World Economy

Use Fiscal Stability to Bolster Inclusive Growth

Effectively channeling of resources to finance sustainable development is a key challenge for the region
Countries can improve governance and fiscal management through effective leverage of technology.
Countries can improve governance and fiscal management through effective leverage of technology.

Countries in the Asia-Pacific region should make the most of the prevailing stable economic conditions to orient their economies towards a more socially inclusive and environmentally sustainable path, the United Nations development wing in the region, the Economic and Social Commission for Asia and the Pacific, has urged.

“Unless economic growth is accompanied by an expansion of decent jobs and strengthening of social safety nets, the region will continue to see a rise in inequality and little progress in eliminating poverty,” a report, by the UN under-secretary general and ESCAP executive secretary, Shamshad Akhtar, said, reported.

"Without concerted efforts, economic growth will continue to come at a significant, and often irreversible, environmental cost,” she added, unveiling the year-end update to the commission's flagship publication, the Economic and Social Survey for Asia and the Pacific.

The report highlights that fiscal sustainability is not a concern in most countries but overcoming the wide financing gap–difference between public investments required to effectively pursue sustainable development and the prevailing trends–requires fiscal space to be enlarged, including through the mobilization of resources, broadening private sector participation and strengthening capital markets.

It also states that countries can improve governance and fiscal management through effective leverage of technology.

“Through the use of technology, governments can improve tax administration and compliance and the implementation of direct benefit transfers while improving public expenditure efficiency,” reads the year-end update.

Private Investment Weak

The report also cautions that while the regional economic outlook for 2018 is “broadly stable”, private investment remains weak in most countries, partly as a result of overcapacity and debt overhang in the corporate and banking sectors of some major economies.

To achieve a stable and sustained economic growth momentum, higher wages supported by productivity gains and revival of private investment will be needed, the report says.

In the Asia-Pacific region, investment requirements are also substantial and so are potential resources. The combined value of international reserves, market capitalization of listed companies and assets held by financial institutions, insurance companies and various funds is estimated at some $56 trillion. Effectively channeling these resources to finance sustainable development is a key challenge for the region.

The need to come up with supplementary financial resources will remain. Public finances are frequently undermined by a narrow tax base, distorted taxation structures, weak tax administrations, and ineffective public expenditure management. This has created problems of balanced fiscalization of sustainable development, even if the national planning organizations have embraced and integrated sustainable development agenda in their forward looking plans.

Despite a vibrant business sector, the lack of enabling policies, legal and regulatory frameworks, and large informal sectors, have deterred sustainability and its appropriate financing. The external assistance from which some countries benefit is insufficient to meet sustainable development investment requirements, a problem often compounded by low inbound foreign direct investment.

Capital markets in many countries are underdeveloped and bond markets are still in their infancy. Fiscal pre-emption of banking resources is quite common. For those emerging countries which have successfully tapped international capital markets, a tightening of global financial conditions means borrowing costs are on the rise.

Rationalizing Tax Incentives

If the quality of the tax policy and administrations in Asia-Pacific economies matches developed economies, the incremental revenue impact could be as high as 3 to 4% of the GDP in major economies such as China, India and Indonesia and steeper in developing countries.

Broadening the tax base by rationalizing tax incentives for foreign direct investment and introducing a carbon tax could generate almost $60 billion in additional tax revenue per year.

But government action must be complemented by the private sector to effectively pursue sustainable development. The right policy environment could encourage private investment by institutional investors in long-term infrastructure projects.

Structural reforms should focus on developing enabling policy environment and institutional setting designed to facilitate public-private partnerships, stable macroeconomic conditions, relatively developed financial markets, and responsive legal and regulatory frameworks.

Regional Cooperation Vital

Finally, while much of the success in mobilizing development finance will depend on the design of national policies, regional cooperation is vital. Coordinated policy actions are needed to reduce tax incentives for foreign direct investment and to introduce a carbon tax. For many least developed countries, the role of external sources of finance remains critical.

In many cases, the success of resource mobilization strategies in one country is conditional on closer regional cooperation. ESCAP remains engaged and its analysis can support the planning and cooperation needed to effectively mobilize finance for sustained, inclusive and sustainable economic growth.

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