## apd-reo-full-text-1018

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### Headline findings
- Asia accounts for more than 60 percent of world growth and is projected to grow at 5.6 percent in 2018 and 5.4 percent in 2019.
- The synchronized global recovery of recent years is starting to fade; risks to the Asian and global forecast are tilted to the downside, reflecting increased financial market volatility, rising trade tensions, and slowing momentum in China.
- Asia’s rapid structural transformation over the past five decades relied on integration via trade and FDI, high savings rates, large investments in human and physical capital, and sound macroeconomic policies.
- Overall per capita income in Asia still substantially lags that in the United States and Europe, despite rapid growth and technological advances in several Asian economies.

### Near- and medium-term outlook and risks
- World growth: 2.4 percent in 2018 before easing to 2.1 percent in 2019.
- Emerging market and developing economies growth: 4.7 percent in both 2018 and 2019.
- Asia projected to grow by 5.6 percent in 2018 (unchanged from April) and 5.4 percent in 2019, down by 0.2 of a percent from April.
- Country projections (selected):
  - China: 6.6 percent for 2018; revised from 6.4 to 6.2 percent for 2019.
  - Japan: 2018 growth marked down from 1.2 to 1.1 percent.
  - India: 7.3 percent in FY2018/19 and 7.4 percent in FY2019/20; revised down by 0.1 and 0.4 percentage point, respectively.
- Inflation: projected to increase to 2.7 percent in 2018 and 2.9 percent in 2019.
- Foreign reserves: most economies, except China, Indonesia, and the Philippines, increased holdings so far in 2018.
- Financial conditions: 2018 cumulative portfolio flows far below 2016–17, with large outflows during Q2; Asian equity indices and exchange rates negatively affected by trade tensions; bond yields and spreads generally increased.

### Principal near- and medium-term risks emphasized
- Increased financial market volatility.
- Rising trade tensions and the possibility of a pronounced and protracted slowdown in trade if tariffs escalate and economies move toward autarky.
- Slowing momentum in China.
- Signs that global trade is slowing as the global expansion becomes less synchronized.

### Trade tensions: scenarios and modeled impacts
- Baseline scenario: United States tariffs on steel and aluminum; products imported from China worth $50 billion subject to a 25 percent tariff and retaliation; further $200 billion in imports from China subject to a tariff starting at 10 percent and rising to 25 percent by year-end; China’s tariffs on an additional $60 billion of US imports. These are included in the World Economic Outlook baseline projections.
- Escalation scenario: United States imposing a 25 percent tariff on a further $267 billion of imports from China and China responding such that all goods imports from the United States face a 25 percent tariff (roughly $130 billion in US imports).
- Auto sector tariffs scenario: United States imposing a 25 percent tariff on all imported cars and car parts (worth about $350 billion) and retaliation.
- Additional model layers: adding potential confidence effects on firms’ investment plans; adding potential tightening in financial conditions for corporates.
- Illustrative peak GDP losses if all channels (enacted and proposed tariffs, retaliation, confidence and financial market effects) were in play:
  - 1.6 percent in China
  - close to 1 percent in the United States
  - 0.9 percent for Asia as a whole
- IMF Flexible System of Global Models simulations suggest tighter financial conditions could lower Asia’s GDP by as much as three-quarters of a percentage point.
- Model outputs: recently enacted measures show small but material GDP impacts; additional tariffs and escalation, plus confidence and market effects, show substantially larger GDP losses, particularly for China and affected Asian economies.

### Trade liberalization scenarios and potential gains
- Three illustrative scenarios (IMF 2018b):
  - China eliminates goods tariffs and reduces nontariff barriers on services for all of its trading partners.
  - All Asian economies open up similarly to each other.
  - All Asia opens up to the whole world and possibly liberalizes FDI restrictions as well.
- In the most ambitious scenario:
  - Asia’s GDP would rise on average by nearly 12 percent.
  - Some economies could see output increases approaching 20 percent.
- Priority reforms to realize gains:
  - Reduce nontariff barriers to services trade.
  - Liberalize investment regimes.
  - Promote intraregional integration and increased focus on final demand within the region.

