## Convergence and Welfare in ASEAN and Beyond

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### Key Takeaways
- The record of growth and development in ASEAN is a qualified success: within convergence and convergence to AEs.
- Slower than growth in Korea, Japan, China at a similar level of development.
- Key ingredients for faster growth: improvements in infrastructure, human capital, and institutions while maintaining sound macro policies.
- GDP per capita is an excellent measure, but welfare goes beyond this: environment, equality, health, leisure etc.

### I. Growth and Income Convergence in ASEAN
- Amid global slowdown, ASEAN-5 growth has moderated while CLMV growth remains strong.
- ASEAN countries have grown faster than their peers; WEO projections show gradual ASEAN convergence in sight.
- Historical convergence patterns:
  - Little income convergence in ASEAN between 1970 and 1990 (PPP GDP per Capita Growth 1970-1990 plotted against 1970 log level).
  - Pace of convergence picked up starting around 1990 (PPP GDP per Capita Growth 1990-2015).
  - Convergence has remained strong in the last 15 years (PPP GDP per Capita Growth 1999-2015).
- Absolute growth slowdown:
  - PPP per capita average growth rates: 1990-2007 vs 2008-2015 show declines (chart labels imply Advanced Economies, CLV, ASEAN5).
  - Example numbers from slide: 4.3; 7.2; 5.9; 1.9; 6.5; 4.6 (presented as data points comparing periods).
- Most ASEAN countries fall short of China, Korea, Japan, and Singapore at the same stage of development.
- Growth accounting, 1986–2015 (selected figures):
  - ASEAN-5: Growth 7.1, 4.1, 4.9; Capital 2.6, 1.7, 1.7; Labor 1.9, 1.3, 1.8; Human Capital 0.8, 0.6, 0.6; TFP 1.8, 0.6, 0.8 (periods 1986–95, 1996–2005, 2006–15).
  - CLV: Growth 6.3, 7.3, 7.0; Capital 1.7, 2.7, 3.2; Labor 1.8, 2.1, 1.0; Human Capital 0.3, 0.6, 0.7; TFP 2.5, 2.0, 2.1.
- Evidence of a middle income trap: cross-country scatter shows many economies clustered at mid-income levels (GDP per capita relative to US benchmarks $3,250; $6,600; $9,300; $19,050 shown in chart context).

### II. Has Income Convergence Been Inclusive?
- Poverty reduction:
  - Drastic reductions of extreme poverty: Poverty headcount ratio at $1.90 a day (2011 PPP) shown for 1990 vs 2014 (percent of total population).
- Emergence of a middle class:
  - Middle Class defined $10–$20 a day (2011 PPP); percent of total population increased between 1990 and 2013.
- Inequality trends:
  - Net GINI Index, 1990–2013: inequality has increased more in Asia than in the rest of the world.
  - Changes in inequality 1990–latest and 1990 level: country-level changes in GINI points plotted (China, Indonesia, Lao P.D.R., Vietnam, Singapore, Cambodia, Philippines, Japan, Korea, Malaysia, Thailand among others).
  - Historical changes prior to 1990 and level in 1964 shown (Net GINI Index, 1964–1990).

### III. Structural Transformation as a Driver of Convergence
- Labor reallocation is crucial: employment shifts from agriculture to industry and services correlate with GDP per capita.
- Employment in agriculture (percent of total) declines with rising GDP per capita; charts indicate substantial moves out of agriculture since 2000.
- Employment shifts since 2000:
  - Employment in Agriculture: change in share since 2000 (percentage points; latest available) shows declines up to -25 percentage points in some cases.
  - Employment in Industry: change in share since 2000 shows increases in poorer countries (range approximately -8 to +10 percentage points).
  - Employment in Services: change in share since 2000 shows increases across all countries (up to about +14 percentage points).
- Vietnam example:
  - Labor productivity in agriculture is less than 1/10 of productivity in the modern FDI manufacturing sector.
  - Close to 50% of the labor force are still employed in agriculture.
  - Continued reallocation of labor can sustain high long-term growth.

### IV. ASEAN Structural Indicators
- Structural factors matter for long-term growth, with varying needs across Asia.
- Gaps in access to infrastructure:
  - Cambodia features the lowest measures of infrastructure access.
  - Sri Lanka performs well on roads per capita and public health infrastructure due to recent public investment increases.
  - Vietnam’s infrastructure parameters are lower than the EDA average, except for public education and access to water.
- Gaps in public investment efficiency:
  - Public capital efficiency gap generally greater in Asia’s LIDCs.
- Human capital and cognitive skills:
  - Economic growth is closely related to cognitive skills as measured by PISA scores (conditional growth rate plotted against conditional test score).
  - Years of schooling and economic growth after considering cognitive skills: conditional growth rate (%) plotted against conditional years of schooling.

