The Role of Fiscal Policy to Achieve Inclusive Growth in Asia

The Role of Fiscal Policy to Achieve Inclusive Growth in Asia Valerie Mercer-Blackman Economic Research and Regional Cooperation Department, Asian Development Bank TOKYO FISCAL FORUM, June 6, 2017

Presentation Outline 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 2

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

But so is OECD s Income inequality is rising in Asia Levels in Asia still better than other regions Tables shows Gini coefficients, 1990s to 2000s. Annualized change in Gini coefficient in developing Asia 5

Income taxes worsen inequality, unlike indirect taxes Estimated marginal impact of taxation on income inequality (percentage points) 7

Although corporate tax rates are not too high, revenues compare favorably to rich countries Corporate income tax (latest year) % % 45 9 30 6 15 3 0 0 MAL HKG THA JPN VIE PHI PRC LATAM SIN IND KOR INO OECD US PAK SRI CAM BAN Tax rate (left scale) Share of GDP (right scale) Source: OECD and KPMG using Haver Analytics 8

but personal income tax revenue low in part due to low incidence and high personal threshold. % 60 Personal income tax (latest year) % 12 45 30 10 8 6 15 4 2 0 0 US OECD JPN KOR MAL INO SIN IND PHI LATAM THA VIE PRC HKG PAK SRI BAN Highest tax rate (left scale) Share of GDP (right scale) Source: OECD, KPMG using Haver Analytics 9

Social expenditures improve equality in Asia 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) 10

Human capital spending per person and GDP per capita Asia behind A. Total human capital spending per person B. Public share of human capital spending per person Average human capital spending per person (Proportion of average labor income of age 30 49) 6.0 4.0 2.0 0.0 INO VIE TIM CAM IND BAN PHI NEP MON THA MAL KOR 0 10,000 20,000 30,000 40,000 50,000 Low Middle High Per capita GDP (in 2011 PPP$) Public human capital spending per person (Proportion of total per person) 1.0 0.8 0.6 0.4 NEP IND CAM PHI TIM INO MON THA MAL KOR 0.2 VIE BAN Developing Asia Rest of the World 0.0 0 10,000 20,000 30,000 40,000 50,000 Low Middle High Per capita GDP (in 2011 PPP$) 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 Source : Abrigo, Lee, and Park (forthcoming). 12

as compared to other countries 100 % Education consumption financing, as % of Total Public Private 100 % Health consumption financing, as % of Total Public Private 80 80 60 60 40 40 20 20 0 FIN SWE AUS SLO GER HUN THA SPA KEN US COS JPN MEX IN0 IND BRA PHI KOR NIG 0 SWE SLO FIN COS AUS SPA GER MEX JPN HUN KEN BRA IND KOR US INO PHI THA NIG 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 13

Public sector still important in health expenditures of small economies the opposite for larger countries % of GDP 20 15 Health Expenditure, as % of GDP, 2014 and 2000 Public expenditure Private expenditure Public expenditure (2000) 10 5 0 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 Source: World Development Report, accessed may 2017 14

and differences in health outcomes are significant. Total in Years Life Expectancy at Birth, 2015 90 80 70 60 50 15 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 Source: World Development Report, accessed May 2017

Spending on education also varies. % share 30 Total government education expenditures, as % of Total government expenditures 25 20 15 10 5 0 16 BHU 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

But quality matters more than quantity. Growth projections Between 2015 and 2045 under different scenarios on education and skills Scenario 1: Raising average years of schooling in Asian economies to average OECD level Scenario 3: Raising the share of students scoring 400+ and 600+ to OECD level India Kyrgyz Republic Philippines Indonesia Georgia Mongolia Azerbaijan Thailand Malaysia Armenia Kazakhstan Viet Nam 0 2 0 4 5 5 20 16 24 20 32 30 0 20 40 60 80 100 120 140 160 180 % increase in GDP per capita between 2015 and 2045 India Kyrgyz Republic Philippines Indonesia Georgia Mongolia Azerbaijan Thailand Malaysia Armenia Kazakhstan Viet Nam 1 42 39 55 60 69 67 71 101 119 132 151 0 20 40 60 80 100 120 140 160 180 % increase in GDP per capita between 2015 and 2045 Source: ADO (2017) Chapter 2 17

