investment and slowing TFP growth. Potential growth in the rest of the region is also expected to decline somewhat because of slowing labor force growth. The external environment is expected to be less supportive than before owing to slowing global growth and trade; tighter financing conditions; high volatility of commodity prices and uncertainty related to the outlook for supply chains, trade, technology transfer, and investment amid the war in Ukraine and the lingering geopolitical tensions.

Policy efforts in several areas could boost potential growth, support poverty reduction, and help several middle-income economies attain high-income status. While policies may be able to stem or even reverse the projected slowing of factor inputs, policies to raise productivity growth offer the most promising path for the region’s economies to improve their growth performance and speed up the convergence of their per capita incomes to advanced economy levels.

Lowering non-tariff barriers and liberalizing trade in services would help the region take advantage of shifts in the global trade landscape and will boost productivity and competitiveness. Achieving more efficient allocation of financial resources would require strengthening prudential measures and supervision. In the field of energy, policies must address energy security issues with long-term sustainable development strategies (World Bank 2022b). Encouraging investment in renewables could improve long-term energy security and reduce emissions. More climate-resilient infrastructure could also help mitigate a possible climate change-related reduction in annual potential growth resulting from increasingly frequent extreme weather events that damage capital stocks and erode labor productivity.

# 5.2. Evolution and drivers of potential growth in EAP

At an average annual rate of 6.2 percent over 2011-21, potential output growth in EAP was nearly twice as high as in the median EMDE, but it was still below its 7.6 percent average rate in 2000-10.<sup>7</sup> The slowdown of potential growth is mostly attributable to China, where potential growth is estimated to have fallen from 8.3 percent a year in 200010 to 6.6 percent a year in 2011-21. Following efforts to prop up growth through creditfueled investment, the Chinese government initiated policies in 2012 to make growth more sustainable and less dependent on investment and exports (World Bank 2017a). By 2019, China’s growth had converged to its potential rate, but significant financial vulnerabilities that had accumulated remained unresolved (World Bank 2021a).

> 7 Estimates of potential growth can vary depending on the methodology used. However, other studies have obtained results similar to those described here, and the slowdown of China’s potential growth, in particular, is clear and undisputed. For instance, Anand et al. (2014) report that China’s potential GDP growth peaked around 2006-07 at 11 percent a year and declined to below 8 percent by 2013. By contrast, potential growth in ASEAN

> (Association of Southeast Asian Nations) countries (for example, Indonesia, Malaysia, the Philippines, Thailand, and Vietnam) has been stable or rising. ADB (2016) reported a gradual decline in China’s potential growth since 2008. Bai and Zhang (2017), Nabar and N’Diaye (2013), Maliszewski and Zhang (2015), and Perkins and Rawski (2008) have also confirmed the slowdown of potential growth in China.