Contributions to growth, 1960 – 2014 (%) Middle income 55,5 21,9 12,8 9,8 staying there Middle income 50,0 10,3 11,4 28,3 rising to high 0 20 40 60 80 100 Physical capital Labor Human capital Productivity Source: ADB (2017): Asian Development Outlook 2017 , Manila: Asian Development Bank. 31
Productivity growth will come from innovation… Research & development stock Patent applications (resident) per labour hour* per million persons Upper-middle Upper-middle 0,3 income staying 44 income staying there there Upper-middle Upper-middle 0,9 income rising to 182 income rising to high high 0 0,3 0,6 0,9 0 50 100 150 200 Source: ADB (2017): Asian Development Outlook 2017 , Manila: Asian Development Bank. 32 *Cumulative gross expenditures on R&D measured in 2010 constant $ per unit of labor hour
…driven by entrepreneurs with new ideas or technology… Opportunity-driven/necessity-driven early-stage entrepreneurship 20 Low Income Middle Income High Income 15 Ratio 10 5 0 7 8 9 10 11 12 Log GDP per capita Source: ADB (2017): Asian Development Outlook 2017 , Manila: Asian Development Bank. 33
Share of most complex exports 4 2 0 -2 -4 6 7 8 9 10 11 Income per capita (log) Source: ADB (2017): Asian Development Outlook 2017 , Manila: Asian Development Bank. 34
Innovation requires investment in human capital… Average schooling years by income group Total schooling Tertiary schooling High High 9,7 0,57 Middle Middle 6,1 0,20 Low Low 2,9 0,05 0 2 4 6 8 10 12 0,0 0,5 1,0 Source: ADB (2017): Asian Development Outlook 2017 , Manila: Asian Development Bank. 35
More innovative economies need more advanced infrastructure… Electricity-generating capacity Internet users Upper-middle Upper-middle income staying 56,5 income staying 10,2 there there Upper-middle Upper-middle income rising to 94,2 income rising to 28,1 high high 0 20 40 60 80 100 0 20 40 Kilowatt hours per 100 people Per 100 people Source: ADB (2017): Meeting Asia’s Infrastructure Needs , Manila: Asian Development Bank. 37
…but Asia still has large infrastructure needs Meeting the Investment Gaps, 2016 – 2020 (annual averages) $ billion in 2015 prices 1.600 $1.340 $459 1.200 $881 800 400 0 Current Investment Gap Annual Needs Source: ADB (2017): Meeting Asia’s Infrastructure Needs , Manila: Asian Development Bank. 38
Efforts needed to attain high income • Pattern of growth will have to evolve – Innovation, human capital and infrastructure play key roles • Sound policies and institutions are vital to support this evolution • Role of macroeconomic stability remains indispensable 39
(2ii) Managing demographic change 40
• The region as a whole has been undergoing a demographic transition process – Move from high fertility and mortality to low fertility and mortality • Population growth is slowing down across the region and total population is projected to fall by the end of the 21 st century in all countries except for the Philippines and Timor-Leste – Japanese economy already hit hard by demographics – Thailand will be the first developing country in the region to reach its population peak in 2023, followed by China in 2028 • Demographic dividends have been largely reaped in most countries 41
Estimated and projected population by major area, medium variant, 1950 – 2100 6 Billions 5 4 Asia 3 2 Africa 1 0 Asia Africa Latin America & Caribbean Europe Northern America Oceania Source: United Nations, Department of Economic and Social Affairs, Population Division (2015). World Population Prospects: The 2015 Revision. 42
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Rising dependency ratios • The share of working population is currently at its peak in most countries • Working-age population (15-64 years) is projected to shrink by about 10% in China and Thailand between 2010 and 2040 • Working-age population will continue to rise for a few more decades in Malaysia, Myanmar, Indonesia, Cambodia, the Philippines, Lao and Timor-Leste • Major implications for economic dynamism, health care systems, old-age care, pension systems, migration… 53
Total dependency ratio (ratio of population aged 0- 14 and 65+ per 100 population 15-64), 1950-2100 120 110 100 Cambodia China 90 India 80 Indonesia Lao PDR 70 Malaysia 60 Myanmar Philippines 50 Thailand Timor-Leste 40 Vietnam 30 Source: United Nations, Department of Economic and Social Affairs, Population Division (2015). World Population Prospects: The 2015 Revision. 54
Young populations gave the region a growth dividend in the past % points Contribution to annual growth rate per capita GDP, 1981 – 2010 1,2 0,8 0,4 0 Developing People's Rep. Rep. of Korea India Philippines Asia of China 55
