Managing Fiscal Sustainability and Aging in Emerging Asia

The aftermath of the global economic and financial crisis of 2007-2008 underlined the importance of maintaining fiscal space and fiscal sustainability. Many Asian economies implemented fiscal stimulus policies during the crisis, and their fiscal conditions generally improved rapidly thereafter, and their overall government debt positions, aside from those of Japan and India, now appear strong. This reflects a number of supportive factors, including strong underlying growth, conservative fiscal management, and financial repression that keeps interest rates low. Nonetheless, there are a number of reasons to believe that conditions in emerging Asian economies will not always be so supportive. First, economic growth will tend to slow as countries reach higher income levels. Second, many Asian countries are aging fast, which will raise old-age-related spending dramatically, while tending to reduce economic dynamism. Third, financial repression is likely to diminish as financial markets develop, making debt management more challenging. The first objective of this paper is to identify long-term issues of fiscal sustainability risk for emerging Asian economies?such as aging and related upward pressures on social protection spending, contingent liabilities, reduction of financial repression, and the exposure of the domestic banking sector to sovereign debt. The second objective is to recommend policies to reduce these risks to sustainability, such as enhancing the efficiency of social insurance programs; improving the balance of revenues and expenditures; implementing more explicit fiscal rules and frameworks; and establishing stronger fiscal surveillance at the national and regional levels.