### Long-term structural challenges
- Trade: a pronounced and protracted slowdown in trade would substantially reduce global growth and leave Asia vulnerable given its trade-driven growth model.
- Demographics: population aging—some economies (India, Indonesia, the Philippines) still benefit from young populations, while Japan, Korea, Thailand, and several others are well past their demographic dividend; risk of “growing old before they grow rich.”
- Productivity: slowing productivity growth driven by declining R&D investment, trade openness, FDI, and firm-level misallocation (including declining firm dynamism).
- Digitalization: offers major benefits and risks—could be a key driver of productivity and welfare but may cause labor dislocation and financial stability concerns.

### Firm dynamism, “zombie” firms, and productivity (Chapter 7 highlights)
- Post-global financial crisis productivity slowdown observed across Asia, most severe in advanced economies and China.
- Firm-level findings (Orbis data for China, Japan, Korea, Malaysia, the Philippines, and Thailand, 2003–15):
  - The share of young firms has fallen.
  - The share of “zombie” firms (aged 10 years or older with ICR < 1 for three consecutive years) has risen, though not to levels seen in Italy and Spain.
  - Young firms tend to have higher productivity growth.
  - Zombie firms have low productivity growth and tend to reduce productivity of other firms by absorbing resources.
- Firm-level characteristics associated with higher productivity:
  - Investing more in intangible assets (for example, R&D).
  - Belonging to exporting sectors.
  - Being foreign-owned.
- Econometric evidence: negative effect of precrisis leverage on post-GFC TFP growth (illustrated as percentage points in source figures).

### Policy recommendations (macro and structural)
- Macro building blocks:
  - Keep monetary policy accommodative in most economies given low inflation and increasing downside risks to a still-strong growth outlook.
  - Fiscal policy should increasingly focus on building buffers.
  - Exchange rates should be kept flexible; use foreign exchange intervention only to deal with disorderly market conditions.
  - Economies with rising inflation or volatile capital flows should maintain a tight monetary stance.
- Financial stability:
  - Address by appropriate micro- and macro-prudential measures.
  - Some central banks raised policy rates; others intervened to support currencies.
- Structural reforms and firm policies:
  - Ensure active entry and exit so that nonviable “zombie” firms do not absorb resources.
  - Help firms address debt overhang and facilitate judicious debt resolution and corporate restructuring.
  - Foster innovation and trade openness to revive productivity growth.
  - Improve insolvency regimes, remove support schemes that keep distressed firms in operation, lift barriers to competition, and promote labor market flexibility.
  - Consider tax measures that shift capital structure from debt to equity (for example, an allowance for corporate equity).
- Trade and investment liberalization:
  - Policymakers could offset declining external demand by liberalizing their own trade and investment regimes, particularly in services, to boost global and intraregional trade.
  - Reinvigorated commitment to an open, stable, rules-based international trade system would enhance productivity and raise incomes.

