Transforming Asia's Low-Income Countries into Tomorrow's Emerging Markets, Speech by Min Zhu, Special Advisor to the Managing Director, International Monetary Fund, Daejeon, Sourth Korea
July 27, 2010Speech by Min Zhu, Special Advisor to the Managing Director, International Monetary Fund
Daejeon, Sourth Korea, July 12, 2010
Asia has become a major economic powerhouse, and is growing in importance. The region accounts for a third of the global economy, up from just under a fifth in 1980. On current trends, Asia’s economy could outstrip the United States and the European Union combined by 2015. Asia has also made remarkable progress with poverty reduction, with China alone pulling hundreds of millions out of poverty over the past few decades. This sudden and dramatic improvement in living standards is unique in world history.
Nevertheless, the increasing prosperity is not evenly distributed across the region. In a number of low-income countries in Asia, per capita annual income averages around only $800. And 40 million people across these countries are living in extreme poverty, with less than $1.25 of income a day.
The good news
The low-income countries in Asia are better placed than their counterparts in other region, and indeed are at the top of list to join the next wave emerging economies. There are a number of reasons for optimism.
First, the low-income countries in Asia have made substantial progress in boosting growth and reducing poverty. Average growth in the decade before the global financial crisis was close to 7 percent a year, helping to double per capita income. In tandem, the percent of the population living in extreme poverty fell from 61 percent in the 1990s to 40 percent today. In some countries, the decline has been particularly remarkable—in Vietnam, for example, poverty was cut almost in half. Also, these countries’ external debt declined to around 32 percent of GDP, and their foreign exchange reserves expanded steadily, reducing external vulnerabilities.
Second, and more recently, the Asian low-income countries weathered the global financial crisis well. Their economies slowed less than in emerging Asia, partly reflecting limited integration into the global economy. Exports shrunk less than in some other economies, as they relied less on big-ticket advanced manufacturing. They also did not depend as much on private portfolio flows. Countercyclical macroeconomic policy also supported activity, with some countries—including Bangladesh, Sri Lanka, and Vietnam—opting for fiscal stimulus,.
Third, we expect GDP growth to bounce back above 6 percent by next year and to remain strong in the medium term. These favorable prospects partially reflect the potential of the Asian low-income countries to enter into a vibrant regional trade network. One of the critical factors behind the rise of Asia over the past two decades was mushrooming regional trade integration. A sophisticated production network facilitated “catch-up” through technology transfers. Low-income Asian economies are poised to step into this production nexus and move up the value chain. They should be able to exploit low costs of communication to export services, rather than rely exclusively on merchandise exports like their predecessors.
The low-income countries are largely innocent victims of the global financial crisis, and now they have to deal with the consequences. They did not make significant policy mistakes, and actually had made progress in improving policies and frameworks. Despite this, they face a double punch of lower trade and financial flows. On the trade side now, export markets in advanced economies are smaller and will expand more slowly than before the crisis. And FDI has not fully rebounded, remittances have shrunk, which further weakens external support to these economies.
A real problem this setback is expected to be long-lasting. Many advanced economies face large fiscal retrenchment needs in the medium term, with average sovereign debt projected to surpass 120 percent of GDP by 2015. Furthermore, unemployment is high and expected to decline only gradually in most advanced economies, reducing prospects for strong domestic demand-driven growth in these advanced economies.
The low-income countries also face important domestic challenges. Rapid credit growth and related banking sector soundness is a concern in some countries, Inflation pressures also increased. Regarding longer-term prospects, there are still huge infrastructure bottlenecks in developing Asia—especially in transport, energy, and communications—that pose a key impediment to stronger growth. Also, lack of diversification of the local economy and excessive dependence on commodity production reduce the ability of these economies to reap the full benefits of their growth potential.
What must countries do?
Countries must respond to these challenges along a number of different dimensions—all geared towards achieving macroconomic stability, boosting growth, and reducing poverty and inequality.
