IMF Survey: Asia Poised To Emerge as Lynchpin of Global Economy
September 21, 2012
- More domestic demand, intraregional trade, and financial integration key to reducing vulnerability to external shocks
- World has stake in ensuring China can move to more sustainable growth model
- Policy actions needed to meet demographic shifts, and create inclusive growth
Asia is in a stronger position to tackle headwinds from the unsettled global economy, but the region must continue with structural reforms and embrace greater integration if it is to meet its potential, an audience heard at a key conference held earlier this month in Tokyo.
The gathering was the second in a periodic series co-organized by the International Monetary Fund and the Stanford Center for International Development, and is designed to foster an exchange of views on key policy issues for Asia between Fund staff and the academic community.
This year, it was co-hosted by the Japan Bank for International Cooperation (JBIC), with financial and logistical support from the IMF’s Regional Office for Asia and the Pacific.
“Asia may be better able to withstand risks today than it was in the past. However, there are new sources of vulnerability stemming from Asia’s greater interconnectedness with the rest of the world and rising income inequality across the region,” said Naoyuki Shinohara, Deputy Managing Director of the IMF.
The best insurance against external risks would be to strengthen domestic sources of growth, while boosting intraregional trade and financial integration, he added.
Bright prospects, but challenges loom
In her keynote address, Anne Krueger, former IMF First Deputy Managing Director and currently Professor at Johns Hopkins University, said Asia had done remarkably well in the last few decades, but “it still has a long way to go, notably with regard to increasing innovation, improving governance, promoting services, strengthening its social safety nets, and accommodating aging populations.”
Krueger warned that the recent experience of advanced economies underscored that there was no room for complacency. As Asia’s stature grows further, she said she hoped that it would take more responsibility for global rules on free trade and the international financial system.
Hiroshi Watanabe, CEO of JBIC, envisaged changes in the regional supply chain. Rather than China being the main assembly hub, Japan and Korea could produce some of the materials, while other countries could produce intermediate parts, and the assembly could be done in low-income countries in Asia, together with some relocation from coastal to lower income regions of China.
Is China rebalancing?
Many participants welcomed the recent reduction in China’s current account surplus, although opinions were divided as to whether this would endure and reflected the rebalancing that China needs.
Some participants felt the current account surplus would rise again as the global economy recovered, although not to the same extent as before the financial crisis. They suggested China’s economy had become more domestically unbalanced, by relying even more on investment to power growth.
Others believed that a small current account surplus was a natural consequence of China’s central position in regional supply chains, even as rising labor costs and consumption would contain its level in the medium term. They suggested that China still had significant investment needs in health, education, services, and infrastructure and that these would help move it toward a more consumption-centric model of growth.
China and the impact on the region
Participants agreed that China’s role in regional supply chains has fueled intra-Asian trade and boosted Asia’s exports to the rest of the world. China’s investment boom has also supported the recovery of Asian partners from the global crisis, but the region now has a stake in ensuring that China can move toward a more sustainable growth model and avoid the risk of a sharp decline in investment.
Although rebalancing China’s growth toward consumption is likely to take some time, it would lower capital imports from the rest of the region, while giving Asian partners increased access to Chinese consumers, including in services.
With labor and other input costs projected to rise in China, there was general agreement among conference attendees that some lower value–added exports could gravitate toward South Asia and the economies of the Association of Southeast Asian Nations (ASEAN), provided they created the right environment, including strong infrastructure and welcoming business climates.
Meanwhile, as China itself moves up the value chain, it may begin to compete more directly with Japan and the newly industrialized economies, putting a premium on innovation and technology.
The impact of Asia’s rise on Latin America and Africa
Growing ties with Asia have helped boost growth and access to low-cost inputs and consumption goods in both Latin America and Africa. In the case of Africa, it has also brought access to more appropriate technologies and financing. Participants agreed that with prospects in advanced economies relatively subdued, ties between Asia and other emerging regions will only grow in the coming years.
In particular, rebalancing in Asia would offer an opportunity for others to gain access to large and rapidly expanding consumer markets. In all of this, an open and more integrated global trade system would yield the greatest benefits for all.
At the same time, several participants highlighted challenges that closer integration with Asia is creating, including avoiding the natural resource curse for commodity exporters, ensuring that greater access to external financing does not compromise debt sustainability, and integration into different value chains to help domestic manufacturers cope with increased competition from Asian exporters.
Harnessing demographic shifts
In the long term, participants focused on two trends that would be key to fulfilling Asia’s potential of emerging as a key pillar of growth for the global economy: adjusting to a rapidly changing demographic structure, and reversing the tide of rising inequality through a greater emphasis on inclusive growth.
Participants noted the very different aging profiles being faced by economies like China, Japan, and the newly industrialized economies and others such as India, the Philippines, and Myanmar. For the latter group of countries with relatively young populations, harnessing the demographic dividend would hinge on strengthening the quality of institutions, investing in education, improving labor market flexibility, and increasing trade openness.
For those economies with rapidly aging populations, issues related to old-age security and health care, fiscal sustainability of entitlement structures, and boosting the labor force through higher retirement ages, increased female participation, and more liberal immigration policies would be key to ensuring stability. In this context, there may be important lessons to be learned from those advanced economies that have undergone similar demographic transitions.
Building inclusive growth
Participants noted with some concern that Asia’s robust growth in the last two decades has been accompanied by a sharp rise in inequality. This is in marked contrast to Asia’s previous three-decade record of growth with equity, and also to other emerging regions, posing risks to social stability and the sustainability of growth.
A number of participants also noted that rising inequality complicates rebalancing in Asia as it increases the share of income in the hands of wealthy individuals, who have a lower propensity to consume.
While acknowledging the complexity of the issue, participants cautioned against policy interventions that were populist or hampered incentives to work and invest, preferring to focus attention on ensuring equal access to public services, notably education and health, while also broadening access to finance to allow the poor to overcome liquidity constraints and better insure against shocks.
The head of the IMF’s Asia and Pacific Department, Anoop Singh, noted that “while the region has made significant progress in terms of trade integration and engagement on macroeconomic issues, consultation is now needed between Asian countries on building a common agenda for more inclusive growth.”
Participants felt that this was an area where the IMF could facilitate a dialogue based on cross-country experiences.