Risks to growth

After a successful summit in Manila, leaders of the Asia-Pacific Economic Cooperation (Apec) headed home with the region facing prospects of slowing economic growth.

In its annual State of the Region report, the Pacific Economic Cooperation Council (PECC) noted that nearly 40 percent of the respondents to its survey expected weaker growth for the global economy over the next year. They cited these as the top risks to growth: slowdown in the Chinese economy, failure to implement structural reforms, lack of political leadership, slowdown in the US economy, and lack of adequate infrastructure.

The 21-member Apec has earlier slashed its GDP growth forecasts for this year and 2016. It expects economic expansion to slow to 3.1 percent in 2015 from May’s forecast of 3.2 percent. For 2016, growth is projected to accelerate to 3.4 percent, still slower than the original 3.8-percent forecast. The latest Apec Economic Trends Analysis already showed that growth in Asia-Pacific economies moderated to 3.1 percent in the second quarter of 2015 from 3.2 percent in the first quarter and 3.4 percent a year ago. Alan Bollard, executive director of the Apec Secretariat, observed that economies across the Asia-Pacific continued to grow but now found themselves in a “holding pattern of lower growth in the absence of high trade volumes.”

The blame goes to the declining contribution of trade to the region’s economic growth—quite ironic because the Apec was formed with the vision to make a free-trade area of the Asia-Pacific. Papers presented at the Apec meetings this week showed that the responsiveness of GDP growth to private consumption was increasing markedly. In contrast, the trade-GDP relationship continued to weaken, with trade in the region contracting during the first half of 2015. While exports are expected to rise by 2.3 percent for the whole of 2015 and by 3.3 percent in 2016 in response to recovering global demand, this is still more than a percentage point below 2014 levels. Trade, the traditional source of growth for the Apec, has now become a drag, as indicated by the contractions in the first half of 2015 when exports were down 5.9 percent and imports 10.3 percent.

With growth this year expected to be the slowest since the financial crisis of 2008, the PECC suggests that the region consider alternative strategies. It points out that since 1996 (when the Philippines first hosted the leaders’ summit), the Apec agenda has actually moved from a
focus on trade liberalization to addressing a broader set of issues, with making growth inclusive topping the list. As PECC secretary general Eduardo Pedrosa observes, the Apec can continue implementing the vision it set out with when it started, but a much greater focus is required to ensure that future growth is inclusive.

The Philippines’ own Doris Magsaysay-Ho, chair of the Apec Business Advisory Council, cites the need for new growth drivers. “The traditional drivers of growth are running out of steam [and] export-led growth is no longer sufficient to drive economic prosperity,” she says. Magsaysay-Ho is specifically pushing for support for MSMEs (micro, small and medium enterprises), which account for 97 percent of firms in the region. Increasing MSME productivity and access to finance are keys to innovation and moving up the value-added chain to make their products and services more competitive, she explains, noting that MSMEs would lead the way toward a service-oriented regional economy. Promoting MSMEs will also address the drive for inclusive growth, considering that many of these are scattered outside the central business districts; thus, any expansion in the sector will generate employment in the rural areas.

Apec documents show that although trade growth over the past quarter of a century has raised incomes, it has not significantly contributed to reducing inequalities in the region. In the course of the Apec’s history, it was noted that while some 300 million people have been lifted out of poverty, many more are excluded from the growth story. The Philippines is a case in point, where poverty has remained at 20-25 percent for the past five years despite the stellar economic growth envied by the rest of the world.

The challenge, as Magsaysay-Ho correctly observes, is to make growth felt and equal. Only then will the Apec appeal to ordinary citizens who have always felt excluded and inconvenienced whenever their government hosted the bloc’s annual meetings.