The Hindu Business Line : UN ESCAP Survey — Reaffirms resilience of regional economies

While assessing the impact of the tsunami and the soaring oil prices on the economies of the Asia-Pacific region, the UN ESCAP Survey contends that the impressive economic performance under conditions of generally low inflation reaffirms the resilience of the regional economies. Yet serious challenges do linger, casting a shadow over prospects of a better phase ahead.

ASIA and the Pacific region, home to the Economic and Social Commission for Asia and the Pacific (ESCAP) of the United Nations with its 53 member-countries and nine associate members, remains vulnerable to natural calamities and external shocks, the worst being the tsunami tragedy of December 2004.

The UN Secretary-General, Mr Kofi Annan, has, in a foreword to the UN's Economic and Social Survey for Asia and the Pacific, released on Monday, enumerated these external shocks as ranging from avian influenza (bird flu) to persistent high oil prices, and the spread of HIV/AIDS to cyclones, typhoons, floods and drought.

The tsunami catastrophe alone is estimated to have taken more than a quarter of a million lives, while devastating the physical and social infrastructure of the affected countries, including export-oriented sectors such as fisheries, agriculture and tourism.

The estimated impact on the GDP of individual countries varies across the region, with the Maldives particularly hard-hit and expected to lose four percentage points of GDP growth this year, owing to its tiny size and heavy dependence on tourism and fisheries.

While Sri Lanka may see a reduction of one per cent in economic growth in 2005 for similar reasons, for the larger, more diversified economies such as India, Indonesia and Thailand, the likely GDP growth loss could be less than 0.5 per cent in 2005.

This is more to do with the relatively meagre contribution of the affected sectors to economic output in those countries and the negligible damage to major areas of economic activity and ports.

Despite this, the Survey makes out a case for reconstruction and rehabilitation to address the broader issue of poverty reduction. Alongside, greater efforts at both the regional and country levels must be made to integrate disaster risk management into policies and programmes, including the setting up of multi-hazard early warning systems.

Rapid economic growth

Even as the ESCAP Survey 2005 does not sweep under the carpet the setbacks suffered by the region, by a quirk of fortune it was also during 2004 that the ESCAP economies grew at their fastest in four years, with broad-based growth accompanied, in several cases, by low inflation.

Thus, Japan, the largest economy in the region, logged the fastest GDP growth rate in 14 years of 2.6 per cent, doubling its 2003 performance, though sustaining the recovery may be difficult. China, the second largest economy, surpassed the rapid growth of 2003 to achieve a 9.5 per cent growth rate, signalling that steps to cool the overheating economy have yet to take full effect.

The Republic of Korea, the third-largest economy, did better in 2004 with a growth rate of 4.7 per cent — 1.6 percentage points higher than the previous year. India, the fourth-largest economy in the region, achieved a rate of 6.9 per cent — 1.6 percentage points below its 2003 performance, but above the trend rate.

ESCAP contends that the impressive economic performance under conditions of generally low inflation reaffirms the resilience of the regional economies. Yet serious challenges do linger, casting a shadow over prospects of a better phase ahead. The foremost in this is the record rise in crude oil prices in nominal terms.

Measured against the SDR (Special Drawing Rights) so as to avoid the valuation effects of the decline in the dollar, the average price of oil in the second half of 2004 was about 50 per cent higher than the average of 2001-03.

The Survey says that, unlike previous oil shocks, where OPEC-supported supply restrictions were the principal cause of higher prices, the 2004 price rises were largely the result of rapid world growth leading to rising demand for oil (an estimated 6.5 per cent increase from 2002 to 2004) including from Asia, mainly China and, to a lesser extent, India.

This put pressure on supplies in the wake of low levels of spare global production and refining capacity and commercial inventories.

A crumb of comfort this time around is, according to the Survey, most developed countries are probably less vulnerable to the 2004-05 price rises than they were to the shocks of the 1970s and early 1980s because energy signifies a smaller share of household purchases and business input costs, something yet to be achieved by the emerging market economies in the Asia-Pacific, where oil consumption relative to GDP is three times the 1.5 per cent ratio in the developed world.