### The digital revolution: contributions, risks, and policy priorities (Chapter 5 highlights)
- Digital contribution to growth:
  - Digital innovation accounted for about 28 percent of per capita growth in Asia (1995–2016).
  - The ICT sector is relatively large in many Asian economies; Asia is home to seven of the world’s top 10 economies in terms of the ICT share of GDP.
  - The ICT sector has been growing substantially faster than overall GDP—twice as fast in India and Thailand, and nearly four times as fast in Japan.
  - A 1 percent increase in the overall digitalization of the Chinese economy is associated with a 0.3 of a percent increase in GDP growth.
- Automation and robots:
  - Two-thirds of the world’s industrial robots are employed in Asia.
  - China accounts for some 30 percent of the market.
  - In 2016, China, Japan, and Korea each employed more robots than the United States.
  - Japan and Korea are the world’s top two producers of industrial robots, with market shares of 52 and 12 percent, respectively.
  - Robot density is high and rising fast in several Asian economies; Korea and Singapore are global leaders in robot density.
- E-commerce and firm outcomes:
  - China’s share of global e-commerce retail transaction value grew from less than 1 percent about a decade ago to more than 40 percent.
  - E-commerce penetration in China: 15 percent of total retail sales; United States: 10 percent.
  - In 2016, mobile payments for consumption purchases totaled $790 billion in China, 11 times the size of such payments in the United States.
  - Firm-level econometric results: participation in online commerce is associated with more than a 30 percent increase in total factor productivity at the firm level in Asia, and an increase in the share of exports in total sales by about 2 units (a 50 percent rise).
- Fintech benefits and risks:
  - Benefits: strengthens financial development, inclusion, and efficiency; fintech-enabled micro loans and bookkeeping can reduce costs and expand outreach; may improve cross-border payments and remittances.
  - Risks: can undermine competition, monetary policy transmission, financial stability and integrity, and consumer protection; migration of activities outside the regulated sector; cryptoassets pose risks related to money laundering, tax evasion, circumvention of capital controls, and other illicit activity; cyber risks will increase.
- Public finance implications:
  - Digitalization correlates with good institutions and can improve VAT, tariff, and other revenues via better transaction reporting.
  - Estimated import-VAT revenue gains from moving halfway to the global digitalization frontier (2016):
    - For Asian economies overall, import VAT revenue could rise by 0.6 of a percent of GDP.
    - For Asian small states (PICs & small states), estimated revenue gains are on the order of 2½ percent of GDP.
- Policy priorities for the digital age:
  - Revamp education for flexible skills and lifelong learning; create new training programs, especially for adversely affected workers.
  - Reduce skill mismatches and invest in physical and regulatory infrastructure that spurs competition and innovation.
  - Address labor market and social challenges, including income redistribution and safety nets.
  - Regional and international cooperation, and targeted domestic policies, to harness digitalization while managing risks.

### Conclusion
- Asia faces important near-term downside risks and fundamental long-term challenges that may require a shift in the region’s growth model.
- With appropriate policy responses—prudent macro policy, trade and investment liberalization, measures to boost firm dynamism and productivity, and policies to harness digitalization—Asia should be well placed to remain at the forefront of global growth over the coming decade and beyond.

*International Monetary Fund, Regional Economic Outlook: Asia and Pacific, October 2018 — apd-reo-full-text-1018.*

### 1.   Overview                                                                                                           

### 1. Overview

### Headline findings
- Asia accounts for more than 60 percent of world growth and is projected to grow at 5.6 percent in 2018 and 5.4 percent in 2019.
- The synchronized global recovery of recent years is starting to fade; risks to the Asian and global forecast are tilted to the downside, reflecting increased financial market volatility, rising trade tensions, and slowing momentum in China.
- Asia has achieved rapid structural transformation over the past five decades through integration with the global economy via trade and foreign direct investment (FDI), high savings rates, large investments in human and physical capital, and sound macroeconomic policies.
- Overall per capita income in Asia still substantially lags that in the United States and Europe, despite rapid growth and technological advances in several Asian economies.

### Near- and medium-term risks emphasized
- Increased financial market volatility.
- Rising trade tensions; possibility of a pronounced and protracted slowdown in trade if tariffs escalate and economies move toward autarky.
- Slowing momentum in China.
- Signs that global trade is slowing as the global expansion becomes less synchronized.

### Long-term structural challenges
- Trade: a potential pronounced and protracted slowdown in trade would substantially reduce global growth and leave Asia vulnerable given its trade-driven growth model.
- Demographics: population aging—some economies (India, Indonesia, the Philippines) still benefit from young populations, while Japan, Korea, Thailand, and several others are well past their demographic dividend; risk of “growing old before they grow rich.”
- Productivity: slowing productivity growth driven by declining R&D investment, trade openness, FDI, and firm-level misallocation of resources (including declining firm dynamism).
- Digitalization: offers major benefits and risks—could be a key driver of productivity and welfare but may cause labor dislocation and financial stability concerns.

