By Eduardo Pedrosa

More prosperity, dampened by a growing inequality

Posted on December 17, 2014

IN THE ALMOST 20 years since the Philippines last hosted Asia-Pacific Economic Cooperation (APEC) forum, the regional and global economy has undergone an enormous transformation.

Some of those changes were predictable, others less so. Few in 1996 would have thought that Asia would, in just a year, undergo a dreadful economic crisis. Fewer still would have imagined that after a decade, the world would undergo yet another traumatic episode, the impacts of which continue to be felt six years on. Not to mention the numerous epidemics and natural disasters that frequently hit the region.

It is this context that forces a review of APEC’s work to ensure that it is pursuing an agenda that not only promotes high quality growth but also prepares the region for the disruptions that can and will occur.

At the APEC Informal Senior Officials Meeting held in Manila recently, Secretary of Trade and Industry Gregory Domingo called on the support of APEC members to provide practical, relevant and results-oriented initiatives.

For more than 40 years, exports have grown at twice the rate of GDP; today, they are growing at roughly the same rate. Some believe it is a cyclical phenomenon due to lower demand for imports in some key markets, while others believe it is going to be a structural feature of the world economy.

The tremendous growth in trade has come as a result of the increasing division of labor, with all APEC economies gaining from increased specialization. This process has been accelerated by technological change, innovative business practice, and policy reform.

Is this over? The answer is “no” -- the opportunities presented by global value chains are far from being fully realized and the digital revolution has barely just begun. The next step is for the region’s small and medium enterprises to get into the game and use the opportunities that digital platforms offer to reach more customers at home and aboard.

How those value chains operate has profound implications for the rules that seek to manage flows as well as opportunities for a more inclusive trading system.

Those rules are now being formulated, not in the World Trade Organization as in the past, but in mega-regional and plurilateral agreements -- like the Trans-Pacific Partnership that does not currently include the Philippines, and the Regional Comprehensive Economic Partnership that does.

Those rules matter. For example, the Information Technology Agreement (ITA) led to an explosion of trade in electronic goods like cellphones and tablets. Without the ITA, these goods would be more costly and less available to people. Digital commerce has been relatively unregulated -- allowing innovation in apps, digital payments, and so on.

The success of globalization and integration in spurring growth and prosperity has brought with it new challenges and risks.

First, growth has led to densely populated areas with implications on spatial inequality, management of its food and energy requirements, and the impacts of disasters. Economic growth in many parts of our region has outpaced the infrastructure built to support it. Without significant investments in infrastructure, the ability of our economies to further integrate and extend the benefits of globalization beyond first-tier cities will be limited.

Second, globalization makes the velocity of the transmission of crises -- be they financial, natural disasters or epidemics -- so much faster. It should not just be a question of relief and recovery from crisis but investing in systems that prevent disruptions from becoming disasters.

Third, higher incomes and better lifestyles as a result of growth put strains on the ecological system.

What can be done? Eco-labeling to ensure that production is sustainable is one way -- but this may only be relevant for the bigger players. In the case of fisheries, marine protected areas can help to restore fish stocks. But even with revenue from tourism, they will still require public funding to ensure the livelihoods of the communities that depend on fisheries.

Even as our region has become more prosperous, inequality has been rising. Technological progress, globalization and market-oriented reform -- while creating enormous new opportunities -- were cited as unintended causes for rising inequality. And these impacts have been compounded by unequal access to opportunity due to weaknesses in governance and social inclusion.

Policy makers can act to address rising inequality through job creation and labor market reform, fiscal measures to reduced inequality in human capital, interventions to reduced spatial inequality, focusing on providing equality of opportunity. Productivity catch-up, structural transformation, and competitiveness-enhancing structural reforms designed to move economies and individuals up the value chain are necessary.

Attitudes toward trade and integration are not always enthusiastic. The small and medium enterprises sector “is one of the strongest voices opposing global trade as they hardly feel the benefits.”

The Pacific Economic Cooperation Council’s survey showed that while opinion-leaders in the Asia-Pacific had broadly positive attitudes toward trade, with 74% of respondents saying that they believed that trade and investment liberalization and facilitation had positive impact on growth for their economy, in Southeast Asia, 40% of respondents thought that trade had caused greater income inequality. Looking at why this might be, in emerging economies, a majority of respondents thought that the benefits of integration had been limited due to supply-side constraints.

The risk for APEC is that if these issues are not addressed, inequality and the feeling that the benefits of integration are limited is and will continue to erode and undermine support for this agenda. Should that continue, then the integration process that has driven growth and the unprecedented reduction of absolute poverty in the region over the past 25 years will suffer and the potential that e-commerce and the digital revolution promises will not be achieved.

APEC needs to continue its work in promoting regional economic integration but at the same time work to strengthen the capacity of its member economies to not only reap the benefits of that process but -- in the words of Professor Federico Macaranas of the Asian Institute of Management -- “democratize the fruits of greater integration.” This requires addressing those supply-side constraints. In terms of skills, this will require significant rethinking in education systems. Competitiveness in the global economy requires world-standard skills. This requires better cooperation between education providers and the businesses that will eventually employ them. It will also mean putting in place 21st century infrastructure that anticipates future needs.

Eduardo Pedrosa is secretary-general of the Pacific Economic Cooperation Council. This is excerpted from the opening remarks he delivered at the APEC Informal Senior Officials’ Meeting, “Consultative Dialogue on APEC 2015 Priorities,” on Dec. 9.