More Domestic Demand Could Help Rebalance Asian Economies
IMF Survey online
March 22, 2011
- Asia needs to strengthen domestic demand to sustain strong growth
- Rebalancing process will vary across countries
- China needs to raise consumption, others need to raise investment
Exports have played an important role in Asia’s economic success to date, but the region now needs to develop a second engine of growth by rebalancing its economy to encourage greater domestic demand, according to IMF economists in a new book.
Speaking at the launch of Rebalancing Growth in Asia: Economic Dimensions for China held at the Carnegie Endowment for International Peace in Washington D.C., one of the editors of the newly published collection of essays, Vivek Arora, said the challenge of rebalancing would differ from country to country.
“Some countries, in particular China, will need to boost consumption, while several other emerging Asian economies will have to focus on investment. And some would need reforms to boost services-sector growth,” said Arora.
Responding to change
Asia, along with other emerging markets, has been making an increasingly large contribution to the global economy, prompting the special advisor to the IMF’s Managing Director, Min Zhu, to remark that “the world is changing.”
Three decades ago, emerging and developing countries made up 32 percent of global GDP, measured by purchasing power parity. By last year that figure had risen to 48 percent, he said.
However, Zhu questioned whether this pace of growth was sustainable without fundamental changes to some economies.
“I think strong emerging market and low-income countries’ growth is good news because it pulls millions and millions of people out of poverty … it’s great, great news. But is it sustainable? That’s where rebalancing becomes the issue.”
Arora suggested that any rebalancing effort by Asia would need to involve comprehensive reforms and coordination among Asian countries.
This would include increasing investment in Southeast Asian countries like Indonesia and the Philippines where improvements in infrastructure would result in significant growth. Other measures might include strengthening Asia’s financial institutions, including equity and bond markets. This would provide alternative financing methods that would facilitate a much-needed reduction in Asia’s high corporate savings rates.
A third major reform would involve a boost in China’s household consumption. As well as adopting broader macroeconomic reforms to achieve this, Arora suggested China should expand its social safety net and encourage growth in the services industries.
In contrast, Pieter Bottelier, a professor at the School of Advanced International Studies (SAIS) at Johns Hopkins University suggested that efforts at economic rebalancing should be directed toward reducing China’s excessive investment, rather than increasing domestic consumption. He pointed out that Chinese consumption had already been growing rapidly.
“Consumption growth in China is not the problem. It has been the fastest growing consumer market in the world—by a huge margin … so that’s not the issue,” he said.
A large part of the newly published book analyses the prospects and likely impact of rebalancing on China. “The need for this rebalancing in China was recognized even before the global financial crisis,” said Arora.
The book concludes that it is unsustainable for the world’s second largest economy to continue depending on export-oriented growth. One essay looks at the impact on employment of shifting the country’s growth model, while another investigates the challenges of raising household consumption.
Measures to rebalance China
Nick Lardy of the Peterson Institute said the book underplayed the significant role the government had played in contributing to imbalances. He pointed to the size of the government’s savings-investment imbalance, which he said was almost as large as that in the household sector.
Lardy also identified the “financial repression,” or the government’s policy of deliberately holding down interest rates to maintain price stability, as another significant factor. “Financial repression is a big part of the story about the imbalances that emerged,” he suggested.
Lardy said that the depreciation of the Chinese currency had contributed to global imbalances, but Bottelier questioned whether the devaluation of the yuan had contributed to the original development of imbalances, or whether it had merely exacerbated them once they had emerged.
As way of a policy response, Arora suggested that reforms “will need to include a package of measures, one of them being exchange rate appreciation. Exchange rate appreciation is an important part—but still only a part—of what is needed.”
Commenting on the book, Lardy suggested the authors might have discussed the argument whether the global imbalances might eventually prove self-correcting.
“A lot of people say ‘Yes they got into these difficulties, it looks very unbalanced, but just wait awhile, it’s all going to go away’,” said Lardy.
This point was taken up by Bottelier who said he believed that “the dynamics at work in China and the rest of the world will push toward greater balances, not greater imbalances.”
Bottelier said the trend toward automatic rebalancing in China would be particularly strong if wages grew at high-than-expected rates. The China expert also identified other tendencies supporting a self-correction in China’s economy, including the government’s planned increased spending on health and education; rising employment in the services sector, which is growing at a faster rate than in manufacturing; and the likely decline in China’s processing trade as the country seeks to increase the domestic value-added in its exports, which would, in turn, reduce the trade surplus.
“Perhaps we don’t have to worry too much, let things happen,” he suggested.
The case against automatic rebalancing
In response, Arora said the thesis that global imbalances would correct themselves had existed for some time but seemed to lack a plausible basis.
Experts have long speculated about the possibility that an undervalued exchange right might be unwound by inflation, and that assertive policy measures might prove counterproductive.
However, there was little clear evidence that wages were rising sufficiently fast to substantially raise household incomes and consumption, he said.
Arora added that the book emphasized the scope for financial reforms to contribute to rebalancing by, for example, reducing the incentives for unduly high corporate saving.
He wrapped up the presentation by saying that the book was not intended as the last word on the subject of imbalances, but as a contribution to the vibrant debate on the subject.