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This paper estimates fiscal multipliers using quarterly data for a panel of nine developing Asian economies, following a vector autoregression model specification, but using local projections to extract the impulse responses. We provide evidence that the 4-quarter and 8-quarter cumulative multipliers for general government spending range between 0.73 and 0.88 in baseline estimations, in line with recently reported estimates for developed countries but larger than those for developing countries. We also find that the corresponding tax multipliers range between -0.41 and -0.62, significantly smaller than recently reported estimates for developed countries but larger than those for developing countries. These results suggest that, without the stimulus measures introduced by countries around the world since the start of the COVID-19 pandemic, the global economy would have suffered even greater output loss. This paper also shows evidence that an economy's structural and transitory characteristics can affect the size of fiscal multipliers. Economies that are less open to trade, have a lower level of debt, adopt a less flexible exchange rate, or maintain accommodative monetary policy have larger spending multipliers than those that are more open to trade, have a higher debt level, adopt a more flexible exchange rate, and maintain contractionary monetary policy. However, the business cycle appears to have little effect on the size of spending multipliers. We also find that the economies with a less flexible exchange rate have larger tax multipliers. But other structural and transitory characteristics appear to not have the expected effects on tax multipliers.

This paper examines underlying factors that could explain the decline in income inequality in the People's Republic of China (PRC) since 2008 and inquires whether the decline indicates that the PRC's income inequality has peaked following the Kuznets hypothesis. The paper first identifies four key drivers of rising income inequality in the PRC since the mid-1980s: rising skill premium, declining share of labor income, increasing spatial inequality, and widening inequality in the distribution of wealth. It then provides evidence that the reversal of these drivers, with the exception of wealth inequality, could partly explain the decline in income inequality since 2008. The paper argues that since part of the reversal of these drivers is policy induced, it is important that the policy actions continue for income inequality to decline further. The paper further argues that a critical factor underlying the Kuznets hypothesis is that taxation and transfers play a bigger role in income redistribution as a country becomes more developed, while their role is still limited in the PRC, the future path of the country's income inequality may not be one directional; and reducing income inequality significantly may require personal income tax and transfers to play a greater role over time.

The central question addressed by this study is whether countries with above-average governance grew faster than countries with below-average governance. Using the World Bank’s worldwide governance indicators to measure governance performance, it examines whether a country with governance “surplus” in a given base year (1998) grew faster on average in a subsequent period (1998- 2011) than a country with governance “deficit.” Governance is defined in several dimensions, including government effectiveness, political stability, control of corruption and regulatory quality, voice and accountability, and rule of law. The study finds that government effectiveness, political stability, control of corruption and regulatory quality all have a more significant positive impact on country growth performance than voice and accountability and rule of law. Developing Asian countries with a surplus in government effectiveness, regulatory quality and corruption control are observed to grow faster than those with a deficit in these indicators—up to 2 percentage points annually, while Middle East and North African countries with a surplus in political stability, government effectiveness, and corruption control are observed to grow faster than those with a deficit in these indicators by as much as 2.5 percentage points annually. Good governance is associated with both a higher level of per capita GDP as well as higher rates of GDP growth over time. This suggests that good governance, while important in and of itself, can also help in improving a country’s economic prospects.

We estimate the People’s Republic of China’s (PRC’s potential growth rate in 2012 at 8.7% and at 9.2% for the average of 2008–2012, about the same as the average actual growth rate for this period. This rate is the natural growth rate, that is, the rate consistent with a constant unemployment rate and stable inflation. The PRC’s natural growth rate displays a downward trend since 2006, when it peaked at 11.1%. Probably the Great Recession has been an important factor, although we argue that there are other factors. We show that the PRC’s potential growth rate is not demand constrained, in particular by the balance of payments. The PRC’s potential growth rate is determined by the supply side of the economy, in particular by: (i) changes in the structure of the economy, in particular in the share of industrial employment; (ii) the working-age population; (iii) the share of net exports in gross domestic product (GDP); (iv) export growth; (v) the share of foreign direct investment (FDI) in GDP; and (vi) human capital accumulation.

This paper looks at the recent trends of rising inequality in developing Asia, asks why inequality matters, examines the driving forces of rising inequality, and proposes policy options for tackling high and rising inequality. Technological change, globalization, and market-oriented reform have driven Asia's rapid growth, but have also had significant distributional consequences. These factors have favored owners of capital over labor, skilled over unskilled workers, and urban and coastal areas over rural and inland regions. Furthermore, unequal access to opportunity, caused by institutional weaknesses and social exclusion, has compounded the impacts of these forces. All these combined have led to a falling share of labor income in national income, increasing premiums on human capital, and growing spatial disparity - all contributing to rising inequality. The three drivers of rising inequality cannot and should not be blocked, because they are the same forces that drive productivity and income growth. This paper outlines a number of policy options for Asian policy makers to consider in addressing rising inequality. These options, aiming to equalize opportunities and, thereby, reduce inequality, include efficient fiscal measures that reduce inequality in human capital, policies that work toward increasing the number and quality of jobs, interventions that narrow spatial disparity, and reforms that strengthen governance, level the playing field, and eliminate social exclusion.

