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Economic Outlook for Southeast Asia, China and India 2015

Strengthening Institutional Capacity

Summary in English

Key findings

Growth prospects look favourable overall in Emerging Asia (Southeast Asia, China and India) over the medium term. Gross domestic product (GDP) growth in the region is forecast to average 6.5% per year over 2015‑19. Although growth in Emerging Asia will moderate gradually due to the slowdown in China, for the ten ASEAN countries as a whole, growth momentum remains robust and broadly similar to that of the past ten years, averaging 5.6% over 2015‑19.

The large ASEAN ‑5 economies – Indonesia, Malaysia, the Philippines, Thailand and Viet Nam – will sustain their growth momentum in the medium term, led particularly by Indonesia and the Philippines with an average annual growth of 6.0% and 6.2% respectively, over 2015‑19. Stable economic prospects are also foreseen for Brunei Darussalam and Singapore. Cambodia, Lao PDR and Myanmar (CL M) should see more rapid growth exceeding 7% over the next five years. Improvements in the agricultural sector and the business environment will also be engines of growth in these countries.

China and India face significant challenges: China’s growth is slowing (6.8% over 2015‑19, compared with 8.2% over 2011‑13) as it seeks to adjust to an ageing population, switches its growth focus from investment to consumption, and copes with agricultural, environmental and educational issues. India’s growth should be stable over 2015‑19 (6.7% compared with 5.5% over 2011‑13), but this could change as the new government carries out ambitious plans for investment and reform.

External and domestic risks remain. Potential external risks include changes to US monetary policy, the Chinese economic slowdown, structural policy changes in Japan, and growth prospects in the euro area. However, these factors will have only a moderate impact on the region (as of November 2014). Domestic political risks include those related to the newly elected governments in India and Indonesia, and the current unrest in Thailand.

Further acceleration of regional integration towards the goal of the ASEAN Economic Community by 2015 is essential. Growth depends on the success of key regional initiatives, such as reducing the Common Effective Preferential Tariffs and improving trade facilitation, accelerating the development of institutional arrangements like investment frameworks, deeper financial integration, education, infrastructure and greater progress on narrowing regional disparities. Integration should also address a broader range of issues in future, including topics like the environment and green growth.

Main policy messages

Improved government capacity is needed to achieve policy goals more consistently. Medium‑term development plans can be valuable tools to help governments guide and co‑ordinate their policies in pursuit of strategic goals and to signal these intentions to the private sector and other domestic and international actors. Technical expertise, appropriate budgeting systems, inter‑ministry co‑operation and strong statistical systems are essential for the effective design and implementation of such plans.

National plans need to be improved. This Outlook includes country case studies on medium‑term development plans for the large ASEAN ‑5 countries, plus Myanmar, China and India. While these countries are focussing on appropriate priority areas for their development, actual performance with respect to plan targets has been uneven. In many cases, reforms to improve competitiveness, education and inclusive and sustainable growth are in particular need of greater attention.

Policy lessons from public sector reform

Emerging Asian economies have undertaken a wide range of public sector reforms in recent decades, with varying levels of success. Further reform is needed. Public spending management systems and tax administrations are more advanced in middle‑income countries like China and India than in the lower‑income countries in ASEAN , but are still less advanced than in OEC D countries. Corruption remains a significant concern, particularly in the CL M countries.

Experiences in Emerging Asia do not provide any magic bullets for ensuring that public sector reforms are effective but they do suggest some guidelines that should help to increase the prospects of success:

Public sector reforms must be carefully adapted to existing institutional capacities and evolve as local circumstances change.

The pacing of reform is important. Starting a public sector reform programme with a few relatively easy to implement measures with high short‑term pay‑offs can help to improve the credibility of the overall programme and provide lessons for implementing the subsequent and potentially more difficult steps.

On‑going commitment to public sector reform from the highest level of political leadership is essential.

Public sector reform is likely to make more rapid and ultimately greater progress when the concerns of key stakeholders are taken into account.

Reducing the informal sector to boost growth

The informal sector is a barrier to growth and development. A significant informal sector is quite common in Emerging Asia’s lower‑income economies with weaker institutional capacity. Although informality appears to be declining across the region with continued development, it remains a barrier to growth as it limits the reach of government and lowers productivity levels.

Policy makers need to implement comprehensive solutions that reduce harmful informal activity without affecting the livelihoods of the poor and marginalised workers who depend on informal income sources. Four policy areas are particularly important in this regard:

Institutional and judicial reforms are needed in several countries to address shortcomings in areas like contract enforcement and protection of property rights that help to make the formal sector more attractive.

Support for small and medium enterprise (SME) development can be helpful, as informal firms tend to be small and this sector has great potential to contribute to growth. Providing expanded access to training and finance for these firms can help to encourage them to operate formally and to improve their productivity.

Tax and regulatory reform may also be needed where excessive burdens on the private sector push workers and employers into the informal sector. This may include restructured tax systems and reduced administrative barriers, particularly for new and small firms.

Targeted enforcement and, possibly, concessions for sectors with high levels of informality should be carefully considered. Such targeted strategies could seek to simultaneously formalise firms, suppliers, customers and even lenders from the informal financial sector.

Summary of
OECD (2014), Economic Outlook for Southeast Asia, China and India 2015: Strengthening Institutional Capacity, OECD Publishing.
http://dx/doi.org/10.1787/saeo-2015-en

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