Looking after this generation in Asia, and the next

Author: Peter Drysdale, East Asia Forum

The issue of the sustainability of economic growth is a hot issue in the debate about economic policy. Growth, as measured through change in GDP, means that people are better off, but it does not mean that people will continue to enjoy a higher standard of living in the future. Sustainability means that social consumption can be at least as high in the future as it is now. Sustainability depends on how the productive base of assets is faring and whether it can continue to generate output for social consumption in the future. An increase in the productive base today implies an increase in potential inter-generational wellbeing.

Children scatter autumn leaves into the air at dusk in Tokyo, Japan, 21 November 2015.  (Photo: AAP)

The coming decades will present significant intergenerational policy challenges and opportunities for economies throughout Asia. The re-emergence of Asia as a centre of global economic activity, rapid demographic change, environmental pressures and technological advances are to name just a few. These things will put pressure on the fiscal sustainability of regional economies and will have significant implications for future economic prosperity throughout the region. The policy actions taken or missed today will have a significant bearing on future outcomes.

It is not surprising that governments, development agencies and most economists focus on income growth along an optimal growth path when discussing sustainability. But do we need to assume optimal income growth to assess sustainability? Sustainable development is not the same thing as optimal growth. Sustainable development simply requires that intergenerational wellbeing will not decline. Critically, high growth rates as traditionally measured could be harmful to intergenerational wellbeing where growth undermines the productive base.

GDP growth does not necessarily indicate growth in wealth. For example, recent GDP growth in Cambodia has at times been accompanied by declines in inclusive wealth — a pattern seen in many countries in the region at various times over the past 25 years including Australia, India, Indonesia, Malaysia, New Zealand, and Papua New Guinea. This has obvious implications for sustainable development policy, as growth is of little value if its fruits are fleeting.

Just as consumption is defined comprehensively to include all non-market goods and services that provide wellbeing, the productive base must be equally comprehensive and include all forms of capital that provide these goods and services. Measuring all these forms of capital and their social values would allow them to be aggregated into a single measure of wealth, referred to as inclusive or comprehensive wealth.

How do these ideas affect assessment of economic policy strategies in our region?

For one thing, there needs to be less emphasis on GDP and other measures of national income and more emphasis on national wealth: on measures of the current flow of production rather than measures of the stock of capital and other assets that make up the productive base. Without measuring how the comprehensive wealth of a country changes over time, we cannot evaluate if economic development is sustainable. Thinking in these terms makes clear that growth cannot proceed at the expense of environmental degradation across the region. It means that the challenge of climate change will have to be dealt with.

For another, the forces at work in most of the major regional economies will put additional pressure on the fiscal sustainability and on the institutions that have contributed greatly to economic performance to date. These things are often taken for granted but will have significant implications for future economic prosperity throughout the region.

The Asian century will see rapid demographic change. The ageing of populations throughout the region and changing community expectations over the delivery of public goods will see increased demand for health and aged care. The fiscal policy response to these changes is yet to be figured out.

How countries, such as China, transition to high-income status will also be crucial. Policy frameworks that help facilitate industrial upgrading, innovation and investment in human capital will be important to drive productivity and avoid the so called middle income trap.

These are the issues with which the latest issue of East Asia Forum Quarterly (EAFQ) deals.

In our lead essay from EAFQ this week, Alan Auerbach points out that many countries — especially more advanced industrial countries, which are already struggling with high debt levels after the global financial crisis — also confront substantial and largely unrelated fiscal challenges over the longer term. Japan and the United States have worrisome short term fiscal problems, and their longer term fiscal prognosis is worse on all the measures on which they can be assessed, Auerbach observes.

The longer term structural fiscal challenge can be significantly attributed to demographic change, the rising cost of age-related social insurance and other spending programs. This challenge is currently intense for mature industrial economies in Europe as well as Japan and Korea in the region, but in a couple of decades China will face a similar problem.

The global financial crisis, says Auerbach, ‘left nearly all advanced economies with substantially higher debt-to-GDP ratios and in many cases with lingering economic weakness that further complicates short-term efforts at fiscal consolidation. But the longer-term challenges these countries face are in many cases related much more to the future fiscal challenge of growing primary deficits, associated with the cost of providing pensions and health care in the face of growing old-age dependency ratios, and not simply reducing overall debt’.

Australia’s government produces an Intergenerational Report every five years to adjust the policy horizon to take account of some of these longer-term challenges but that has become a politicised process in recent times and needs to have independent stature.

On all these fronts, the appropriate frame for policy development needs to take into account intergenerational considerations, and success judged not simply on GDP levels or growth today but rather on the sustainability of living standards and social product for the next generation.

Peter Drysdale is editor of the East Asia Forum. 

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