the role of fiscal policy to achieve inclusive growth … role of fiscal policy to achieve inclusive...

The Role of Fiscal Policy to Achieve

Inclusive Growth in Asia

Valerie Mercer-BlackmanEconomic Research and Regional

Cooperation Department, Asian Development Bank

TOKYO FISCAL FORUM, June 6, 2017

Presentation Outline

2

Defining Inclusive Growth

Fiscal policies in Asia: redistribution, incidence and subsidies

Enhancing opportunities: health and education

Meeting Asia’s infrastructure needs: the role of the public sector

A framework for inclusive growth

3

Fiscal policies can improve equality of opportunity

• Equality of opportunities is based on the notion that institutions and economics allow everyone to fully participate in the benefits, through adequate health, education and basic infrastructure.

• It can coexist with high (or worsening) income inequality within countries.

• This is the part where the quality of fiscal expenditures is more important

Annualized change in Gini coefficient in developing Asia• But so is OECD’s

• Levels in Asia still better than other regions

•• Tables shows Gini coefficients, 1990s to

2000s.

5

Income inequality is rising in Asia


6





Income taxes worsen inequality, unlike indirect taxes

7

Estimated marginal impact of taxation on income inequality (percentage points)

Although corporate tax rates are not too high, revenues compare favorably to rich countries…

8

0

3

6

9

0

15

30

45

MAL

HKG

THA

JPN

VIE

PHI

PRC

LATA

M SIN

IND

KOR

INO

OEC

D US

PAK

SRI

CAM

BAN

%%

Corporate income tax (latest year)

Tax rate (left scale) Share of GDP (right scale)

Source: OECD and KPMG using Haver Analytics

…but personal income tax revenue low in part due to low incidence and high personal threshold.

9Source: OECD, KPMG using Haver Analytics

0

2

4

6

8

10

12

0

15

30

45

60

US

OEC

D

JPN

KOR

MAL INO

SIN

IND

PHI

LATA

M

THA

VIE

PRC

HKG

PAK

SRI

BAN

%%Personal income tax (latest year)

Highest tax rate (left scale) Share of GDP (right scale)

Social expenditures improve equality in Asia…

10

But not social protection, as few countries have it relative to the rest of the world. The unexpected positive effect of social protection may be due to a narrow benefit coverage and a lack of targeting to the poor for the few services and transfers that Asian countries provide.

Estimated marginal impact of government spending on income inequality(percentage points)


11





Human capital spending per person and GDP per capita—Asia behind

12

A. Total human capital spending per person B. Public share of human capital spending per person

Source : Abrigo, Lee, and Park (forthcoming).

BAN = Bangladesh, CAM = Cambodia, IND = India, INO = Indonesia, MAL = Malaysia, MON = Mongolia, NEP = Nepal, PHI = Philippines, KOR = Rep. of Korea, THA = Thailand, TIM = Timor‐Leste, VIE = Viet Nam.Note : Lifetime public and private human capital spending is based on a synthetic cohort measure of health and education spending based on NTA data. It is calculated as the sum of public and private per capita health consumption for age 0 to 17, and of public and private per capita education consumption for age 3 to 27

BAN

INO

INDCAM

MON

MAL

NEPPHI

THA

TIMVIE

KOR

0.0

2.0

4.0

6.0

0 10,000 20,000 30,000 40,000 50,000

Averag

e hu

man

cap

ital spe

nding p

er perso

n(Propo

rtion of average la

bor inc

ome o

f age 30‐49

)

Per capita GDP (in 2011 PPP$)

HighMiddleLow

BAN

INO

IND

CAM

MON

MAL

NEP PHI

THA

TIM

VIE

KOR

0.0

0.2

0.4

0.6

0.8

1.0

0 10,000 20,000 30,000 40,000 50,000

Public hum

an ca

pital spe

nding p

er perso

n(Propo

rtion of to

tal p

er perso

n)

Per capita GDP (in 2011 PPP$)

Developing Asia

Rest of the World

Low Middle High

…as compared to other countries

13

0

20

40

60

80

100

FIN

SWE

AUS

SLO

GER

HUN

THA

SPA

KEN US

COS

JPN

MEX IN0

IND

BRA

PHI

KOR

NIG

%

Education consumption financing, as % of Total

PublicPrivate

0

20

40

60

80

100

SWE

SLO

FIN

COS

AUS

SPA

GER

MEX JPN

HUN

KEN

BRA

IND

KOR US

INO

PHI

THA

NIG

%

Health consumption financing, as % of Total

PublicPrivate

Note: Data refers to annual nominal flows per person by single‐year of age expressed in the country's own currency, and pertains to the aggregated data for all ages.Source: Calculated using data from Ronald Lee, Gretchen Donehower, and Tim Miller (2011). NTA Country Report, US, 2003. National Transfer Accounts. URL: http://www.ntaccounts.org

Public sector still important in health expenditures of small economies—the opposite

for larger countries

14

0

5

10

15

20

TIM

LAO

TKM

MYA PAK

BRU

BAN

INO

NAU SRI

BHU

THA

MAL

PNG

KAZ

ARM FIJ

MON

IND

PHI

SIN

VAN

SOL

TON

PRC

CAM

UZB

NEP AZE

KGZ

TAJ

VIE

SAM

GEO KOR

AFG

PAL

KIR

MLD

FSM

TUV

RMI

% of GDPHealth Expenditure, as % of GDP, 2014 and 2000

Public expenditurePrivate expenditurePublic expenditure (2000)

Source: World Development Report, accessed may 2017

…and differences in health outcomes are significant.

