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Monday, November 28, 2022
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    Reforms for recovery

    Danial Norjidi

    The World Bank’s East Asia and Pacific Economic Update October 2022 highlighted that growth in developing East Asia and the Pacific outside China is forecast to accelerate to 5.3 per cent in 2022 from 2.6 per cent in 2021, according to a press statement.

    It added that China, which previously led recovery in the region, is projected to grow by 2.8 per cent in 2022, decelerating from 8.1 per cent in 2021.

    For the region as a whole, growth is projected to slow to 3.2 per cent this year from 7.2 per cent in 2021, before accelerating to 4.6 per cent next year.

    The press statement shared that, looking ahead, economic performance across the region could be compromised by slowing global demand, rising debt, and a reliance on short-term economic fixes to cushion against increasing food and fuel price.

    World Bank East Asia and Pacific Vice President Manuela V Ferro said, “Economic recovery is underway in most countries of East Asia and the Pacific.

    “As they prepare for slowing global growth, countries should address domestic policy distortions that are an impediment to longer term development.”

    It was also shared that growth in much of East Asia and the Pacific has been driven by recovery in domestic demand, enabled by a relaxation of COVID-related restrictions, and growth in exports.

    The report mentioned that, looking ahead, three factors pose threats to inclusive and sustainable growth, namely: global deceleration, rising debt, and policy distortions.

    As the press statement elaborated, “The global economic slowdown is beginning to dampen demand for the region’s exports of commodities and manufactured goods. Rising inflation abroad has provoked interest rate increases, which in turn have caused capital outflows and currency depreciations in some East Asia and Pacific countries. These developments have increased the burden of servicing debt and shrunk fiscal space, hurting countries that entered the pandemic with a high debt burden.”

    “As countries of the region seek to shield households and firms from higher food and energy prices, current policy measures provide much-needed relief, but add to existing policy distortions,” the statement said. It added that controls on food prices and energy subsidies benefit the wealthy and draw government spending away from infrastructure, health and education.

    “Lingering regulatory forbearance, aimed to ease lending through the pandemic, can trap resources in failing firms and divert capital from the most dynamic sectors or businesses.”

    World Bank East Asia and Pacific Chief Economist Aaditya Mattoo commented, “Policymakers face a tough tradeoff between tackling inflation and supporting economic recovery. Controls and subsidies muddy price signals and hurt productivity. Better policies for food, fuel, and finance would spur growth and insure against inflation.”

    The report noted that more efficient measures can provide relief and, along with reform of long-standing policy distortions, could spur growth.

    “Support through income transfers is preferable to price regulation because it does not distort choices and can be targetted to those most in need,” said the report. “In food, governments should shift focus from rice-centric food security to nutrition security by reducing subsidies and trade barriers that favour rice, thereby encouraging diversified production of nutritious food.

    “In fuel, policy responses should help meet the immediate need for affordable energy without compromising energy security and sustainability. Encouraging investment in renewables could reduce exposure to fossil fuel price volatility and help meet emission reduction commitments.

    “In finance, authorities will need to strengthen prudential measures and enhance the financial sector’s ability to allocate resources efficiently. Transparent and timely reporting of bank asset quality can help assess and address the risks of credit misallocation arising from pandemic crisis support measures, like regulatory forbearance and repayment moratoria.

    “Recent price and interest rate shocks could reduce East Asia and Pacific growth by 0.4 percentage points; inefficient instruments would soften the impact on current welfare but magnify the growth cost; more efficient intervention and deeper reforms – not just in the three areas discussed above but also in services and factor markets – could even offset the growth impact of recent shocks.”

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