1

Joseph E. Zveglich, Jr. Assistant Chief Economist, Asian Development Bank

OECD – Development Center

Paris, 19 April 2012

Key messages • Developing Asia to maintain growth momentum

despite weak global demand—6.9% in 2012 and 7.3% in 2013

• Inflation will moderate to 4.6% and 4.4% in 2012 and 2013, but geopolitical risks can raise oil prices

• Uncertainties in the eurozone remain, but developing Asia can manage its effects

• Currently, no clear case for short-term countercyclical policy

• Developing Asia is facing a new challenge—rising inequality

2

Regional outlook

3

Developing Asia’s growth is subdued but steady…

10.1

6.7 6.0

9.1

7.2 6.9 7.3

0

1

2

3

4

5

6

7

8

9

10

11

2007 2008 2009 2010 2011 2012f 2013f

GDP growth

5-year moving average

4

f: forecast

…despite continued weakness in major industrial economies

2010

Actual

2011

Actual

2012 ADO 2012 projection

2013 ADO 2012 projection

GDP growth (%)

Major industrial economies 2.8 1.2 1.1 1.7

United States 3.0 1.7 2.0 2.3

Eurozone 1.9 1.4 -0.5 1.0

Japan 4.4 -0.7 1.9 1.5

5

Growth supported by domestic demand

6

2.1 3.1 4.8 3.8

2.2 1.2 2.5 1.8

1.3

5.7 5.0 4.2

2.2 4.0 5.2

0.8

-1.8

1.9

10.4 9.2 9.6

7.5 6.2

3.6

7.8

0.1

-4

-2

0

2

4

6

8

10

12

2010 2011 2010 2011 2010 2011 2010 2011

Private Consumption Government Consumption

Investment Net Exports

PRC India Korea, Rep. of Thailand

Varying Growth by Subregion …

7.2

6.2

8.0

6.4

4.6

7.0

6.9 6.1

7.4 6.6

5.2 6.0

7.3

6.2

7.7 7.1

5.7

4.1

0

1

2

3

4

5

6

7

8

9

Developing Asia

Central Asia East Asia South Asia Southeast Asia

The Pacific

Subregional GDP growth

2011 2012f 2013f

7

f: forecast

…emphasizes disparities within Asia

2011 2012f 2013f

South Asia 6.4 6.6 7.1

India 6.9 7.0 7.5

Pakistan 2.4 3.6 4.0

Sri Lanka 8.3 7.0 8.0

Southeast Asia 4.6 5.2 5.7

Indonesia 6.5 6.4 6.7

Malaysia 5.1 4.0 5.0

Philippines 3.7 4.8 5.0

Singapore 4.9 2.8 4.5

Thailand 0.1 5.5 5.5

Viet Nam 5.9 5.7 6.2

2011 2012f 2013f

Central Asia 6.2 6.1 6.2

Kazakhstan 7.5 6.0 6.5

Kyrgyz Republic 5.7 5.0 5.5

East Asia 8.0 7.4 7.7

China, People’s Rep. of 9.2 8.5 8.7

Hong Kong, China 5.0 3.0 4.5

Korea, Rep. of 3.6 3.4 4.0

Taipei,China 4.0 3.4 4.6

The Pacific 7.0 6.0 4.1

Fiji Islands 2.1 1.0 1.2

Papua New Guinea 8.9 7.5 4.5

8

f: forecast

Inflation is set to recede…

4.4

6.6

1.4

4.4

5.9

4.6 4.4

0

1

2

3

4

5

6

7

2007 2008 2009 2010 2011 2012f 2013f

Inflation

5-year moving average

9

f: forecast

…but commodity price volatility is a threat

10

100

120

140

160

180

200

220

240

Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12

Index, 2005=100

Energy Food

Nature of the eurozone crisis has changed—as has the risk for Asia

• Risk of liquidity crunch has diminished

• Fiscal austerity to drag eurozone growth

• Asia can manage current conditions

• But if the situation worsens:

