Determinants Of Growth In Emerging Economies

As per the IMF reports the developing Asia is to grow at 5.7 per cent in 2016/2017 as compared to 5.9 per cent in 2015. India being an exception with growth rate of 7.4 per cent in 2016 and projected growth rate of 7.8 per cent in 2017 due to strong public investments, appropriate measure to fund the stalled projects and upticking the bank credit despite weak exports. The government led reforms is bound to attract more foreign direct investment but a lot needs to be done to restore confidence due to weak bank balance sheets. Considering Asia as a whole the lower commodity prices dragged inflation to 2.2 per cent in 2015. But as the domestic demand rebounds the inflation would revive to 2.5 per cent in 2016 and further 2.7 per cent in 2017. The tightening of the US monetary policy and further moderation of growth rate of China may cause the financial volatility in emerging Asian economies and capital flow imbalances. Reforms to raise labor productivity will ignite the growth prospects.

Let us critically analyze the determinants of potential growth in the emerging economies in Asia

The distribution of demographics and the labor productivity are the two important determinants for the potential growth. The sum of the growth in labor force and plus growth in the potential labor productivity or output per worker determines the potential growth. As per world economic forum reports the labor productivity accounted for almost 80 per cent of the average potential growth from 2000 to 2015. The demographic changes has significant impact in some economies like Japan and India as contrast. The working age population explains about 50 per cent of potential growth in Malaysia and 47 per cent in Singapore. The empirical evidence reveals the fact that one percent point off the working age population growth shaves 1 percent point from the potential growth. It is also of paramount importance to understand what determines the labor productivity boosting the future potential growth when demographic changes becoming less favorable in the emerging economies.

Capital Accumulation through lifting labor productivity affects the potential growth
Upgrading industrial equipment, infrastructure and adopting the modern latest technologies can help the low income economies to grow much faster during the transition compared to their potential growth rate. As per IMF reports additional $1000 of initial income per capita lowers the potential growth by 0.3 per cent points. And in the process the advantage of backwardness fades through the course of development compared to the developed economies.

Amenable policy interventions affects the productivity factors
Gains in the tertiary education enrollment and trade openness can boost potential growth especially the emerging economies where there is room for improvements. International financial markets should be integrated which it is a function of quality of regulation in specific economy. Steady improvements in the institution variables coupled with government effectiveness and market flexibility can lift the potential growth.

Macro Economic Stability accelerates economic growth
The deviation between the actual growth and potential growth with bouts of accelerating inflation or deepening unemployment has negative effect on the potential growth. It is estimated that reduction in this volatility by 1 per cent would raise the potential growth dividend of nearly 0.2 per cent points. In reality the policy initiation to push the actual growth above the potential is bound to have only temporary effect on the economic productive capacity.

Efficient Labor Allocation through removal of obstacle makes economy dynamic
An economic perennial growth can only be possible when the labor/capital is allocated and utilized to the most productive firms. IMF reported through analyzing 10000 firms in 14 developing economies in Asia which corroborates the fact that obstacles like judicial bias, excessive labor regulation, disparity in access to finance, discontinuous electricity supply and inefficient decision making impedes the productive and efficient allocation of factors across wide range of firms. This might make them too large, too small; too labor intensive or too capital intensive .There has to be an honest effort to remove these obstacles to expedite the firm's efficiency and thus attaining the final goal of sustained growth.

Intensification of the demographic drag in Asia & Changes post financial crisis 2007
There has been a decline in the average potential growth in Asia by 2.2 per cent points between 2008-2014 as compare to the historic trends. In the absence of the structural reforms the potential growth across the economy may further decline due to factors like unfavorable demographics, convergence with respect to the advanced economies and slow in growth rate of China and monetary policy changes in USA …

The region initially had benefitted due to the age structure. Decline in population growth in countries like China and Japan coupled with ageing has pushed the demographic dividend into a burden. As per the United Nations projects reports the working age population will be lower in 2015 -2010 as compared to 2008-2014 which has the potential to depress the growth by 0.4 per cent points.

The Economic Slowdown of China
China world's second largest economy has a profound impact on the neighboring economy due to global nature of businesses. The empirical analysis controlling the determinants of the potential growth shows 1 percent point decline in actual growth rate as compared to 0.2 globally. Due to the rebalancing act of more consumption driven growth model its pace of expansion as per forecast is to slow down drastically which is bound to impact other neibouring economies .

The smart policy changes has potential to offset the labor squeeze
Increased female participation rates and by extending the working age can increase the percentage of the working population. Especially in economies that suffers from severe demographic changes. More flexible immigration policy can attract the skilled labor. The high labor productivity has three key components - Public and Private Investments policy and institution reforms and efficient macroeconomic management.

Capital Investments play a pivotal role in development -Investments in Infrastructure through creative financing solutions can accelerate the growth. To facilitate the private investments there has to be offering on the table through effective policy to incentivize private companies to purchase new assets. Accelerating depreciation is one of the new methods in towards this initiative.

Reforms offer scope for change in attaining the growth frontier
High quality institutions and effective policy can invigorate long term growth. The reforms like rationalizing the financial and labor markets, more transparent access to land, enhanced business environment for ease of doing business, has the potential to make firms and hence overall economy more efficient and productive. This paradigm shift will increase the growth by one percentage point annually.

Effective macroeconomic management
Sound management of the macroeconomic indicators is the foundation of growth. Lowering the volatility of actual growth with respect to the forecast potential growth can enhance the overall growth in the region. To ensure bright future in terms of growth there has to be policy responses to improve the labor supply, enhance the labor productivity, institutional quality and maintaining the overall macroeconomic stability for the growth endeavor