### V. Reforms Needed to Accelerate Convergence
- Policies for faster, safer convergence (1): Sound macro-financial environment
  - Internally consistent macro policies
  - flexible exchange rates
  - Reserves and fiscal buffers
  - macroprudential policies to rein in credit growth
  - monitor financial stability risks, bolster crisis management frameworks
- Policies for faster, safer convergence (2): Promote inclusive, sustainable growth
  - Avoid poverty traps: speed up structural transformation; scale up infrastructure investment, invest in human capital
  - Avoid middle income traps: raise educational attainment, diversify economy, promote home-grown innovation
  - Create fiscal space to invest in overcoming development traps: mobilize domestic revenue, raise investment efficiency
  - Remove impediments to trade and investment
  - In many countries, raise domestic savings to finance development efforts domestically

### VI. Convergence and Welfare: A Broader View
- From Income to Consumption-equivalent Welfare:
  - GDP per capita is an excellent indicator of economic wellbeing, but with limitations.
  - Broader welfare measures take into account consumption, leisure, inequality and health based on Jones-Klenow (AER, 2016).
  - Cross-country comparisons of consumption-equivalent welfare are presented; work in progress aims to add resource/environment sustainability.
- Highlights:
  - GDP per capita is closely correlated with welfare but with important differences.
  - For countries with low consumption share, shorter lives and high inequality, welfare index is lower than income per capita.
  - Rebalancing that raises consumption share, and policies that promote inclusion and resource and environmental sustainability all raise welfare.

### VII. Resource Sustainability and Genuine Saving
- Genuine Saving framework:
  - Genuine Saving (Adjusted Net Saving, ANS) = change in National Wealth; Hartwick Rule emphasizes maintaining positive Genuine Saving.
  - ANS adjustments: GNS = GNI – C + TR; ANS = GNS – Consumption of Fixed Capital + Education Expenditure – Natural Resource Depletion – Pollution Damage.
  - Natural Resource Depletion = Net Forest Depletion + Net Energy Depletion + Net Mineral Depletion.
  - Pollution Damage = CO2 damage + particulate emissions damage.
- Patterns in saving and pollution:
  - ANS exceeds NNS in Developed Asia but falls short of NNS in Developing Asia (Net National Savings vs Adjusted Net Savings, 2010-14 average, percent of GNI).
  - Pollution damage costs lower in advanced Asia, higher in developing Asia (CO2 and PM damage as percent of GNI; 2010-14 average).
  - Pollution damage in developing Asia is declining over time (Total pollution damage, developing Asia, percent of GNI; 1995–2013 series).
- Policy implications:
  - Hartwick rule: Maintain positive Genuine Saving.
  - Fiscal rules: save resource rents; intergenerational equity.
  - Revenue mobilization: broad, diversified revenue bases; develop instruments to capture resource rents.
  - Effective public investment in infrastructure, education.
  - Sound public financial and investment management.
  - Taxation and market instruments to deal with externalities due to national and global environmental externalities.
- Emissions:
  - Asia accounts for 45 percent of CO2 emissions in 2013: Developed Asia 6.41; Developing Asia 38.2; ROA 55.4; total emission 35.8 million kt.

### VIII. Scaling Up Infrastructure Investment (DIG model application)
- DIG model links public investment and growth; includes:
  - adjustment costs to investment
  - inefficiencies in revenue collection
  - investment management
- Scaling up public infrastructure options:
  - Gradual vs frontloaded
  - Tax vs debt-financed
  - The role of raising revenue collection efficiency
- Summary of results:
  - A gradual scaling up of public investment is preferable: governments learn how to invest, gradually raising efficiency, and accelerating public capital accumulation.
  - Front-loaded investment is costly because of absorptive capacities, low collection efficiencies, higher tax rates needed.
  - Less distortionary tax financing (VAT), together with (mainly external) debt financing of public investment are best for growth, though debt increases.
- Importance of tax collection efficiency:
  - Raising public investment efficiency and tax collection together allows more revenue at unchanged tax rates via strengthened compliance, broadened bases, fewer exemptions.
  - Revenue improvements narrow the gap between effective tax rates and statutory rates.

