East Asia and the Pacific Economic Update April 2024 - Firm Foundations of Growth (English)

Developing East Asia and Pacific is growing faster than the rest of the world but slower than before the pandemic. While recovering global trade and easing financial conditions are expected to support economies in the region, increasing debt, protectionism and policy uncertainty could dampen growth. Regional growth is projected to ease to 4.5 percent in 2024 from 5.1 percent last year. Growth in developing East Asia and Pacific excluding China is projected to pick up to 4.6 percent this year from 4.4 percent in 2023. Growth in China is projected to moderate to 4.5 percent this year from 5.2 percent in 2023, because of near term problems, such as highdebt and a weak property sector, as well as longer-term challenges, such as aging and trade frictions. Growth among Pacific Island countries is forecast to decline to 3.6 percent in 2024 from 5.6 percent last year, as the post-pandemic rebound dissipates. EAP’s current macroeconomic challenges risk obscuring the microeconomic foundations of longer-term growth. Over thelast decade, growth has been driven primarily by investment rather than by increased productivity of firms. Now private investment is weak and productivity declining – further inhibiting the incentive to invest. Firms are the protagonists of productivity growth. Some of the less productive firms in EAP countries are beginning to catch up with the moreproductive ones. But the most productive firms in the region are not taking full advantage of new technologies and not seeing the productivity growth of the leading global firms. For example, in digital manufacturing sectors, such as electronics, between 2005 and 2015 the productivity of the top 5 percent of firms globally increased two-and-a-half times faster than the top firms in Indonesia, Malaysia, the Philippines and Viet Nam. Both incentives and capacity are a problem. Incentives for firms to compete and innovate have been diluted by explicit protection in services and implicit protection in goods. The capacity to manage and innovate has been undermined by the inadequacy of skills. Using industrial policies to improve incentives and capacity will be hard because both fiscal resources and institutional capability are limited. Instead, bold policy action to unleash competition, improve infrastructure and reform education could revitalize the region’s economy.