Oil, the key

Stating that the region remains hostage to a sustained rise in oil prices as it is still a large net importer of oil, the Survey says India produces 0.8 million barrels per day (bpd) and imports 2.1 million bpd, while China produces 3.5 million bpd but imports 2.4 million bpd.

For India, which has been a net importer of oil and finds the revision of petro-product prices politically unpalatable, the ESCAP Survey has some realistic recipes for effective management of the precarious supply situation.

The Survey says that if oil-importing countries in the region were to lower taxes or increase subsidies on oil products within a constant tax-to-GDP ratio (already practised in India by both the UPA government and its predecessor NDA regime notwithstanding dismantling of the administered price regime), this would only redistribute income from the general taxpayers to oil product users.

Essentially, governments have sought to shield consumers from the full impact of high crude oil prices by either reducing the taxes and duties they levy on oil products or by not letting the final prices paid by consumers fully reflect the rise in crude oil prices that has supervened in the previous few months.

But as oil prices have remained stubbornly high for several months, both approaches will prove to be a heavy financial burden on the Governments concerned, says the Survey, which ought to be heeded by the authorities.

Amplifying the dangers in such a two-track policy widely adopted by countries, including India, the Survey says that in the first instance there would be a clear fiscal cost that would have to be made up through taxes elsewhere or through higher borrowing if the Government is committed to maintaining a particular level of spending.

In the second instance, the government would need to find the resources to compensate the oil companies, whether private or state-owned (in India, national oil companies such as IOC, for instance), that have not been able to pass on the full cost of the crude oil to the consumers.

Underscoring the undesirable upshot of subsidised oil products, it says subsidies invariably distort relative prices, discourage conservation and fuel efficiency in transport and encourage overuse of the subsidised items.

It said even apparently well-targeted subsidies, such as for diesel fuel, may prove unsustainable over the medium term and, eventually, have the same negative effects as more general fuel subsidies.

Besides, with all fuel subsidies, the overall environmental impact is clearly negative.

It is time the Indian authorities shed their reservation on revision of petro-product prices and resisted the temptation to continue endlessly with environmentally-unfriendly subsidies in perpetuity.

Uncertain outlook

Compounding the developments in the energy market, the outlook for 2005 is still uncertain; overall growth in the region could well be lower than in 2004.

The document warned that any slowdown in the momentum of growth, were it to occur, could have social and macroeconomic repercussions for the governments of the region.

Sustained buoyant growth has been instrumental in driving the increase in employment that lifted millions out of poverty after the 1997-98 economic crisis and again after the slowdown following the end of the dotcom boom in 2001.

Hence, any slowdown again would not only have immediate social and economic consequences but might also damage the longer-term prospects for the region by putting off public investment in vitally needed physical and social infrastructure.

On the macroeconomic front too, a slower pace of growth would in all likelihood constrain the growth of tax revenues and could thus be responsible for widening fiscal deficits once again in several economies.

Taking a broader picture of the negotiations in Geneva on the General Agreement on Trade in Services (GATS), where the stakes are high for labour-exporting developing countries, the Survey pertinently seeks to treat labour as a regional public good.

It calls for measures for the orderly flow of labour, particularly in the light of increasing international human migration in the coming decades.

In this context, a fresh look at the extant frameworks, such as Mode-4 of the WTO Agreement, would be a starting point.

India, which has been rallying G-20 countries on the common cause of agricultural trade liberalisation, should marshal support for Mode-4 under the GATS, for which "request and offer" is still being received, so that a liberalised visa regime for qualified people seeking employment abroad would be in place to the mutual benefit of host and supplying countries.

In sum, this year's Survey of the UN ESCAP has brought into focus contemporary issues that are vital to ensuring sustainable economic growth over the long haul, especially for the developing countries of the Asia-Pacific region.

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