Achieve macroeconomic stability. Strong and balanced growth is built on a pillar of macroeconomic stability. It is important for country authorities to rebuild policy buffers—fiscal, monetary, and external—and further improve financial sector soundness. It is also important to further improve accountability and transparency of macroeconomic policies.
Strengthen sustained growth. Countries need to boost internal demand, especially in infrastructure investment. They also need to integrate better into the regional trade network. This is a difficult task and governments should give priority to structural reforms, which can help boost competitiveness and facilitate regional integration. Among these reforms, developing financial markets is particularly important to ensure a better allocation of capital and provide savings vehicles to raise household income. Overall, the low income countries in Asia can learn from their emerging market neighbors when it comes to achieving sustained growth.
Address social issues. Social safety nets need strengthening, and countries also need to attend more to health and education needs of their populations. While the experience during the crisis was favorable, countries still have a long way to go to provide adequate protection against shocks and to ensure that gains from growth are broadly shared. Many countries still have large income disparities and sizeable pockets of poverty.
Give priority to implications of climate change. Southeast Asia is one of the most vulnerable regions in the world to climate change, given long coastlines; concentration of people and activity along the coast; and reliance on agriculture, natural resources, and forestry. According to the ADB, without action, Southeast Asia could lose the equivalent of 6¾ percent of GDP each year by 2100, more than twice the global average loss. To support low-income country efforts to overcome the challenges of climate change, the Copenhagen Accord suggests that $100 billion a year is needed by 2020.
How can the IMF help?
The international community should stand ready to help low-income countries meet these challenges. Of course, different groups and organizations have different competencies, and so must respond in different ways. The IMF focuses primarily on macroeconomic stability and sustainable growth, and our contribution to low-income countries will be along these lines. It can help along the following dimensions:
Flexible financing. In July 2009, the IMF revamped its concessional lending facilities for low-income countries. Once additional loan and subsidy resources are mobilized, these changes will boost available resources for low-income countries to $17 billion through 2014—and all concessional lending will be at zero interest until 2012. Most of the needed subsidy resources will come from the IMF’s internal resources, including the use of resources linked to the limited sales of gold.
The IMF also increased the flexibility of its facilities. Three new lending facilities are established: the Extended Credit Facility (ECF) provides flexible medium-term support, the Standby Credit Facility (SCF) is designed for short-term and precautionary needs, and the Rapid Credit Facility (RCF) provides emergency to deal with shocks. Nepal already received an RCF in May 2010. The IMF also enhanced country ownership by making lending programs more flexible, streamlining policy conditions, supporting countercyclical policies, and attending to the needs of the most vulnerable groups in program countries.
Better surveillance. Helping countries achieve macroeconomic stability is the core mandate of the IMF and our main tool to do this is bilateral and multilateral surveillance. We tailor our bilateral surveillance according to individual country circumstances, and we carefully consider macro policies, systemic issues, cross-country spillovers, and macro-financial linkages. As part of our cross-country experience, we provide lessons from emerging markets to low-income countries. In addition, we hope to introduce a new vulnerability exercise specifically for low-income countries.
More technical assistance. This “knowledge transfer” often flies below the radar, but it is incredibly important. IMF technical assistance provides a vital role in strengthening institutions and building capacity, with a particular emphasis on public resource management and accountability. We have numerous regional technical assistance centers, including one in Fiji. We also have a number of regional training institutes and programs, including in China, India, and Singapore.
The Asian low-income countries should be able to take their seat at the table, tapping into Asia’s longstanding production nexus, and moving up the ladder.
While a lot depends on individual country’s policies, the international community must also help. Advanced countries should maintain aid flows, finance efforts to overcome climate change in low-income countries, and resist protectionist pressures.
The IMF remains fully committed to supporting low-income countries. This support comes in multiple fronts, including lending, surveillance, and knowledge transfer. We are also working hard to ensure that low-income countries’ voices are heard in the global community and their representation is protected during the ongoing IMF governance reform.
The IMF is determined to make sure that the low-income countries in Asia do not get left behind and instead share in the common prosperity of the region.