Azernews.Az

By Aynur Jafarova

Softer than expected economic activity in China and India and jitters over the U.S. quantitative easing (QE) program will weigh on Asia and the Pacific's growth prospects in the near term, a new Asian Development Bank (ADB) report released on October 2 reads.

ADB Chief Economist Changyong Rhee believes that Asia and the Pacific 2013 growth will come in below earlier projections due to more moderate activity in the region's two largest economies and effects of QE nervousness.

"While economic activity will edge back up in 2014, current conditions highlight the need for the region to exercise vigilance to safeguard financial stability in the short term while accelerating structural reforms to sustain economic growth in the longer term," he said.

The report notes that shifting expectations on the timing of the wind-back of the U.S. Federal Reserve's QE program sparked the recent exodus of foreign capital from emerging markets, including India and Indonesia.

While the sudden outflow of capital exposed vulnerabilities in the region, the report said fears of a crisis are unwarranted given the solid current account surpluses and ample foreign exchange reserves in most of the region's developing economies.

"Nevertheless, capital flow volatility like this underscores the need to closely monitor financial markets," the report reads. "At the same time, slowing growth highlights the need to push ahead with overdue reforms in areas like foreign direct investment, infrastructure development, fiscal consolidation and social protection programs, to sustain growth for the long term."

The ADB predicts that the growth in East Asia is now expected to come in at 6.6 percent for both 2013 and 2014, while in South Asia, GDP is seen to expand by 4.7 percent in 2013 and 5.5 percent in 2014, well below previous projections of 5.7 percent and 6.2 percent.

Moderating growth in China follows recent efforts to reign in credit and the booming shadow banking system, as the authorities seek to redirect the economy along a more sustainable medium-term growth path. However, the deceleration in India's economy reflects ongoing industry and investment bottlenecks stemming from poor infrastructure and delayed structural reforms.

"Southeast Asia's growth will be crimped by the soft performances of its three biggest economies with lackluster exports and moderating investment weighing on Indonesia, Thailand and Malaysia. By contrast the Philippines is expected to continue to perform strongly. The sub-region will grow 4.9 percent in 2013, with the pace set to quicken to 5.3 percent in 2014, as it benefits from an investment recovery and firmer exports, supported by improved global trade and recent currency depreciations," the report reads.

Meanwhile, ADB forecasts that Central Asia will see growth decelerate to 5.4 percent in 2013 on slower-than-expected economic activity in Kazakhstan and Georgia, before recovering to 6 percent in 2014.

Asia should step up governance reforms

The report further reads that Asia and the Pacific's economic gains should be matched by stepped-up efforts on governance so that growth benefits can be more evenly shared and development progress locked in.

ADB Chief Economist Changyong Rhee believes that progress on good governance has lagged well behind the region's economic achievements and there has been little headway in closing the governance gap with advanced economies.

"There is abundant global evidence to show that governance improvements correlate strongly with faster and more inclusive growth, higher investment, and more rapid poverty reduction," he said.

According to the report, people typically judge governance standards by their experiences with public services, and in Asia services lag those in advanced economies, in both quantity and quality.

"Large infrastructure gaps also plague the region with over 75 percent of the populations of Myanmar, Afghanistan and Cambodia still lacking electricity. Corruption, too, remains a threat, with a survey in China showing that 40 percent of respondents found corruption to be the main cause of poor public services," the report said.

Central Asia is weak on all governance indicators while East Asia shows strong government effectiveness, regulatory quality and rule of law, but lags in controlling corruption. Southeast Asia also struggles with controlling corruption and giving a voice to all its citizens. Political stability and regulatory quality are the key issues in South Asia.

"Tackling the current shortcomings requires a multi-pronged approach, including directly involving communities in delivering services to give them a greater say in how and where funds are used. Devolving power and funding to local authorities is also crucial, with Bangladesh and the PRC using increased tax and spending autonomy to boost social infrastructure and poverty programs. Broader use of modern information technology is also essential to empower citizens, drive improvements in service quality, increase transparency, and reduce opportunities for corruption," the report said.

Since individual countries are at different stages of development, there is no one-size-fits-all approach to governance improvements, the report says. However as a general rule of thumb, low-income countries should look to improve government effectiveness, the quality of regulations and rule of law, and to scale up corruption controls to support growth. Middle-income countries, meanwhile, need to respond to the aspirations of increasingly affluent citizens who want to have a greater say in the development process.

"Inflows of cheap foreign capital into Asia may have allowed some countries to put governance reforms on the back burner, but recent financial market volatility and a pullback in economic activity have added fresh urgency to long-term structural action which can ensure development gains are not lost, and future growth benefits all," the report said.

ADB, based in Manila, is dedicated to reducing poverty in Asia and the Pacific through inclusive economic growth, environmentally sustainable growth and regional integration. Established in 1966, it is owned by 67 members - 48 from the region. In 2012, ADB assistance totaled $21.6 billion, including cofinancing of $8.3 billion.