Structural reforms key to raising Asia's potential growth

IN 2015, the Asia-Pacific region continued to set the pace for the world economy, accounting for 60 per cent of global growth. Asia's strength comes in spite of an atmosphere of mediocre global output. But as the region faces strong global headwinds, it must make increased efforts to boost productivity through a recommitment to structural reforms.

New ADB (Asian Development Bank) research demonstrates that in the absence of stronger efforts at reforms, potential growth - that is, the maximum level of economic output consistent with full employment and stable inflation in the absence of any pickup in the pace of reforms - in many Asian economies is likely to be lower than the period immediately before the Global Financial Crisis (GFC).

Why is it useful to acknowledge the challenge of declining potential growth? For one thing, when a country's actual growth is below potential it would be appropriate to use monetary and fiscal stimulus to raise the actual growth to be closer to the potential. On the other hand, if actual growth is at or near potential, structural reforms to increase potential should take priority over stimulus by monetary or fiscal policies.