Economic forecasts have since been updated
GDP growth in developing Asia is expected to stay strong, at 5.2% in 2022 and 5.3% in 2023. The pace of the recovery, however, varies across subregions. But in general, regional growth is being supported by a robust recovery in domestic demand in economies that are continuing to catch up with their pre-pandemic trend, particularly in South Asia. Here growth will remain strong in 2022 at a forecast 7.0%, accelerating to 7.4% in 2023. East Asia almost converged to its pre-pandemic trend in 2021 and growth rates are expected to normalize to 4.7% in 2022 and 4.5% in 2023. Growth rates in the other subregions will return to their pre-pandemic averages this year or next.
Chief Economist Albert Park discusses developing Asia's latest economic outlook and the risks involved, including escalating global geopolitical tensions, tightening financial conditions, and COVID-19’s continued threat.
Inflation in developing Asia stayed below the global trend in 2021, but is expected to rise. Because of relatively low food inflation, less severe supply disruptions, and the incomplete recovery, regional inflation remained moderate at 2.5% last year. Price pressures were less broad-based than in advanced economies, including the US where inflation averaged 4.3%, and emerging economies in Latin America and the Caribbean, and Sub-Saharan Africa, where prices increased by 9.3% and 10.7%, respectively. Inflation in developing Asia this year and next will be driven by continuing recovery and elevated energy and commodity prices. The regional inflation rate is forecast to rise to 3.7% in 2022, before dipping to 3.1% in 2023. Headline inflation is expected to accelerate in all subregions but the Caucasus and Central Asia. Monetary authorities should keep a close watch for incipient inflationary pressures.
The Russian invasion of Ukraine has upended the global economic outlook and greatly amplified uncertainty for a world economy still contending with COVID-19. The war’s outbreak in late February severely disrupted global economic conditions. Shockwaves have been felt in financial and commodity markets, and energy and food prices have spiked sharply and threaten to remain elevated or rise further. The highly uncertain outcome of the invasion is an additional hurdle for developing Asia’s economies, many of which are still grappling with COVID-19.
Achieving the Sustainable Development Goals for a greener and more inclusive future requires vast public spending. While more efficient spending can free up some fiscal resources, much greater resources are needed to promote inclusive development in earnest. Tax revenue was gradually rising in the region before the COVID-19 pandemic but was still comparatively low. Restoring fiscal sustainability after COVID-19 adds to the urgency of making all forms of fiscal resource mobilization more effective, especially taxes.
Estimates that benchmark current tax revenue against key economic characteristics suggest that countries in developing Asia could increase tax revenue from a pre-pandemic average of around 16% of GDP by, on average, 3–4 percentage points. Options to strengthen revenues depend on country circumstances, but two priorities with broad promise are better optimization of tax expenditures and more efficient collection of value-added tax (VAT), including appropriate taxes on the fast-growing digital economy. In addition, strengthening personal income and property taxes can raise additional revenue and make tax systems more progressive.
Environmental tax instruments continue to grow and positively guide investment and consumption in developing Asia. Some regional governments have long experience in levying environmental taxes, notably on pollutions and fossil fuels. More recently, Asian economies have actively explored carbon pricing instruments to curb emissions. The region can draw valuable lessons from early adopters, especially by ensuring sufficiently high tax rates and pollution prices and effective monitoring, reporting, and verification systems. Higher corrective taxes, primarily on alcohol or tobacco, can raise additional tax revenue estimated at around 0.6% of GDP while improving health outcomes and cutting medical costs.
New analysis finds that reducing business registration costs can expand the share of the formal sector in the whole economy and the taxes it pays. Tax reform to boost revenue may be politically challenging, but global experience shows that strong leadership can enable success. Effective strategies strengthen tax administration, including through better use of information and communication technology, and improve taxpayer morale by, for example, improving the quality of public spending.
There is an urgent need to mobilize resources in developing Asia, not just to restore fiscal sustainability after COVID-19, but also to fund the vast public spending needed to build a more inclusive and sustainable future for the region.
The Asian Development Outlook analyzes economic and development issues in developing countries in Asia. This includes forecasting the inflation and gross domestic product growth rates of countries throughout the region, including the People’s Republic of China and India.