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Emerging Asia is risking to fall into the middle-income trap – jeopardising sustainable and equitable growth – if the region is not able to establish effective policies to promote green finance, digitalisation, and enhanced regional cooperation. This is the conclusion of the Annual Outlook 2022 by London-based think tank Asia House.
According to the report, policies in Asia have yet to experience real investment spending levels that can achieve a sustainable recovery from the Covid-19 pandemic. It argued that while low-interest rates and liquidity injections could boost consumption and create financial wealth, they barely had an impact on real investment.
According to the International Monetary Fund (IMF), Emerging and developing Asia is expected to grow 5.9% this year, that would be the fastest growth worldwide. By 2050, Asian economies are expected to make up more than 50% of the global Gross domestic product (GDP). However, this can only be reached by a determined effort by the authorities to fill an evident policy gap to enable growth to continue
at the required levels, the Asia House report stated.
“Asia finds itself at an important crossroads with its constituent economies poised to transition to higher levels of income, innovation, and resilience,” according to the think tank report.
In order to establish this long-term economic resiliency and growth, Asia House has identified what it calls a “triple policy challenge”: The region needs to address green finance, digitalization and enhanced regional coordination.
Green finance key for Emerging Asia
For green finance, countries in the region must achieve historic levels of coordinated public and private investment to meet the Paris Agreement commitments, the report stated.
The World Economic Forum defines green finance as “any structured financial activity that’s been created to ensure a better environmental outcome.” An example of green finance is green bonds. The market is expected to reach $2.36 tn by 2023. China is among the three largest green bond issuers in the world.
However, access to and distribution of green finance has remained uneven in Asia. According to economists’ estimates, green financing needs are significant in the region, with about $26 tn being required between 2016 and 2030 to maintain growth levels, eradicate poverty and respond to climate change.
Policymakers must address the issue and create an investment climate where green finance can become mainstream and prosper, the think tank said. Central banks in the region are advised to consider sustainability objectives in formulating their monetary policy mandates and include climate risks in their assessment process. Currently, only 12% of central banks have explicit sustainability mandates. Since the banking sector cannot fund green projects alone, governments need to engage non-bank financial institutions to participate by providing incentives.
Promotion of Industry 4.0 for sustainable growth
Furthermore, the region needs to build on its digital success, the think tank noted. Asia is already a leader in digital innovation, but needs to place priority on broader and more diversified digitalisation activities. “Asia can build further on digital success stories that are supporting its drive to tackle climate change and where digitalisation is increasingly being applied in agricultural, financial and energy markets,” the report said.
As per Asia House, the promotion of Industry 4.0, the integration of automation, artificial intelligence (AI), cloud computing etc. in manufacturing – coupled with digital reskilling and knowledge diffusion is needed to secure the Asian Century and avoid the middle-income trap. The think tank further recommends accelerating digital trade agreements and expanding digital technologies like digital currencies.
In the report, the think tank also established “economic readiness” indices for green finance and digitalization. It calculates various macroeconomic metrics, scoring each country out of 100. Countries included are China, India, Indonesia, Japan, Malaysia, the Philippines, Thailand, and Vietnam.
China leades both lists with 72 points each, according to the analysis. “China’s green bond market has grown rapidly, with issuance breaking a new record last year,” the think tank noted. Japan came second in both indexes, at 63 for green finance and 59 points for digitalization.
India had the third-highest score in green finance but had the lowest in digitalisation. Thailand and the Philippines were at the bottom ranking in both indices.
While fostering economic recovery is unlikely to be an easy task for the majority of Asia’s economies, Asia House concludes that is further important for the region to work together. “On a regional level, pragmatic coordination needs to become far more concrete in order to mobilise funding to build resilience against economic shocks and to tackle the climate crisis.”