This paper reviews the theoretical and empirical literature on the role of financial sector development, with a view to deepening understanding of the rationale of development assistance to the financial sector of developing countries. The review leads to the following broad conclusions: (i) there are convincing arguments that financial sector development plays a vital role in facilitating economic growth and poverty reduction, and these arguments are supported by overwhelming empirical evidence from both cross-country and countryspecific studies; (ii) there are however disagreements over how financial sector development should be sequenced in developing countries, particularly the relative importance of domestic banks and capital markets and, in developing the banking sector, the relative importance of large and small banks; (iii) while broadening the access to finance by microenterprises, small and medium-sized enterprises (SMEs), and vulnerable groups is recognized as critically important for poverty reduction, it is also widely believed that microfinance and SME credit programs need to be well designed and targeted to be effective. In particular, these programs need to be accompanied by other support services such as provision of training and capacity building, assistance in accessing markets and technologies, and addressing other market failures; and (iv) financial sector development and innovation will bring risks, and it is therefore essential to maintain sound macroeconomic management, put in place effective regulatory and supervisory mechanisms, and carry out structural reforms in developing the financial sector. The paper argues that these conclusions provide a strong justification for development assistance to target financial sector development as a priority area, and that, like any public sector intervention, such assistance should be designed to address market and nonmarket failures. The paper also highlights several areas where more research is urgently needed, in particular, how to sequence financial sector development, how to balance the need for financial innovation and that for economic and financial stability, and how to make microfinance and SME credit programs work better to reduce poverty.

Capitalizing on the most recent worldwide estimates of the impacts of climate change on agricultural production, this paper assesses the economic effects of climate change for Southeast Asian countries through 2080. The results suggest that the aggregate impacts of agricultural damages caused by climate change on the global economy are moderate. However, the uneven distribution of productivity losses across global regions would bring significant structural adjustments in worldwide agricultural production and trade, ultimately leaving the developing world as a net loser. With the anticipated declining agricultural share in the economy, a reduction in agricultural productivity would have small, but non-negligible negative impacts on Southeast Asia's economic output. However, the expected increase of crop import dependence in the coming decades would make most Southeast Asian economies suffer more welfare losses through deteriorated terms of trade. Depending on a country's economic structure, the negative effects are expected to be less for Singapore and Malaysia, but greater for Philippines, Indonesia, Thailand, and Viet Nam. For Southeast Asia to cope with the potential agricultural damages arising from the expected changes in climate the region must concentrate on reversing its current trend of declining agricultural productivity.

This paper examines the relationship between economic growth and environmental sustainability in the People’s Republic of China by empirically estimating environmental Kuznets curve (EKC) models using provincial-level panel data from 1985 to 2005. The results show that there exists an inverted-U shaped relationship as hypothesized by the EKC model between per capita income and per capita emissions (or discharges) in the cases of waste gas from fuel burning and waste water, with a turning point at per capita gross domestic product of $12,903 and $3,226, respectively, in 2005 purchasing power parity terms. This relationship does not hold in the case of waste gas from production or solid waste. The estimation results from the model allowing region-specific slope coefficients show that the EKCs of the more developed coastal region have a flatter rising portion with turning points occurring at a higher income level than those of the less developed central and western regions. The paper argues that this may reflect technology diffusion and leapfrogging and institution imitation across regions at different stages of development. Policy implications of these findings are discussed.

This overview introduces the background of the study "Inclusive Growth toward a Harmonious Society in the People's Republic of China (PRC)", under which all the papers in this special volume were prepared. It summarizes key findings of these papers as grouped into three parts: (i) Inclusive Growth and Policy Options; (ii) Balancing Efficiency and Equity Objectives: International Experiences; and (iii) Empirical Analysis of Income Inequalities in the PRC. In concluding, this overview argues that building a harmonious society is the most important development challenge that the PRC faces, and that a development strategy anchored on inclusive growth provides an effective approach to addressing this issue.

Developing Asia is embracing inclusive growth as a key development goal in response to rising inequalities and increasing concern that these could undermine the very sustainability of Asia's growth. This paper argues that inclusive growth emphasizes creation of and equal access to opportunities; and that unequal opportunities arise from social exclusion associated with market, institutional, and policy failures. A development strategy anchored on inclusive growth is outlined, consisting of two mutually reinforcing strategic pillars of high and sustainable growth to create economic opportunities, and social inclusion to ensure equal access to opportunities. This will enable developing Asia to accomplish the agenda of eradicating extreme poverty and, at the same time, address the development challenge brought about by rising inequalities. It is argued that the Asian Development Bank (ADB) should respond to the emerging needs of developing Asia by adopting inclusive growth as its overarching goal. This goal, if adopted, will require ADB to modify its corporate strategy, including its vision, mission, strategic pillars, and core operational priorities. Implications for ADB's country and regional operations are discussed.

The choice of an appropriate social discount rate for cost–benefit analysis of public projects has long been a contentious issue and subject to intense debate among economists. This debate has gained new impetus from the recent discussions on the economics of climate change. The purpose of this paper is to survey theories and practices in the choice of the social discount rate. More specifically, the paper examines economic arguments for discounting future benefits and costs and analytical approaches to the choice of the social discount rate, including how a social discount rate can be estimated empirically under each approach; and policy practices followed by countries around the world in the choice of the social discount rate. This paper is intended as a reference material on project economic analysis for ADB staff, consultants, and concerned government officials in developing member countries.