15

50

60

70

80

90

AFG

PNG

TKM

MYA KIR

PAK

LAO

SOL

IND

PHI

UZB TIM

CAM

INO

PAL

FSM TAJ

MON

BHU

NEP FIJ

KGZ

AZE

KAZ

BAN

VAN

TON

SAM

THA

ARM

GEO

MAL SRI

VIE

PRC

MLD

BRU

KOR

SIN

HKG

Total in YearsLife Expectancy at Birth, 2015

Source: World Development Report, accessed May 2017

Spending on education also varies.

16

0

5

10

15

20

25

30

GEO TIM

AZE

LAO

BRU

CAM

ARM SRI

KIR

KAZ

AFG

MLD PAK

PHI

FIJ

IND

PAL

BAN

KGZ

TAJ

NEP SOL

INO

TON

VIE

HKG

THA

MAL SIN

FSM

TKM

VAN

RMI

BHU

% shareTotal government education expenditures, as % of Total government

expenditures

But quality matters more than quantity.

17

Growth projections Between 2015 and 2045 under different scenarios on education and skills

30

0

5

5

20

2

16

0

24

20

4

32

0 20 40 60 80 100 120 140 160 180

Viet Nam

Kazakhstan

Armenia

Malaysia

Thailand

Azerbaijan

Mongolia

Georgia

Indonesia

Philippines

Kyrgyz Republic

India

% increase in GDP per capita between 2015 and 2045

Scenario 1: Raising average years of schooling in Asian economies to average OECD level

1

39

42

55

60

67

69

71

101

119

132

151

0 20 40 60 80 100 120 140 160 180

Viet Nam

Kazakhstan

Armenia

Malaysia

Thailand

Azerbaijan

Mongolia

Georgia

Indonesia

Philippines

Kyrgyz Republic

India

% increase in GDP per capita between 2015 and 2045

Scenario 3: Raising the share of students scoring 400+ and 600+ to OECD level

Source: ADO (2017) Chapter 2


18





Infrastructure is associated with development

Note: Infrastructure index is computed based on first principal component of infrastructure stocks in roads, airport, electricity, telephone, mobile, broadband, water and sanitation. Higher values represent greater infrastructure availability.Source: ADB estimates based on data from World Development Indicators and PovcalNet, World Bank

010

2030

4050

Pove

rty R

ate

0 2 4 6Infrastructure Index

67

89

1011

Nat

utal

Log

of G

DP

per c

apita

(201

0 $)

0 2 4 6 8 10 12Infrastructure Index

Infrastructure and GDP per capita Infrastructure and poverty ($1.9 per day (2011 PPP)

6.8 6.65.7 5.4 5.1

4.94.3 4.2

3.7

2.6 2.6 2.5 2.3 2.2 2.1 2.1 1.9 1.8

‐ 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0

Public Private

Infrastructure investment varies across countries

20

GDP = gross domestic product; PRC = People’s Republic of China.* Public sector includes central government budget only.Note: Based on BUDGET + PPI measure. Actual budget investments except Armenia, Bhutan, Georgia, Maldives, Myanmar, and Thailand,which are planned or estimated budget investments.Sources: Country sources for public sector investments; Private Participation in Infrastructure Database, World Bank;World Bank (2015); World Development Indicators, World Bank; ADB estimates.

Latest year from 2010‐2014, Budget + PPI as % of GDP

Electricity Generation Capacity Transmission and Distribution Loss

Note: Regional averages are calculated with population as weights.Source: International Energy Statistics, US Energy Information Administration; World Development Indicators, World Bank.

More and better infrastructure is needed

Annual Growth, %

Telecom and power more attractive to private finance

22

Source: ADB estimates based on country sources and Private Participation in Infrastructure Database, World Bank;World Development Indicators, World Bank.

Public/Private share of infrastructure investment, 2011

23.4%

51.2%

78.6%99.8%

76.6%

48.8%

21.4%0.2%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Telecommunications Power Transport Water & sanitation

Public Private

More innovative economies need more advanced infrastructure…

94.2

56.5

0 20 40 60 80 100

Moving fromupper middle

to high

Staying uppermiddle

Kwh per 100 people

Electricity‐generating Capacity

28.1

10.2

0 20 40

Moving fromupper middle

to high

Staying uppermiddle

Per 100 people

Internet Users

23

…which is vital for sustained growth.