### Key policy recommendations
- Strengthen macro building blocks:
  - Keep monetary policy accommodative in most economies given low inflation and increasing downside risks to a still-strong growth outlook.
  - Fiscal policy should increasingly focus on building buffers.
  - Exchange rates should be kept flexible.
  - Economies with rising inflation or volatile capital flows should maintain a tight monetary stance.
- Liberalize trade and investment:
  - Model simulation exercises suggest recent tariff actions and proposals could weigh heavily on growth: the impact on China’s output could be up to 1.6 percent over the first two years, and for the region as a whole, GDP could drop by up to 0.9 percent (short-term policy stimulus is expected to offset much of the impact, and the effects would fade over time).
  - Policymakers could offset declining external demand by liberalizing their own trade and investment regimes, particularly in services, to boost global and intraregional trade.
- Strengthen productivity prospects:
  - Ensure active entry and exit so that nonviable “zombie” firms do not absorb resources better deployed elsewhere.
  - Help firms address debt overhang.
  - Foster innovation and trade openness to revive productivity growth.
- Seize digitalization opportunities while managing spillovers:
  - Digital innovation has accounted for nearly one-third of Asia’s per capita growth over the past two decades.
  - E-commerce is associated with higher firm productivity; digitalization is improving revenue collection and expenditure targeting.
  - Aggregate labor dislocations have been less pronounced than feared, but policies are needed to soften labor-market impacts and enhance financial stability.
  - Improve education, infrastructure, and regulatory environments to allow digitalization to be an even stronger engine of growth.

### Conclusion
- Asia faces important near-term downside risks and fundamental long-term challenges that may require a shift in the region’s growth model. With appropriate policy responses—prudent macro policy, trade and investment liberalization, measures to boost firm dynamism and productivity, and policies to harness digitalization—Asia should be well placed to remain at the forefront of global growth over the coming decade and beyond.

*International Monetary Fund, Regional Economic Outlook: Asia and Pacific, October 2018 — 1. Overview.*

### 2.4 percent in 2018 before easing to 2.1 percent

### 2.4 percent in 2018 before easing to 2.1 percent

### Global and Regional Overview
- World growth: 2.4 percent in 2018 before easing to 2.1 percent in 2019 as output gaps close and monetary policy becomes less accommodative.
- Emerging market and developing economies are projected to grow at 4.7 percent in both 2018 and 2019.
- Risks have shifted to the downside, tied particularly to tightening financial conditions and rising trade tensions.
- Differential country prospects reflect the impact of higher oil prices, tighter financial conditions, and idiosyncratic domestic factors.

### Recent Developments in the Region
- Growth in 2018:H1 was softer than in 2017, especially in advanced economies; growth remained robust in emerging market economies and broadly in line with expectations.
- China: After rising to 6.9 percent in 2017, growth continued strong into 2018:H1 but likely slowed since, given weakening investment growth.
- Japan: After exceeding potential for two years, growth dropped into negative territory in 2018:Q1 before rebounding sharply in 2018:Q2.
- India: Growth continues to recover steadily after disruptions related to demonetization and the rollout of the goods and services tax.
- ASEAN-4 (Indonesia, Malaysia, the Philippines, Thailand): Growth generally lost momentum in 2018:H1, except in Thailand.
- Inflation and trade: Headline inflation inched up in several economies due to higher oil prices and currency depreciation; export growth generally slowed in early 2018 while current account balances narrowed on higher oil prices.
- Foreign reserves: Most economies, except China, Indonesia, and the Philippines, increased holdings of foreign reserves so far in 2018.
- Financial conditions: Tightened, especially in Asian emerging market and developing economies, due to US policy normalization, rising global trade tensions, and volatility in some large emerging market economies.
  - 2018 cumulative portfolio flows far below 2016–17, with large outflows during Q2.
  - Asian equity indices and exchange rates were negatively affected by trade tensions; bond yields and spreads generally increased.
  - Some central banks raised policy rates; others intervened to support currencies.
  - Recent volatility comparable in some respects to the taper tantrum, but Asia affected much less than other regions and more tied to developments in China.

### Asia’s Near-Term Outlook
- Asia projected to grow by 5.6 percent in 2018 (unchanged from April) and 5.4 percent in 2019, down by 0.2 of a percent from April.
- China: Projected growth remains at 6.6 percent for 2018; marked down from 6.4 to 6.2 percent for 2019.
- Japan: 2018 growth marked down from 1.2 to 1.1 percent.
- India: Projected to grow at 7.3 percent in FY2018/19 and 7.4 percent in FY2019/20; revised down by 0.1 and 0.4 percentage point, respectively, on account of higher oil prices and further monetary policy tightening.
- ASEAN-4: Growth projections revised down except in Thailand.
- Inflation: Projected to increase to 2.7 percent in 2018 and 2.9 percent in 2019, reflecting higher commodity prices; inflation expected to remain below target in several economies.
- Current account balances: Expected to narrow with higher oil prices.

