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The Asia-Pacific economy is expected to grow by 3.6 percent in 2017 and 2018. This is a significant improvement from last year when growth was at around 3.2 percent. Much of this improvement comes from faster than expected growth in the region’s largest economies: the United States, China and Japan. However, underlying the upbeat forecast, there remain important structural concerns about the nature of growth in the region: high levels of debt; the impact of rising interest rates on the ability of the individuals and the corporate sector to service that debt; slowing trade and its ability to act as a driver of growth; and the impact of the digital economy.
According to PECC’s annual survey, the top-5 risks to growth were:
• Increased protectionism
• Lack of political leadership
• A slowdown in the Chinese economy
• Possible slowdown in world trade growth
• Failure to implement structural reforms.
Over 44 percent of respondents selected increased protectionism as a top 5-risk to growth for their economy. This finding should not be entirely surprising, according to Global Trade Alert, since 2008, Asia-Pacific economies have adopted a total of over 71,000 trade restricting policy measures.
On the side of forward momentum on trade opening, there is uncertainty over the future of regional trade initiatives. According to economic modeling studies, the implementation of the TPP-11 could boost the GDP of the 11 economies by 3.0 per cent. Estimates suggest that if the RCEP economies eliminate all import tariffs that existed as of 2011, the average real GDP of the RCEP economies would be boosted by 1.9 percent.
Underlying the uncertainty over the future of trade integration are concerns about rising income inequality and its distributional impact. Based on modeling simulations, the magnitudes of the adjustments of employment, measured in terms of the share of the labor force that needs to shift sectors, are estimated to be less than 20 percent of real GDP gains on average among the APEC economies as a result of tariff removals and NTM reductions among the APEC economies.
Close to two-thirds of respondents expect RCEP to conclude in the next 2-5 years and about 50 percent believe that the TPP-11 (the TPP without the US) would go ahead in the same number of years. In addition to traditional trade integration initiatives, other new forms of cooperation are underway such as the Belt and Road Initiative (BRI). Over the past three years, the BRI has gradually entered a new phase of comprehensive and pragmatic cooperation with more than 100 economies and international organizations involved and formal agreements signed with 69 of them. Complementary to the BRI are the Asian Infrastructure Investment Bank (AIIB). In one year since the AIIB started operations, it has approved its first four projects, totaling about US$500 million and covering areas such as energy, transportation and urban development.
The latest update to PECC’s index of economic integration in the Asia-Pacific region has fallen below its 2009 level. This fall follows the zigzag recovery as well as the possible influence of antiglobalization in the Asia-Pacific region after the Global Economic Crisis. The index measures the degree of integration taking place in the Asia-Pacific region based on intraregional flows of: goods, investment, tourists, and five measures of convergence - gross domestic product (GDP) per capita, share of non-agriculture to GDP, the urban resident ratio, life expectancy, and share of education expenditure in gross national income (GNI).
While the traditional trade and economic policy discussions continue, internet-based technologies are rapidly changing the ways in which businesses, consumers and governments interact with each other. The extent to which this transformation is taking place is leading some to conclude that the digital economy is not only the future of our economy, it is the economy. Goods and services are being digitized, not only in how they are developed, but also in how they are delivered and consumed. This transformation is happening in all sectors - health, education, security, finance, and government. Three immediate questions for policymakers and trade officials arise:
• What is the digital economy and what are its implications;
• What are the opportunities and risks; and,
• What are the policy implications – domestically as well as internationally?
The impact of the digital economy on labor markets will be large. Routine and more mechanical types of work are already being replaced by machines, automation, robots, and systems. This is emerging as a significant political concern which is likely to heighten dramatically in the near future unless policymakers begin to plan for and promote such transitions. The ILO, among others, is attempting to track the impact on jobs resulting from automation and the so-called 4th Industrial Revolution, but without proper, consistent, and comparable measurements of the digital economy, it remains a fraught task. According to the results of PECC’s 2017 State of the Region survey, while people expected some types of jobs to decrease, such as clerical and assembly line work, others were expected to increase such as technical and professional jobs.
The digital economy, if successful, can promote efficiency, innovation, and inclusion. The lower cost of accessing and utilizing ICT makes economic activities more productive and innovative. For example, enabling farmers to get information on the weather and real-time market prices, while SMEs gain access to e-commerce platforms. However, each technological revolution and globalization wave has come with creative disruption. As in previous phases of globalization, there is a tendency to try to ‘protect’ the development of the data economy or the digital economy. In the past, this took the form of tariffs on goods or services trade. Today, these protectionist moves often focus on requiring data to be processed or stored locally, and other restrictions of data flows. Increasingly, the issues that are becoming policy blockers to free trade are centered on data flows.
APEC could play a significant role in addressing these issues, precisely because of its convening and coordinating role and its nonbinding nature. To begin with, APEC could - and should - establish principles for the digital economy that individual economies could implement. This would be much like the work APEC did to socialize investment and competition policy in the 1990s.
For these developments to be successful, trust is required: negotiators, bureaucrats, politicians, advocates in the various economies need to better understand the reasons behind different approaches to the policies that they are adopting.
As APEC Leaders gather for their meeting in Danang, it is most likely that the disconnect between the political environment for freer trade and the need for strategies to boost growth is likely to come to the fore. The top 3 policy priorities for APEC Leaders’ discussions identified in PECC’s survey were:
• Promoting sustainable, innovative and inclusive growth through the APEC Growth Strategy;
• The emergence of anti-globalization & anti-trade sentiments; and
• Progress toward the Bogor Goals and the Free Trade Area of the Asia-Pacific (FTAAP).
Although the Bogor Goals and the FTAAP were still considered a priority, they came behind the need to discuss promoting sustainable, innovative and inclusive growth in the region. This indicates a strong recognition of the need for APEC to have a balanced agenda that takes into account the concerns of all stakeholders in the regional economic integration process to ensure that growth is more inclusive.
(Full report can be downloaded pdf here (1.76 MB) )