0.0

0.5

1.0

1.5

‐1 0 1 2 3 4 5 6 7

%

Years (t)

Note: t = 0 is the year of the shock. Shock represents an exogenous 1 percentage point of GDP increase in public investment spending.

Effect of Public Investment on Output

24

How big are infrastructure investment gaps?

25Note: Gap = Investment Needs – Current Investment

Infrastructure investments and gaps, 2016–2020 ($ billion in 2015 prices)

Estimatedcurrent

investment (2015)

Climate adjusted

Annual needs Gap Gap as

% of GDP

Total (25 economies) 881 1,340 459 2.4

Total without PRC 195 503 308 5.0

PRC 686 837 151 1.2

Our GDP growth projections

Region/country Actual 2000-20151/

Baseline projection2016-20302/

Developing member Economies 7.6 5.3

Central and West Asia3/ 7.7 3.1East Asia 8.5 5.1South Asia3/ 6.6 6.5Southeast Asia 5.2 5.1The Pacific 3.9 3.1

PRC 9.5 5.6India 7.0 6.8Indonesia 5.3 5.5

PRC = People’s Republic of China1/ Source: World Bank WDI and 2015 Key Indicators (for Taipei,China; Myanmar; Cook Islands; and Nauru); 2/ 2016‐2017: 2016 Asian Development Outlook (ADO, 2016), 2018‐2030: ADB projections; Lower (upper) bound represents a pessimistic (optimistic) scenario with the growth rates of individual DMCs lower (higher) by 1 percentage point than the point estimates for the 2016‐2030 period.3/ 2003‐2015 annualized growth rate.

Debt sustainability the key to medium‐term infrastructure financing

27

11682

7473

6967

6459

5753

4746

4443

4137

3434

3230

292727

237

6644

4242

30

48

0 20 40 60 80 100 120 140

BhutanMongoliaSri LankaMaldives

Kyrgyz RepublicIndia

PakistanViet NamMalaysia

Marshall IslandsArmenia

FijiChina

ThailandPapua New Guinea

PhilippinesBangladeshCambodiaMyanmar

KiribatiNepal

MicronesiaIndonesia

KazakhstanAfghanistan

South AsiaEast Asia

The PacificSouth East Asia

Central and West Asia

DEVELOPING ASIA

% of GDP

Debt Threshold

Developing Asia: General Government Debt, 2015 (Percent of GDP)

But most countries still run deficits despite growth.

28

Asia Central and WestAsia East Asia South East Asia The Pacific South Asia

1990‐1999 (2.8) (1.2) (0.6) (2.9) (6.2)2000‐2009 (3.2) 2.1 (1.6) (1.4) (1.2) (7.3)2010‐2015 (2.7) 1.7 (0.8) (1.9) (3.2) (7.2)

(8.0)

(6.0)

(4.0)

(2.0)

‐

2.0

4.0pe

rcen

t of G

DP

Developing Asia: Fiscal Balances, 1995–2015 (Percent of GDP)

0

100

200

300

400

500

600

CurrentInvestment

Additional Public AdditionalPrivate

InvestmentNeeds

Investmen

ts($ billion in 201

5 prices)

$195

$121

$187 $503

Private$62.5

Public$132.6

Private$249

Public$254

Bridging the gap

29

* 25 countries minus the PRCNote: Numbers may not add up to total due to rounding.Source: ADB estimates based on data from country budget documents, NAS data from national statistic offices, IMFInvestment and Capital Stock Dataset, Asian Development Bank Key Indicators 2016, World Bank World DevelopmentIndicators, World Bank Private Participation in Infrastructure Database.

Infrastructure investment by financing source, excluding PRC,* 2016–2020, (annual average, $ billion in 2015 prices)

Policies to close the gap

• Fiscal reforms– Tax reforms– Spending reorientation– Prudent borrowing– Nontax revenues

• Promoting private participation– Create conducive investment

climate– Deepen capital markets– Make greater use of pubic‐

private partnerships (PPPs)• Better planning, design and

execution30

Fiscal Space in Developing Asia (% of GDP)

Role for MDBs• MDB infrastructure financing in Asia is 2.5% of current investment– Without PRC and India: MDB share > 10%

• MDB finance for infrastructure will rise. For ADB– Scale up annual loan and grant approvals from $17.5 billion in

2016 to more than $20 billion by 2020

– Growing share for the private sector

• Blending finance with expertise and knowledge, support policy reform, promoting regional cooperation

Conclusions• Asian governments have ample room to increase

opportunities.• Increasing taxes unlikely to improve income distribution—

better to focus on efficiency of tax collection.• Expenditures on health and education support inclusive

growth, but quality—more than years of schooling‐‐will be key as most Asian countries join the ranks of the middle‐income emerging markets.

• Infrastructure continues to be critical to support growth in Asia—and leads to increased opportunities.

• Technology will change equation (examples: congestion pricing in Dhaka, biometric IDs, cashless systems, matching databases, telecommuting options)

32

Thank You

33

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