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In the year and a half since the global pandemic started the Asia-Pacific economy has undergone an extraordinary decline but is set to post a sharp recovery this year thanks to unprecedented policy support and the remarkable innovation and manufacture of vaccines.
The region is expected to grow by 6.1 percent in 2021 and 5.1 percent in 2022. PECC’s annual survey of the regional policy community (run from 12 August to 17 September) shows a sense of optimism among respondents with 55 percent expecting stronger economic growth for the world economy next year.
However, the divergent recovery from the crisis is evident in forecasts as well as in the views of respondents for specific economies and sub-regions. Respondents are far more optimistic about the prospects for growth for those economies that had achieved higher levels of vaccination at the time they were surveyed, notably, the United States and China. This underscores the importance of achieving vaccine equity across all economies of the region.
Although most growth forecasts for 2021 have been downgraded since April this year due to the emergence of the Delta variant, the outlook for 2022 remains on the brighter side with the hope that vaccine distribution will spread more broadly across regional economies with most achieving 60-70 vaccination rates by mid-2022.
However, vaccine equity remains an enormous challenge with several economies well below those averages.
Top Risks to Growth
The top risk to growth by far was future waves of Covid-19, this was followed by:
These perceptions of risk are likely related, with respondents concerned about the capacity to lead and implement the necessary policy reforms for a sustainable and inclusive recovery. Regional cooperation can play a useful role in mitigating these risks, capacity building where needed, and building confidence in the direction of reform. This is especially important given concerns about rising protectionism.
Priorities for APEC Leaders
Stakeholders’ perceptions of risk aligned strongly with what they think APEC Leaders should discuss when they meet this November.
Clearly stakeholders expect leaders to focus on Covid-19 issues – both how to deal with the problem of vaccine inequality as well as how economies can safely open their borders to travel. At the same time there is a strong hope that the Asia-Pacific can deliver meaningful input to global climate change discussions while addressing problems of inclusive growth. Equally there is a view that progress requires cooperation between the region’s two biggest economies the United States and China.
One issue that business stakeholders think should be a priority for Leaders’ discussions that was not on the overall list was the region’s progress towards its goals on freer trade and investment and a Free Trade Area of the Asia-Pacific (FTAAP). This priority along with the US-China trade conflict and rising trade tensions addresses stakeholders’ perceptions of risks about rising protectionism and slowing trade. On the bright side, there is momentum in the region with the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the Regional Comprehensive Economic Partnership (RCEP) as well as the Pacific Alliance. APEC can provide a useful platform for further dialogue on issues related to the expansion and indeed updating of these agreements.
One clear impact of the Covid-19 crisis has been the acceleration of the digital transformation of the region’s economies. Within the Asia-Pacific there is a trend towards digital trade agreements: the Digital Economy Partnership Agreement among Chile, New Zealand and Singapore (with interest from Canada and Korea in joining), the Pacific Alliance has set out a roadmap for creating a regional digital market, and ASEAN members have announced the goal of starting negotiations on a Digital Economy Framework Agreement by 2025. The question is where does this leave APEC’s work on the digital economy?
Dealing with Covid-19 and its Economic Consequences
The ongoing pandemic continues to influence stakeholders’ perceptions of risk as well priorities for policy cooperation. Respondents believe that new waves of Covid-19 is the top risk for growth over the next 12 months and the best way to deal with this is through vaccination. Dealing with international mobility issues were seen as more important as the typical issues that the policy community has been discussing such as a WTO agreement on trade and health, a temporary waiver of the WTO TRIPS agreements, mechanisms to enhance visibility on input supplies for Covid-19 vaccines.
The high priority given to ‘the safe international movement of people starting with those involved in logistics and supply chains’. may be because of the high cost of international freight associated with the constraints in the industry and the need for dealing with the frictions in the system. While the common standards for vaccination passport and test results reflects the need to reboot the tourism and travel sector which is not only a critical sector for many APEC economies in terms of jobs and growth but also provides capacity for the transport of goods.
Climate change was the second highest risk to growth in addition to being a top 5 priority for APEC Leaders’ discussions, indeed, 60 percent of respondents to our survey believe that ‘immediate and drastic action is necessary to address climate change’, with a further 30 percent saying that ‘some action should be taken now.’ Chapter 2 addresses how the region can support global efforts to address climate change. It attempts to identify key areas for regional cooperation in climate mitigation and adaptation initiatives.
While mitigation actions like the increased use of renewables and energy efficiency topped the list of policy responses, adaptation policies such as a sustainable forest management and reforestation and promotion of circular economy were not far behind. Most green finance portfolios tend to emphasize mitigation despite a recognized need to increase adaptation finance. Of the $78.9 billion in climate finance transferred by high income economies in 2018, only 21% was spent on adaptation. APEC member economies could play a strong and positive role as a group in supporting adaptation finance at the COP26 summit.
Respondents to PECC’s survey tended to focus on APEC’s traditional areas of work, i.e. reducing barriers to trade and investment in renewable energy components and equipment in the region. This is an issue APEC members have a clear track record on with their commitment to reduce tariffs on a specific list of environmental goods in 2012. With the rapid developments in technology this list may be out of date and need revisiting. A further issue that needs to be explored is what constitutes an environmental service. These actions could help to reduce the uncertainty that stakeholders are concerned about with ‘rising protectionism’ at least insofar as trade in renewables is concerned.
APEC member economies could propose climate mitigation and adaptation policies and measures at COP26 which are consistent with the rapid resumption of economic growth and free trade to meet broadly-shared development and environmental goals.
The chapter raises many important issues for the region. APEC member economies could play a lead role in carbon pricing by establishing region-wide carbon markets to promote emission mitigation in a market-friendly manner.
However, there are also problems. One concern is the threat of ‘carbon trade tariffs’. APEC member economies could constructively strive for a cooperative outcome that avoids such threats to free trade and reciprocity norms under the aegis of the WTO.
Index of Integration
Chapter 3 is an update to PECC’s integration index based on 2019 data, ie pre-Covid-19 crisis. The index measures the degree of integration taking place in the Asia-Pacific region based on intraregional flows of: goods; investment; tourists; and five measures of convergence: gross domestic product (GDP) per capita; share of nonagriculture to GDP; the urban resident ratio; life expectancy; and share of education expenditure in gross national income (GNI). The index was developed in 2008 as a tool to measure the degree of integration taking place in the Asia-Pacific.
The latest update to PECC’s index of economic integration in the Asia-Pacific region in 2019 continued to show an increased level of integration, even surpassing the previous peak in 2010.
An important feature of the index is that it excludes trade and investment flows among geographically contiguous sub-regional trading partners. This is to control for the effect that sub-regional flows may have on the index, whereby a very high degree of integration among, for example, Southeast Asian economies could result in a falsely high measure of integration with the Asia-Pacific region as a whole.
When APEC leaders set out the Bogor Goals in 1994, they set out a vision through which the region would not only maintain high growth rates but also narrow development gaps. While the region has done well in integrating and overall incomes have increased at a dramatic pace, the index shows that there is a long way to go in terms of closing development gaps.