emphasized that “it is critical that productivity growth is accelerated and that its benefits are passed on to the labour force.” Rather than relying excessively on debt to support growth, such steps will foster more sustainable growth by strengthening domestic demand and assisting countries in pursuing the 2030 Agenda for Sustainable Development. “Economic growth supported by increases in real wages is more resilient than growth backed by accumulation of debt,” said Dr. Akhtar. (SH)

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