### Risks to the Forecast (Near-Term and Medium-Term)
- Balance of risks shifted to the downside in the near term and remains tilted to the downside over the medium term.
- Sources of near-term downside risks include:
  - Escalating trade tensions:
    - United States announced tariffs on products imported from China worth $50 billion subject to a 25 percent tariff; China announced retaliation on a similar scale.
    - On September 17, the United States announced a further $200 billion in imports from China subject to a tariff starting at 10 percent and rising to 25 percent from January 2019; China announced tariffs on an additional $60 billion of US imports.
    - The United States has suggested a further $267 billion of goods may be hit with tariffs, and has proposed tariffs on the automotive sector.
    - Sustained trade tensions could undermine confidence, hurt financial markets, disrupt supply chains, and discourage investment and trade.
    - Model simulations suggest growth in Asia could drop by up to 0.9 of a percent over the next couple of years.
  - Tighter global financial conditions:
    - Higher-than-expected US inflation could lead the US Federal Reserve and other advanced-economy central banks to tighten faster than markets price in.
    - Deterioration of risk appetite, rising trade tensions, and political/policy uncertainty could lead to tighter financial conditions, reduced capital flows, and higher funding costs.
    - IMF Flexible System of Global Models simulations suggest tighter financial conditions could lower Asia’s GDP by as much as three-quarters of a percentage point.
  - Homegrown risks:
    - China: trade-off between stabilizing growth and deleveraging could slow deleveraging and heighten medium-term risks.
    - Other economies face domestic risks including high private-sector leverage in Korea, inflated real estate markets in Australia and Hong Kong SAR, and slower-than-envisaged implementation of structural reforms in India.

### Policy Recommendations to Build Resilience
- Maintain expansion, contain risks, and strengthen resilience to downside risks while raising medium-term growth and inclusiveness.
- Preserve international and regional collaboration.
- Policy priorities (tailored by cyclical positions, structural constraints, and policy space):
  - Allow exchange rates to move flexibly and act as shock absorbers; use foreign exchange intervention only to deal with disorderly market conditions.
  - Monetary policy: With low inflation and negative output gaps in most advanced economies in the region, monetary policy should generally remain accommodative; a tighter stance warranted where inflation is rising or where capital flows remain volatile and balance sheets show significant currency mismatches.
  - Financial stability: Address by appropriate micro- and macro-prudential measures.
  - Fiscal policy: Focus on building buffers, supporting inclusive long-term growth, and reducing excessive external imbalances.
  - Structural reforms: Pursue reforms to raise potential output and productivity, boost labor force participation (including females), and ensure opportunities for all segments of society.
    - Priority reform areas: trade liberalization, measures to boost firm dynamism, and policies to harness the benefits of digitalization while addressing financial and labor market disruptions.

### The Evolving Role of Trade in Asia
- Asia’s heavy reliance on trade and integration in global value chains have been critical to the region’s growth.
- Rising incomes and wages, a less buoyant medium-term outlook in advanced economies, and slower reallocation out of labor-intensive sectors (especially in China) suggest the need for Asia to reconsider an export-oriented growth model.
- Secular decline in manufacturing’s share in employment and the rise of automation point to a needed shift toward tradable services.
- Increasingly inward-looking policies in advanced economies (recent tariffs and investment-related actions) weigh on growth, particularly in China, though Chinese policy stimulus may offset some impact.
- Reinvigorated commitment to an open, stable, rules-based international trade system and global trade liberalization would enhance productivity and raise incomes.
- Trade restrictiveness and “trade costs” remain high in Asia despite progress in cutting goods tariffs and nontariff barriers; reform in areas such as agriculture and opening services and digital trade could boost intraregional and global trade.

### Key Findings from Background Trade Analysis
- Trade openness rose sharply starting in the late 1990s and early 2000s but has plateaued, and in some cases declined, since the global financial crisis—reflecting the global trade slowdown and maturing global value chains, particularly in China.
- Two complementary models examining trade policy changes (consistent with the October 2018 World Economic Outlook) find:
  - Effects of recently enacted tariffs and retaliation are small but material, especially for China.
  - GDP losses would rise substantially should additional tariffs be implemented, and particularly so if business confidence and market effects are added.