…but some countries now face a demographic tax % points Contribution to annual growth rate per capita GDP, 2011 – 2030 0,8 0,4 0,0 -0,4 -0,8 Developing People's Rep. Rep. of Korea India Philippines Asia of China 56
Family support is declining in Asia, but public transfers are underdeveloped Support system for people ages 65 and above, selected economies China, People's … India Indonesia Korea, Rep. of Asia Philippines Taipei,China Thailand Japan Austria Germany Europe Hungary and USA Spain Slovenia Sweden USA Brazil Chile Latin Costa Rica America Mexico Uruguay -50 0 50 100 150 % Private transfers Public transfers Savings 57
Countries’ response depends on their stage in the demographic transitions • Younger countries must: – Capitalise on their demographic dividend, which is neither automatic nor guaranteed – Create more jobs and training • Older countries must: – Pursue structural reforms to offset the decline of demographic dividend – Use their large and growing pool of retirement savings to develop the financial market 58
… but there are also common actions • Both groups of countries must begin to lay the foundation for fiscally sustainable old-age economic security systems • Heterogeneity provides the base for potentially large gains from regional cooperation and integration (migration) 59
(iii) Maintaining social cohesion 60
Share of total income going to top 1 percent income group in developing countries, 1920 – 2005 Source: Atkinson, Piketty, and Saez (2011): “Top Incomes in the Long Run of History,” Journal of Economic Literature , Vol. XLIX. 61
Annualised change in inequality of expenditure or income, 1990s and 2000s 62 Source: Kanbur et al. (2016).
Consumption expenditure share of the richest 10%, selected developing Asian economies 1990 or earliest 2014 or latest 40 36 35 35 32 32 31 31 30 30 30 29 29 30 27 25 25 20 Source: World Bank PovCal data. 63
Quintile ratios for countries with rising inequality 9 8,2 8,2 8 7,4 7,1 6,8 7 6,6 6,3 6 5,7 5,2 4,8 5 4,7 3,9 4 3 Bangladesh Fiji Georgia Lao PDR Sri Lanka Viet Nam 1990s 2010s 64
Rise in Asia’s inequality over time is a concern • Asia-wide Gini increased to 45% in the 2010s compared to 40% in the 1990s • 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 65
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 66
Why inequality matters (1) • If inequality had remained stable in the developing Asian economies where it increased, the same growth in 1990 – 2013 would have lifted an additional 165 million people out of extreme poverty —equivalent to 4.5% of the region’s population in 2013 • The rise in inequality in 19 OECD countries is estimated to have knocked 4.7 percentage points off their cumulative growth between 1990 and 2010 67
Why inequality matters (2) • High inequality could lead to a misallocation of human capital – Those with little wealth or low income cannot invest in human capital or wealth- and income-enhancing activities • High and extreme inequality can damage society and institutions – It can strain social cohesion and lead to conflicts that discourage investment • High inequality may cause political backlash – Public pressure to enact populist policies may benefit the poor in the short term, but hold back efficiency and growth in the long run 68
Why has inequality risen? • Technological progress, globalisation, and market deregulation favour: – skilled over unskilled labour – capital over labour – certain geographical locations (such as urban and coastal areas) over others (such as rural and inland regions) • Aging populations, since older cohorts have a more unequal income distribution than younger cohorts 69
Education inequality accounts for 25 – 35% of total inequality Income inequality decomposition by educational attainment of household head 50 46,2 Share of between-group inequality, % 44,2 40 35,7 30,8 29,9 29,8 30 26,5 25,0 24,7 23,2 20,3 20 8,1 10 0 1995 2007 1993 2009-10 1990 2010 2002 2008 1994 2009 1995 2005 PRC India Indonesia Pakistan Philippines Thailand 70
Spatial differences contribute to widening inequality Share of spatial inequality to total inequality (%) 60 54 50 38 40 35 32 30 26 22 21 20 13 10 0 Sri Lanka Philippines Pakistan Indonesia India Viet Nam Bhutan PRC (2009) (2009) (2008) (2009) (2008) (2008) (2007) (2007) 71
Policy makers can act to reverse rising inequality through infrastructure development • Eliminate barriers to investment and job creation • Provide urban infrastructure to absorb rural population and reduce urban-rural gaps • Improve regional connectivity to reduce regional disparity • Improve access to markets, and health and education facilities for the poor • Provide better social services such as hospitals and schools for a wider section of the population 72
