Tan Kong Yam

Fiscal sustainability and competitiveness in Europe and Asia

1. Overview 2. Fiscal Sustainability and Competitiveness: Definitions, Issues and Measures 3. Nordics 4. GIPSIs 5. North Asia and India 6. Southeast Asia 7. Drawing Lessons

Fiscal Sustainability and Competitiveness: Definitions, Issues, and Measures

This chapter explores the issue of fiscal sustainability and the nexus between public debt and export competitiveness with applications to selected European and Asian economies. The next section briefly outlines some analytical concepts relating to fiscal sustainability as well as their practical limitations. Section 2.2 directly links the issue of export competitiveness with fiscal sustainability and focuses on empirical estimates of debt thresholds. Section 2.3 uses the estimates derived to ascertain the extent of fiscal space or lack thereof in a set of country case studies in Europe and Asia. Section 2.4 concludes.

North Asia and India

The period between the Asian financial crisis and the global financial crisis (2000–07) was marked by a favourable macroeconomic environment combined with generally healthy fiscal positions and robust economic growth across most of emerging Asia (i.e., excluding Japan). The slump in 2007–08 forced several countries to opt for massive countercyclical policies to deal with the crisis, and this in turn worsened their fiscal positions. While the downturns induced by the global financial crisis proved to be temporary in Asia, there are two specific sources of domestic risk that appear to be a common denominator in most economies there. The first concerns rapidly inflating asset prices, particularly in the property sector. The second refers to aging-related expenditures that are likely to add to these economies’ fiscal pressures in the future. In order to maintain fiscal sustainability in the future, these economies must undertake greater efforts to curtail increases in social sector spending. Considering that the Asian economies do not have easy financing options available to meet the challenges arising from growing aging-related expenditures, especially with narrow and low tax bases, it is important that the economies take fiscal prudence seriously and make sure that they remain fiscally sustainable in the long run.