### Trade-Tension Scenarios (as modeled)
- Baseline scenario: Measures already implemented by the United States on steel and aluminum; products imported from China worth $50 billion subject to a 25 percent tariff and retaliation; further $200 billion in imports from China subject to a tariff starting at 10 percent and rising to 25 percent by year-end; China’s tariffs on an additional $60 billion of US imports. These are included in the World Economic Outlook baseline projections.
- Escalation scenario: United States imposing a 25 percent tariff on a further $267 billion of imports from China and China responding by raising the base and rates such that all goods imports from the United States face a 25 percent tariff (roughly $130 billion in US imports).
- Auto sector tariffs scenario: United States imposing a 25 percent tariff on all imported cars and car parts (worth about $350 billion) and retaliation.
- Additional layers: Adding potential confidence effects on firms’ investment plans; adding potential tightening in financial conditions for corporates.
- Model outputs (illustrative): Red lines (recently enacted measures) show small but material GDP impacts, green and yellow lines (additional tariffs and escalation, plus confidence and market effects) show substantially larger GDP losses, particularly for China and affected Asian economies.

*Source: IMF, Regional Economic Outlook: Asia and Pacific, October 2018 (apd-reo-full-text-1018).*

### 7. Indonesia

### 7. Indonesia

### Trade tensions and peak GDP impacts
- If all channels (enacted and proposed tariffs, retaliation, confidence and financial market effects) were in play, peak GDP losses would be:
  - 1.6 percent in China
  - close to 1 percent in the United States
  - 0.9 percent for Asia as a whole
- For many economies in Asia, output effects of tariffs fade after a few years, but there could be substantial lasting effects in China, Korea, and the United States.
- Aggregate short-term job losses would likely be limited, but certain sectors—particularly those targeted by specific tariffs—could see sizable impacts.

### Trade liberalization scenarios and potential gains
- IMF (2018b) illustrates three scenarios:
  - China eliminates goods tariffs and reduces nontariff barriers on services for all of its trading partners.
  - All Asian economies open up similarly to each other.
  - All Asia opens up to the whole world and possibly liberalizes FDI restrictions as well.
- In the most ambitious scenario:
  - Asia’s GDP would rise on average by nearly 12 percent.
  - Some economies could see output increases approaching 20 percent.
- Priority reforms to realize gains:
  - Reduce nontariff barriers to services trade.
  - Liberalize investment regimes.
  - Promote intraregional integration and increased focus on final demand within the region.

### Productivity growth in Asia: firm dynamism and zombies
- Post-global financial crisis productivity slowdown observed across Asia, most severe in advanced economies and China.
- Firm-level analysis (Orbis data for China, Japan, Korea, Malaysia, the Philippines, and Thailand, 2003–15) highlights:
  - The share of young firms has fallen.
  - The share of “zombie” firms (aged 10 years or older with ICR < 1 for three consecutive years) has risen, though not to levels seen in Italy and Spain.
  - Young firms tend to have higher productivity growth.
  - Zombie firms have low productivity growth and tend to reduce productivity of other firms by absorbing financial, labor, and other resources.
- Firm-level characteristics associated with higher productivity:
  - Investing more in intangible assets (for example, R&D).
  - Belonging to exporting sectors.
  - Being foreign-owned.
- The global financial crisis had a lasting negative impact on firm productivity, working through a financial channel: more highly leveraged firms had persistently lower tangible and intangible investment, leading to lower productivity growth.

### Key statistics from figures and analysis
- Peak responses to trade tensions are generally from 2020.
- Figure references and quantitative highlights:
  - Peak GDP losses: 1.6 percent (China); close to 1 percent (United States); 0.9 percent (Asia as a whole).
  - In trade liberalization with eased FDI restrictions, Asia’s GDP increase: nearly 12 percent (average); some economies approaching 20 percent.
  - Definition used for zombie firms follows McGowan and others (2017): aged 10 years or older and ICR less than one for three consecutive years.
  - The econometric evidence shows a negative effect of precrisis leverage on post-GFC TFP growth (illustrated as percentage points in Figure 16).