Other policy responses (1) • Efficient fiscal policy: – Increase spending on education and health, especially for the poor – Develop better targeted social protection schemes, including conditional cash transfers – Mobilize greater revenues by broadening the tax base • Interventions to address lagging regions: – Develop new growth poles in lagging regions – Strengthen fiscal transfers to invest more in human capital and provide better access to public services in poorer areas – Remove barriers to migration from poor to more prosperous regions 73
Other policy responses (2) • More employment-friendly growth: – Support development of small- and medium-sized enterprises – Remove distortions in factor markets that favor the use of capital over labor – Strengthen labor market institutions to provide necessary protection of workers without imposing excessive costs for businesses – Introduce public employment schemes as a temporary bridge to address pockets of unemployment and underemployment • Governance reforms to equalise opportunities: – Strengthen governance – Level the playing field – Contain monopoly power and corruption – Prevent elite capture – Eliminate social exclusion 74
(2iv) Safeguarding financial stability 75
China’s debt as a share of GDP Source: Fitch Ratings, from People’s Bank of China, Bank for International Settlements, Hong Kong Monetary Authority and commercial banks data 76
(2v) Aligning growth with environmentally sustainable development – how to manage a green transformation to low-carbon growth? 77
• Rapid economic growth in Asia has contributed to significant improvements in human welfare, but it has also led to profound socio-economic changes, and serious environmental implications – Air and water pollution – Rapid depletion and degradation of natural resources – Deforestation and land degradation – Rapid loss of the region’s rich biodiversity endowment 78
• Asian countries increasingly confronted by the prospect of a dwindling supply of environmental capital to support the growing demands of a more numerous, wealthier, and urbanised population – Changing patterns of consumption and mobility – Clean and ample water, arable land, and unpolluted air are vital ecosystem services necessary to maintain SEA’s economic growth • Yet recent economic expansion has largely been pursued at the expense of the environment, undermining delivery of these ecosystem services in the future • This unsustainable trajectory will progressively hinder future development – Effects on people’s health, livelihood, and security – Compromises the potential of sustained growth and its benefits for future generations 79
The ecological footprint of Asian countries is growing • The Ecological Footprint measures the area (in hectares) required to supply the ecological goods and services we use • It outstrips the available biocapacity – the land actually available to provide these goods and services • Biocapacity acts as an ecological benchmark against which the Ecological Footprint can be compared • Both biocapacity and Ecological Footprint are expressed in a common unit called a global hectare (gha) 80
Ecological footprint and biocapacity Japan Korea Singapore China 81 Source: Global Footprint Network, 2016.
Ecological footprint and biocapacity India Pakistan Bangladesh Sri Lanka 82 Source: Global Footprint Network, 2016.
Ecological footprint and biocapacity Philippines Thailand Malaysia Vietnam 83 Source: Global Footprint Network, 2016.
Ecological footprint and biocapacity Cambodia Indonesia Laos Myanmar 84 Source: Global Footprint Network, 2016.
Climate change • Economic growth came at the expense of high carbon emissions • East Asian countries are exposed to the effects of climate change • Climate change and environmental problems threaten to undermine future growth, food security, and regional stability 85
CO2 emissions (kt) 700.000 600.000 500.000 400.000 300.000 200.000 100.000 0 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Brunei Cambodia HongKong Indonesia Korea Laos Malaysia Myanmar Philippines Singapore Thailand Vietnam 86 Source: World Bank, March 2017.
CO2 emissions (kt) 12.000.000 1.400.000 1.200.000 10.000.000 1.000.000 8.000.000 800.000 6.000.000 600.000 4.000.000 400.000 2.000.000 200.000 0 0 China Japan (rights axis) 87 Source: World Bank, March 2017.
Carbon intensity of selected Asian countries (CO2 emissions in kg per 2005 US$ of GDP) 88 Source: Volz (2016). Note: Scale for China is on the right axis.