Infrastructure is associated with development Infrastructure and GDP per capita Infrastructure and poverty ($1.9 per day (2011 PPP) Natutal Log of GDP per capita (2010 $) 6 7 8 9 10 11 Poverty Rate 0 10 20 30 40 50 0 2 4 6 8 10 12 Infrastructure Index 0 2 4 6 Infrastructure Index 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

Infrastructure investment varies across countries 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 6.8 6.6 Latest year from 2010 2014, Budget + PPI as % of GDP 5.7 5.4 5.1 4.9 4.3 4.2 3.7 2.6 2.6 2.5 2.3 2.2 2.1 2.1 1.9 1.8 Public Private 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. 20

More and better infrastructure is needed Electricity Generation Capacity Annual Growth, % 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.

Telecom and power more attractive to private finance Public/Private share of infrastructure investment, 2011 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 76.6% 23.4% 48.8% 51.2% 21.4% 78.6% 0.2% 99.8% 0% Telecommunications Power Transport Water & sanitation Public Private Source: ADB estimates based on country sources and Private Participation in Infrastructure Database, World Bank; World Development Indicators, World Bank. 22

More innovative economies need more advanced infrastructure Electricity generating Capacity Internet Users Staying upper middle 56.5 Staying upper middle 10.2 Moving from upper middle to high 94.2 Moving from upper middle to high 28.1 0 20 40 60 80 100 Kwh per 100 people 0 20 40 Per 100 people 23

which is vital for sustained growth. % 1.5 Effect of Public Investment on Output 1.0 0.5 0.0 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. 24

How big are infrastructure investment gaps? Infrastructure investments and gaps, 2016 2020 ($ billion in 2015 prices) Estimated current investment (2015) Annual needs Climate adjusted 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 Note: Gap = Investment Needs Current Investment 25

Our GDP growth projections Region/country Baseline Actual 2000-2015 1/ projection 2016-2030 2/ Developing member Economies 7.6 5.3 Central and West Asia 3/ 7.7 3.1 East Asia 8.5 5.1 South Asia 3/ 6.6 6.5 Southeast Asia 5.2 5.1 The Pacific 3.9 3.1 PRC 9.5 5.6 India 7.0 6.8 Indonesia 5.3 5.5 PRC = People s Republic of China 1/ 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 mediumterm infrastructure financing DEVELOPING ASIA 48 Debt Threshold Central and West Asia South East Asia The Pacific East Asia South Asia 30 42 42 44 66 Afghanistan Kazakhstan Indonesia Micronesia Nepal Kiribati Myanmar Cambodia Bangladesh Philippines Papua New Guinea Thailand China Fiji Armenia Marshall Islands Malaysia Viet Nam Pakistan India Kyrgyz Republic Maldives Sri Lanka Mongolia Bhutan 7 23 27 27 29 30 32 34 34 37 41 43 44 46 47 53 57 59 Developing Asia: General Government Debt, 2015 (Percent of GDP) 64 67 69 73 74 82 116 0 20 40 60 80 100 120 140 % of GDP 27

But most countries still run deficits 4.0 despite growth. 2.0 percent of GDP (2.0) (4.0) (6.0) Developing Asia: Fiscal Balances, 1995 2015 (Percent of GDP) (8.0) Asia Central and West Asia 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) 28

Investments ($ billion in 2015 prices) 600 500 400 300 200 100 0 $195 Current Investment Bridging the gap Infrastructure investment by financing source, excluding PRC,* 2016 2020, (annual average, $ billion in 2015 prices) Private $62.5 Public $132.6 $121 Additional Public $187 $503 Additional Private Investment Needs Private $249 Public $254 * 25 countries minus the PRC Note: 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, IMF Investment and Capital Stock Dataset, Asian Development Bank Key Indicators 2016, World Bank World Development Indicators, World Bank Private Participation in Infrastructure Database. 29

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 pubicprivate partnerships (PPPs) Better planning, design and execution Fiscal Space in Developing Asia (% of GDP) 30

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 middleincome 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