### Policy implications and recommendations
- Foster firm dynamism:
  - Improve insolvency regimes and remove support schemes that keep distressed firms in operation.
  - Lift barriers to competition in goods markets.
  - Promote increased labor market flexibility.
- Address debt overhang and avoid excessive leverage:
  - Facilitate judicious debt resolution and corporate restructuring to address weak balance sheets.
  - Adopt proper institutional frameworks and supportive tax measures.
  - Introduce appropriate micro- and macro-prudential regulations to contain leverage.
  - Consider tax measures that shift capital structure from debt to equity (for example, an allowance for corporate equity) to reduce leverage and boost investment in tangible and intangible capital.
- Foster innovation and trade openness:
  - Broaden fiscal incentives for R&D where appropriate.
  - Strengthen intellectual property rights regimes while avoiding undue limits on competition.
  - Continue opening economies to international trade and foreign investment to stimulate competition and knowledge transfer and support higher TFP growth.
  - Recognize that current trade tensions could dampen intangible capital deepening in Asia by increasing policy uncertainty for firms.

*International Monetary Fund | Regional Economic Outlook: Asia and Pacific (October 2018), Chapter 7.*

### 5. The Digital Revolution

### 5. The Digital Revolution in Asia: Disruptor or New Growth Engine (or Both)?

### Overview
- The digital revolution is driven by advances in artificial intelligence, robotics, computing power, cryptography, and the explosion of big data.
- These technological advances are multiple and overlapping, creating synergies and accelerating outcomes across all sectors and activities of the economy.
- History suggests benefits from such revolutions may be observed only with a delay—after a sufficient stock of the new technology and complementary innovations and capital investments are built up—and disruptions may also take place only over time.
- The section is based on IMF 2018d.

### The Digital Landscape in Asia
- Asia exhibits the highest dispersion of economies in terms of adoption of digital technologies; nonetheless, at any given income level, Asian economies are at the frontier relative to global peers.
- Several Asian economies with currently low levels of digital usage are increasing those levels rapidly.
- Automation via industrial robots:
  - A full two-thirds of the world’s industrial robots are employed in Asia.
  - China is now the single biggest user, accounting for some 30 percent of the market.
  - In 2016, China, Japan, and Korea each employed more robots than the United States.
  - Robot density (the number of industrial robots per 1,000 workers) is high and rising fast in several Asian economies; Korea and Singapore are the global leaders in robot density, followed by Germany and Japan.
  - Japan and Korea are the world’s top two producers of industrial robots, with market shares of 52 and 12 percent, respectively.
- E-commerce and fintech leadership:
  - China’s share of global e-commerce retail transaction value grew from less than 1 percent about a decade ago to more than 40 percent.
  - E-commerce penetration in China stands at 15 percent (as a share of total retail sales), compared to 10 percent in the United States.
  - In 2016, mobile payments made by individuals for consumption purchases totaled $790 billion in China, 11 times the size of such payments in the United States.
  - Prior to tightened regulations, more than 90 percent of Bitcoin trading volumes were against the renminbi.
  - Some small states in the region have been approached by private investors to adopt cryptoassets as legal tender, raising legal and regulatory concerns.

### Asia’s Growth and the Digital Contribution
- Diffusion of global innovation was the key driver of growth in Asia over the past two decades; digital innovation alone accounted for about 28 percent of per capita growth (1995–2016).
- The ICT sector is relatively large in many Asian economies; Asia is home to seven of the world’s top 10 economies in terms of the ICT share of GDP.
- The ICT sector has been growing substantially faster than overall GDP—twice as fast in India and Thailand, and nearly four times as fast in Japan.
- Digitalization can boost productivity in non-ICT sectors:
  - A 1 percent increase in the overall digitalization of the Chinese economy is associated with a 0.3 of a percent increase in GDP growth.