Share of global greenhouse gas emissions from energy production Source: BP Statistical Review of World Energy. 89
Top emitters: fossil fuels and industry (absolute) The top four emitters in 2015 covered 59% of global emissions China (29%), United States (15%), EU28 (10%), India (6%) Source: Global Carbon Project (2016). 90
Top emitters: fossil fuels and industry (per capita) Countries have a broad range of per capita emissions reflecting their national circumstances Source: Global Carbon Project (2016). 91
Top emitters: fossil fuels and industry (per capita) Depending on perspective, the significance of individual countries changes Source: Global Carbon Project (2016). 92
Top emitters: fossil fuels and industry (per capita) Cumulative emissions from fossil-fuel and cement were distributed (1870 – 2015): USA (26%), EU28 (23%), China (13%), Russia (7%), Japan (4%) and India (3%) Cumulative emissions (1990 – 2015) were distributed China (21%), USA (20%), EU28 (14%), Russia (6%), India/Japan (4%) Source: Global Carbon Project (2016). 93
Major flows from production to consumption Flows from location of generation of emissions to location of consumption of goods and services Values for 2011. EU is treated as one region. Units: MtCO 2 Source: Global Carbon Project (2016). 94
Asia is critical to achieving the 2°C goal Developing Asia’s share in global greenhouse gas emissions Share in 1990 – 1999 Share in 2012 Developing Asia = 25% Developing Asia = 40% Rest of Rest of the the world = world = 60% 75% Source: ADB (2016): Asian Development Outlook 2016 Update , Manila: Asian Development Bank. 95
Developing Asia’s emissions by scenario GtCO 2 equivalent/year Business as 45 usual 40 35 30 INDC 25 20 15 INDC to 2°C 10 5 0 2015 2020 2025 2030 2035 2040 2045 2050 INDC = intended nationally determined contribution 96 Source: ADB (2016): Asian Development Outlook 2016 Update , Manila: Asian Development Bank.
Primary energy composition in developing Asia under modelled scenarios Business as usual INDC to 2 ° C Billion tons of oil equivalent Billion tons of oil equivalent 10 10 8 8 Oil 34% (3.4 BTOE) 6 6 Nuclear Oil 1% (0.1 BTOE) Gas 34% (2.1 BTOE) 14% (1.4 BTOE) 4 4 2% (0.1 BTOE) Gas Nuclear 11% (0.7 BTOE) 10% (0.6 BTOE) Coal 2 2 41% (4.1 BTOE) Coal 43% (2.6 BTOE) Renewable Renewables s 0 10% (0.9 BTOE) 0 2015 2020 2025 2030 2035 2040 2045 2050 2015 2020 2025 2030 2035 2040 2045 2050 INDC = intended nationally determined contribution 97 Source: ADB (2016): Asian Development Outlook 2016 Update , Manila: Asian Development Bank.
Additional 2015 – 2050 energy supply investments in developing Asia under INDC to 2 o C mitigation Trillion US$2005 20 15 Research, 0.15 Renewables, 6.66 10 Nuclear, 0.28 Grid and Storage, 5.53 5 Fossils with CCS, 4.57 Fossil Fuels, -4.39 0 Oil Extraction, -2.55 -5 -10 98 Source: ADB (2016): Asian Development Outlook 2016 Update , Manila: Asian Development Bank.
Carbon trade and early action reduce costs of the low-carbon transition Cost of emissions reduction Cost of emissions reduction as % of GDP in developing Asia as % of GDP in developing Asia % of GDP % of GDP 5 2,5 INDC to 2 o C Optimal 2 o C with trade 4 2,0 Effect of early 3 1,5 action Effect of trade 2 1,0 INDC to 2 o C with trade INDC to 2 o C with trade 1 0,5 0 0,0 2015 2020 2025 2030 2035 2040 2045 2050 2015 2020 2025 2030 2035 2040 2045 2050 99 Source: ADB (2016): Asian Development Outlook 2016 Update , Manila: Asian Development Bank.
Climate mitigation generates significant benefits and co-benefits GDP change from climate Reduction in premature change under different deaths from air pollution in scenarios (%) 2050 moving from business as usual to 2 o C scenarios 0 Change in ‘000 deaths annually 0 -2 -100 2 o C pathway India -4 -200 8% gain -300 -6 PRC Business as usual -400 -8 -500 Rest of South Asia -10 Rest of East Asia, Southeast Asia, and the Pacific -600 Indonesia -12 -700 100 Source: ADB (2016): Asian Development Outlook 2016 Update , Manila: Asian Development Bank.
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