Challenging year for Asia Pacific: UNESCAP report

Warns that countries need tough policy changes to stimulate waning growth

By Cheranka Mendis
Asia Pacific faces another year of tough policy changes to stimulate growth, with Sri Lanka in particular having to manage monetary policy, control inflation, provide jobs for youth and reduce high inequality, it was revealed in a report released yesterday.
The latest United Nations Economic and Social Commission for Asia and the Pacific (ESCAP) projections released in the ‘Economic and Social Survey of Asia and the Pacific 2012: Pursuing Shared Prosperity in an Era of Turbulence and High Commodity Prices’ predicts Eurozone growth to contract by 3.5 per cent in 2012, which would cut growth by 1.3 per cent and exports by $ 390 billion from the baseline.

Senior Minister Dr. Sarath Amunugama reads the latest UNESCAP report – Pic by Upul Abayasekara

To steer inclusive development in Asia Pacific, which is expected to grow at a moderate 6.5 per cent this year, the region should concentrate on policy changes that would stimulate and rebalance growth, promote regional cooperation to share risks and opportunities and implement long term structural reforms to cope with high commodity prices. ESCAP Economic Affairs Officer Vatcharin Sirimaneetham addressing the gathering at the launch noted that six policy changes in the report are highlighted as essential for the region. The challenges include managing growth and inflation balance, coping with volatile capital flows, addressing job recovery, rising social and income inequalities, dealing with disaster risks and rebalancing towards better quality growth.
“In general, the region has room for fiscal and monetary policy responses. Governments can use these to respond to the crisis. Policymakers need to find their preferred inflation growth nexus,” Sirimaneetham said.
In the Sri Lankan context, it was suggested that a monetary policy to balance credit growth along with inflation, with softer exports and domestic output growth would be beneficial for the country.
He commented that surges of capital inflow could sharply destabilise regional economies.
“Countries are still striving to implement appropriate financial market policies. Statistics have revealed that forceful and tailor-made capital control measures are shown to prevent large inflows.”
On job recovery, Sirimaneetham pointed out that there is not enough job creation in the formal sector. Unemployment for the region will remain at four per cent for another year and over three times more youth are likely to face unemployment this year.
In addition to that, over one billion employed workers are vulnerable as of now. “Employment policies must be established to improve productivity, working conditions and should focus on enhancing opportunities for youth employment,” he said.
In Sri Lanka, youth unemployment was recorded to be around 20 per cent in 2010, a figure that was double the regional average. The informal sector is said to have hired nearly two thirds of the workers.
Even though growth has helped reduce poverty over the years, income inequality is still on the rise. The report indicates that policy goals ensuring equal opportunities for all in sectors such as basic education, healthcare and infrastructure must be formed. Like unemployment, Sri Lanka’s inequality in 2010 is higher than the regional average with the Gini Index recording 49 for Sri Lanka in 2010.
On dealing with disaster risks, Sirimaneetham stated that damages and losses due to natural disasters in the region in 2011 accounted to $ 267 billion. In order to prevent further damage and to minimise the large spillovers to other economies in regional production networks, it was recommended that policies should be developed to invest more in disaster risk education while governments must also lead in disaster prevention and management and better utilise regional cooperation networks.
To redirect the region’s growth drivers from extra-regional demand to intra-regional and domestic demand, rebalancing the region towards better quality growth is vital, he added. Policies in this regard should aim at increasing inclusiveness of growth, fostering agricultural development, supporting the concept of green economy and exploit the potential of regional economic integration.
However, the long term challenge for Asia Pacific is the high commodity prices, Sirimaneetham acknowledged. A rising trend since 2000 punctuated by the global economic crisis, the commodity boom can be seen in the context of rising emerging economies. With Sri Lanka belonging to what the report classifies as ‘aspiring countries,’ policy options must be looked at to avoid having weaker incentives to move up. “Countries such as Sri Lanka should reduce reliance on a few labour intensive manufacturers and participate more in regional supply chains.”
Minister of International Monetary Cooperation Dr. Sarath Amunugama also noted that the volatility in the global market would affect the country negatively, especially with the majority of Sri Lanka’s exports going to Europe and USA.
However, there is no cause to hit the panic button, he said. “What we must do now is exploit the crisis and find opportunities for us to grow in. We must look at future policies in a hard headed way. If we play our cards right and have a sophisticated approach, we’ll be on a good path.”
The country should also place more emphasis on agriculture, he stated. Claiming that the Government is now thinking about exporting rice, Amunugama noted that more effort must be put in to finding solutions for post-harvesting production problems, growing better quality paddy and research and development. Transmitting to a ‘blue economy,’ the country should also use the ocean to its advantage, he said.
“The biggest gap is that we are woefully short in private sector promotion and attracting foreign direct investments.” Conceding that without this, seven per cent growth will be but a dream, Amunugama said that a monetary policy addressing this must be implemented. The country’s bureaucracy must be addressed and the delivery system must be improved, the Minister added. “Take the Sampur project. We have been fiddling with it for five years now.”