– Effect on global value chains

– Implications for trade finance

– Impact on capital flows

11

Fickle capital flows need to be watched

39.7 45.1 16.6 12.9

39.3 50.8 36.1 38.1

-17.7

46.8

-53.4

33.6 10.4

-20.7

92.9 45.1

44.5

30.5

-60

0

60

120

180

Q1 2010

Q2 Q3 Q4 Q1 2011

Q2 Q3

$ billion

Capital flows, emerging Asia

FDI Portfolio Other investments Net

12

Currently, no clear case for countercyclical policy

13

-6

-3

0

3

6

2005 06 07 08 09 10 11 12 13

%

Output gap, East Asia and India

People's Rep. of China Hong Kong, China India Republic of Korea Taipei,China

Forecast

-6

-3

0

3

6

2005 06 07 08 09 10 11 12 13

%

Output gap, Southeast Asia

Indonesia Malaysia Philippines Singapore Thailand Viet Nam

Forecast

Monetary policy readjustment may be required if inflation pressures build

-0.6 -0.7

0.7

0.0

-1.1

-1.3 -1.4

-0.8

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

Indonesia Pakistan Korea, Rep. of

Thailand

Per

cen

tage

po

ints

Change in core and headline inflation, July/Aug 2011 vs. Jan/Feb 2012

Core Headline -12

-10

-8

-6

-4

-2

0

2

4

6

8

10

Jan-08 Sep-08 May-09 Jan-10 Sep-10 May-11 Jan-12

Real interest rates

China, People's Rep. of India Indonesia

14

Boost domestic demand without undermining fiscal positions

• Budget-neutral measures for expenditure switching to social spending

• Expand expenditure alongside revenue enhancements

• Important for Asia in confronting rising inequality

15

Confronting rising inequality in Asia

16

Inequality in Asia is on the rise…

• Inequality increased in countries accounting for more than 80% of Asia’s population

• Gini coefficients worsened from:

– 32 to 43 in the PRC

– 33 to 37 in India

– 29 to 39 in Indonesia

• Taking developing Asia as a single unit, its Gini coefficient went from 39 to 46

17

…as rich have benefited from growth more than the poor

18

3.9

7.1

4.8 4.1 4.3

5.1 4.8 4.5 4.7

8.9

5.7 6.6

5.9

9.6

6.9

4.8

0

2

4

6

8

10

12

BAN GEO IND INO LAO PRC SRI TAJ

Quintile ratios, countries with rising inequality

1990s 2000s

BAN=Bangladesh; GEO=Georgia; IND=India; INO=Indonesia; LAO=Lao PDR; PRC=People’s Republic of China; SRI=Sri Lanka; TAJ=Tajikistan

Both within- and between-country inequality increased in Asia

• Between-country inequality grew faster, due to PRC’s relatively rapid growth

• But more than 2/3 of inequality in Asia still due to within-country inequality

19

22.6 29.6

77.4 70.4

0

10

20

30

40

50

60

70

80

90

100

1996 2008

Between-country inequality

Within-country inequality

Inequality of opportunity is also prevalent

• Children from poorest households 3–5 times more likely to be out of school, and 10–20 times less likely to attend college

• Infant mortality rates among poorest households 2–3 times larger

• Gender disparities in tertiary education persist

20

Asia’s inequality is lower, but its rise over time is a concern

• Average Gini in developing Asia was 38 compared with 52 for Latin America

• Asia’s recent experience contrasts with “growth with equity” in the 1960s and 1970s

• Many African and Latin American countries recorded declines in Gini coefficients

21

Inequality matters for Asia

• Widening inequality undermines poverty reduction

– More inclusive growth would have lifted another 240 million people out of poverty

• Inequality can weaken the basis of growth itself

– Can undermine social cohesion and worsen the quality of governance

Policy makers recognize the problem

22

Why has inequality risen?

• Technological progress, globalization, and market-oriented reform drove high growth in Asia, but they favored:

– capital over labor

– skilled over unskilled workers

– cities over inland areas

23

Labor share is declining

24

48.4

30.5 36.5

42.2

28.8

21.8

0

10

20

30

40

50

60

People's Rep. of China Indonesia India

%

Share of labor income (manufacturing sector), selected Asian countries

Mid-1990s Mid-2000s

Education inequality accounts for 25–35% of total inequality

25

8.1

26.5

20.3

29.9 29.8 25.0 23.2 24.7

30.8 35.7

44.2 46.2

0

10

20

30

40

50

19

95

20

07

19

93

20

09

-10

19

90

20

10

20

02

20

08

19

94

20

09

19

95

20

05

PRC India Indonesia Pakistan Philippines Thailand

Shar

e o

f b

etw

ee

n-g

rou

p in

eq

ual

ity,

%

Income inequality decomposition by educational attainment of household head

Spatial differences contribute to widening inequality

26

13

21 22 26

32 35

38

54

0

10

20

30

40

50

60

Sri Lanka (2009)

Philippines (2009)

Pakistan (2008)

Indonesia (2009)

India (2008)

Viet Nam (2008)

Bhutan (2007)

PRC (2007)

Share of spatial inequality to total inequality (%)

Policy makers can act to reverse rising inequality

• Implement targeted fiscal policies to reduce inequality in human capital

• Introduce interventions to address lagging regions

• Make growth more employment friendly to increase the labor income share

27

Key messages

• Developing Asia to maintain growth momentum despite weak global demand—6.9% in 2012 and 7.3% in 2013

• Inflation will moderate to 4.6% and 4.4% in 2012 and 2013, but geopolitical risks can raise oil prices

• Uncertainties in the eurozone remain, but developing Asia can manage its effects

• Currently, no clear case for short-term countercyclical policy

• Developing Asia is facing a new challenge—rising inequality

28