### Automation and the Future of Work
- IMF (2018d), using an approach pioneered by Acemoglu and Restrepo (2017), analyzes robot usage and manufacturing employment:
  - Overall, there is no evidence that robots destroy jobs on net globally—the productivity-enhancing effects have offset displacement effects.
  - Restricting attention to Asia, there is a slight negative impact on overall manufacturing employment, particularly in heavily automated sectors like electronics and automobiles.
  - Workers with medium-level education (upper secondary and postsecondary non-tertiary) are more vulnerable to displacement than those with either low or high education levels.
  - In Japan, increased robot density in manufacturing is associated with greater productivity and local gains in employment and wages—Japan’s experience suggests that economies with aging populations (for example, China, Korea, and Thailand) may also benefit from automation.

### E-commerce as a Growth Driver
- E-commerce can support growth and rebalancing:
  - For consumers, better access to a wider range of products and services at lower prices can boost consumption.
  - McKinsey (Dobbs and others 2013) finds that in China, while 60 percent of internet spending represents purchases diverted from traditional retail to online channels, close to 40 percent represents incremental (new) consumption.
  - For firms, e-commerce provides new business opportunities and access to larger markets, supporting investment.
- Firm-level econometric results (IMF 2018d):
  - Participation in online commerce is associated with more than a 30 percent increase in total factor productivity at the firm level in Asia.
  - Participation in online commerce is associated with an increase in the share of exports in total sales by about 2 units, corresponding to a 50 percent rise.
  - E-commerce appears especially beneficial for small firms in Asia.

### Digitalization of Finance (Fintech)
- Potential benefits:
  - Fintech can strengthen financial development, inclusion, and efficiency, enabling individuals and SMEs to leapfrog access to financial services via cell phones.
  - Fintech-enabled micro loans and accessible bookkeeping tools can reduce costs and expand outreach.
  - Fintech may improve cross-border payments and remittances, reduce counterparty risk, and decrease costs for market participants.
- Risks:
  - Fintech applications can undermine competition, monetary policy transmission, financial stability and integrity, and consumer and investor protection.
  - Technologies may disrupt established financial institutions and lead to migration of activities outside the regulated sector.
  - Economies with greater propensity for technological leapfrogging have tended to see falling levels of traditional financial infrastructure, particularly bank branches.
  - Large Asian tech firms (for example, Alibaba, Tencent, Baidu, and GO-JEK) have become important providers of financial services, increasing competitive pressures on traditional institutions.
  - Cryptoassets pose risks related to money laundering, tax evasion, circumvention of capital controls, and other illicit activity; cyber risks will increase as the financial system digitizes further.

### Digitalization to Strengthen Public Finance
- Digitalization correlates with good institutions and performance and presents opportunities to improve public finance.
- Risks of erosion of the tax base can be addressed with enhanced data sharing and withholding mechanisms.
- Adoption of digitalization by governments should facilitate increases in VAT, tariff, and other revenues by improving transaction reporting.
- Estimated potential import-VAT revenue gains from moving halfway to the global digitalization frontier (2016):
  - For Asian economies overall, import VAT revenue could rise by 0.6 of a percent of GDP.
  - For Asian small states (PICs & small states), estimated revenue gains are on the order of 2½ percent of GDP.
- Digitalization can improve public financial management and the efficiency of public spending, including better targeting of social assistance.

### Policies for the Digital Age
- Policymakers must accept the inevitability of the digital revolution and strike a balance between enabling innovation and addressing risks.
- Policies to harness digital dividends include:
  - Revamping education to meet demand for more flexible skill sets and lifelong learning.
  - New training programs, especially for the most adversely affected workers.
  - Reducing skill mismatches between workers and jobs.
  - Investing in physical and regulatory infrastructure that spurs competition and innovation.
  - Addressing labor market and social challenges, including income redistribution and safety nets.
- Policy priorities differ across Asian economies due to different initial conditions; regional and international cooperation will be key.
- The IMF can play an important role in developing effective policy responses.
- Policies that soften labor market impacts can improve welfare and increase societal willingness to support transitions; with the right policies, the digital revolution could be a new engine of growth and prosperity for Asia and the world.

*Source: IMF Regional Economic Outlook: Asia and Pacific, chapter 5, “The Digital Revolution in Asia: Disruptor or New Growth Engine (or Both)?” (based on IMF 2018d).*

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_Source: https://www.imf.org/-/media/files/publications/reo/apd/2018/apd-reo-full-text-1018.pdf_