### IX. Model Calibration and Baseline Results (selected figures)
- Table 1: Selected initial values (%) for Cambodia, Sri Lanka, Vietnam (selected entries):
  - Public investment to GDP i z,o: 8.1 (Cambodia), 4.8 (Sri Lanka), 7.4 (Vietnam)
  - Public domestic debt to GDP b o: 0.4 (Cambodia), 43.7 (Sri Lanka), 23.7 (Vietnam)
  - Public concessional debt to GDP d o: 33.4 (Cambodia), 21.0 (Sri Lanka), 2.5 (Vietnam)
  - Public external (commercial) debt to GDP d c,o: 0.0 (Cambodia), 8.3 (Sri Lanka), 21.6 (Vietnam)
  - Grants to GDP G o: 3.0 (Cambodia), 0.1 (Sri Lanka), 3.5 (Vietnam)
  - Remittances to GDP R o: 1.3 (Cambodia), 10.1 (Sri Lanka), 7.4 (Vietnam)
  - Consumption tax (VAT) τ c o: 10.0 (Cambodia), 15.0 (Sri Lanka), 10.0 (Vietnam)
  - VAT revenue loss θ c o: 46.0 (Cambodia), 74.6 (Sri Lanka), 7.0 (Vietnam)
  - Public investment efficiency s o: 32.1 (Cambodia), 85.2 (Sri Lanka), 70.4 (Vietnam)
  - Return on public infrastructure investment R o: 34.0 (Cambodia), 27.0 (Sri Lanka), 22.0 (Vietnam)
- Table 2: Impact on growth and public debt after 15 years (selected outcomes):
  - Cambodia, Gradual: Avg. growth 0.25 (Taxes only), 0.24 (Dom. Debt), 0.31 (Ext. debt), 0.26 (VAT/Debt), 0.21 (Taxes/Debt); Δ (public debt/GDP) -0.62, 23.65, 17.41, 15.32, 17.56 (some scenarios marked NF).
  - Cambodia, Aggressive: Avg. growth 0.14, 0.13, 0.22, 0.12, 0.09; Δ (public debt/GDP) -0.34, 26.30, 18.25, 21.78, 21.95 (some NF).
  - Sri Lanka, Gradual: Avg. growth 0.57, 0.56, 0.65, 0.56, 0.53, 0.60, 0.56; Δ (public debt/GDP) -3.02, 20.26, 12.70, 13.47, 13.71, 14.42, 13.42.
  - Sri Lanka, Aggressive: Avg. growth 0.36, 0.35, 0.44, 0.37, 0.33; Δ (public debt/GDP) -1.89, 25.32, 14.77, 19.70, 18.15 (some NF).
  - Vietnam, Gradual: Avg. growth 0.39, 0.36, 0.45, 0.42, 0.38, 0.42, 0.40; Δ (public debt/GDP) -1.34, 18.57, 11.04, 6.68, 8.12, 5.32, 5.95.
  - Vietnam, Aggressive: Avg. growth 0.23, 0.21, 0.30, 0.25, 0.26, 0.27, 0.24; Δ (public debt/GDP) -0.79, 23.29, 12.75, 15.70, 16.07, 12.94, 10.64.
- Higher revenue collection efficiency enables countries to address large infrastructure needs while maintaining debt sustainability:
  - Tax revenue productivity (Revenue in percent of GDP divided by tax rate) and Effective Tax Rates (percent) shown for Cambodia, Sri Lanka, Vietnam, Average Asia.

### X. Adjusted Net Saving and Natural Resource Depletion in Asia and ASEAN
- Accounting and trends:
  - Asia: Small gap between ANS and NNS overall (NNS and ANS, percent of GNI, 2001–2014 series).
  - ANS lower than NNS in developing Asia (scatter 2010-14 average).
  - NNS and ANS in developing Asia and ASEAN shown over 2001–2014 (percent of GNI).
- Natural resource depletion:
  - Asia: natural resource depletion series 1995–2013 (Net forest depletion, Energy depletion, Mineral depletion, Total).
  - Developing Asia: Energy resource depletion series 1995–2013.
  - ASEAN: Natural resource depletion series 1995–2013.
- Net national savings and adjusted net savings definitions and decomposition reiterated.

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_Source: https://www.imf.org/-/media/files/news/seminars/2b_presenter_mourouras.pdf_