State of the Region Report 2014


Message from the Co-Chairs of PECC

On behalf of the Pacific Economic Cooperation Council’s twenty-six member committees, we are pleased to present our ninth annual report on the State of the Region.

When we changed the product from the Pacific Economic Outlook to the State of the Region our objective was to try to provide a unique report on the Asia-Pacific – to capture general trends defining the development of the region and to highlight the challenges facing us.

The challenge of today is growth. As highlighted in Chapter 1 of the report, the recovery from the Global Financial Crisis continues, albeit at a far from robust pace, with economic growth at around two percentage points off from the immediate pre-crisis period. Furthermore, growth remains supported by extraordinary stimulus measures that cannot continue into the foreseeable future. We focus this year on some of the potential ‘engines of growth’ for the region over the medium to longer term.

One of these is middle-class consumption in the region’s emerging economies. Since the foundation of APEC in 1989, average incomes in the region have tripled from around US$5,000 to more than US$15,000. More and more people in the region have gone from living at barely subsistence levels to being able to live more like their counterparts in more advanced economies. As the report points out, consumers in the region’s emerging economies still spend around a third of their income on food compared to just a tenth in advanced economies. As incomes rise, that proportion will lessen allowing consumers more discretionary expenditure.

If one of the characteristics of this so-called ‘new normal’ is lower consumption growth in advanced economies then the firms that used to export to those markets will need to find new customers – or go bust. These new customers might well be the very people producing the products that used to be only within the reach of those in rich economies or indeed the rich in emerging ones. However, this is but one potential growth engine; there are others. Last year’s report focused on the need for infrastructure. This remains an area where bottlenecks exist and emerging economies are well-behind. As we argued in last year’s report, investment in infrastructure is not only needed but timely given the need to boost aggregate demand.

Another potential engine of growth is innovation. Over the past couple of decades, advanced economy growth in the region has benefitted much more from investment in ICT and in skills than emerging economies.

One of the major features of the State of the Region report is our annual survey of regional opinion-leaders. The results this year are instructive. Once again a slowdown in China is the top risk to growth but strikingly the lack of political leadership was the second highest risk. This finding is perhaps best taken in conjunction with other findings: the third highest risk to growth was the failure to implement structural reforms. The top priority for APEC Leaders was progress on a Free Trade Area of the Asia-Pacific (FTAAP); and the second most important factor for Asia-Pacific growth was further trade and investment liberalization.

Taken as a group of findings they perhaps reflect an underlying sense that while we know that structural reforms are needed, and that trade liberalization is important to the future of growth, the political will to achieve them could be a problem. Overcoming entrenched interests resistant to change is not a new problem; it has always been there. But in today’s political environment characterized by wrong-headed economic nationalism and short-termism exacerbated by political cycles, leadership is much harder to come by at the domestic level, let alone the international.

One initiative where leadership is required is the FTAAP. Chapter 2 goes into some detail on how the current trade initiatives like the Trans-Pacific Partnership (TPP) and the Regional Comprehensive Economic Partnership (RCEP) could form the basis of an eventual FTAAP. As the central narrative here is growth, the point we emphasize is that its achievement could add around 2.3 percent to global GDP in 2025. This is one initiative that could significantly contribute to the G20’s objective to increase global growth. This is not to suggest that it will be easy to achieve. Neither the TPP nor the RCEP are foregone conclusions, and even if negotiations are concluded, there is no guarantee that the domestic political support will be there to see them through difficult ratification processes.

Another issue that has been on our radar for some time is the changes taking place in regional and global energy markets. Our 2011 report focused on the potential for transpacific energy trade. This year’s survey results showed some sharp differences in views among sub-regions. While only 4 percent of respondents from North America picked energy security as a top 5 risk to growth for their economies 30 percent of Southeast Asians rated it as a top 5 risk.

On the occasion of APEC’s 25th anniversary we are pleased to note that 61 percent of respondents to our survey thought that the organization is as important or more important today compared to 1989 when it was created. This marks a significant improvement over previous years. In particular, respondents from Southeast Asia have gone from being rather ambivalent towards the APEC process to being much more supportive. One reason may well be the focus that has been put on addressing supply side constraints – a major concern for Southeast Asia and other emerging economies. As last year’s survey showed, while Southeast Asians remained supportive of the idea of freer trade, they also believed that the benefits they received from it were limited due to supply side constraints like lack of infrastructure and skills.

In this regard we believe that APEC needs to keep a balance to its agenda as it has done since its formation. The emphasis on free trade and now behind the border reforms are critical – they will help to ensure the most efficient allocation of resources, but this must come with significant initiatives to ensure that all economies are ready to benefit from the process.

The region and the world have changed much since APEC was founded. As a progenitor and forerunner of APEC we have had a privileged role of being able to actively contribute to this evolution. As much as APEC needs to be an institution that brings this region together, it must also find a way to ensure that the region remains outward looking and play its role in guiding the development of the world economy.

There are many people we would like to thank for their contributions to this report: the editorial committee and the report’s coordinator, Eduardo Pedrosa, Peter Petri & Ali Abdul Raheem, Chen Bo, CNCPEC, JANCPEC and USAPC, the staff at the PECC International Secretariat, especially Jessica Yom, Betty Ip and Lee Ho Ching. We would also like to express our appreciation to all of our member committees as well as all those who have taken the time to share their views and perspectives on the region with us through the survey.




yusuf wanandi



 Jusuf Wanandi

Donald Campbell

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