Factory in Ayutthaya, Thailand: by breaking down trade barriers, Asia can fully reap benefits of globalization (photo: Sukree Sukplang/Reuters)
INCLUSIVE GROWTH IN ASIA
The January 27–28 conference, entitled “Frontier Asia: Economic Transformation and Inclusive Growth,“ noted that Asia is already more diversified than Africa and the Middle East—a feature that is often associated with high growth rates and more limited output volatility.
“Joining the next generation of emerging markets is the goal, but moving there presents many challenges”, IMF Deputy Managing Director Naoyuki Shinohara told delegates. He was addressing policymakers from ten fast-growing Asian “frontier economies” at the conference, organized jointly by the IMF and the Japanese International Cooperation Agency (JICA).
Frontier economies are the group of developing countries that overall are experiencing strong growth that points toward a continued rise up the development ladder. The conference brought together senior officials and academics from Bangladesh, Bhutan, Cambodia, Lao PDR, Maldives, Mongolia, Myanmar, Nepal, Timor-Leste, and Vietnam.
With a combined population of 350 million people and a location in the world’s most dynamic region, these economies have grown by on average by over 6 percent every year in the last two decades—a performance surpassed only by China and India. The conference heard that “Frontier Asia” countries now have the potential to move from low-income to emerging market economies—provided they make the right policy choices.
While circumstances in their respective countries may differ, central bank governors and finance ministers at the event identified three shared challenges:
• Ensure that the benefits of growth are widely shared among the population
• Accelerate reforms to diversify their economies, and
• Avoid financial sector vulnerabilities.
Quest for inclusive growth
Conference participants agreed that all of the region’s citizens should participate in its strong economic performance. “Growth has produced a significant reduction in poverty, but it might also lead to rising income inequality”, warned JICA Vice President Kiyoshi Kodera. “This is what we have seen in other emerging Asian countries”, he added.
Ensuring inclusive growth is no easy task and the policy makers offered different approaches. One country example that attracted much attention was the host nation, Thailand. Satoshi Ijima, professor at Saitama University, showed how rural income support—such as microcredit schemes—and education policies had been successfully employed to keep down unemployment and to prevent excessive income disparities. JICA’s Kodera also recalled the successful experience of Japan in the 1960s, where progressive taxation and a strong social safety net were used to create a healthy middle class.
Diversify to grow
Anoop Singh, Director of the IMF’s Asia and Pacific Department, encouraged policymakers to redouble their efforts to further diversify their economies into higher value–added sectors in manufacturing and services. “The process of economic transformation calls for accelerated structural reforms, improved institutions, and investment in infrastructure”, he said.
Trade integration represents an additional opportunity for the region, the conference was told. A study by JICA showed that “fragmentation”—the decomposition of production chains into separable component blocks distributed across countries—is particularly strong in Asia.
By breaking down trade barriers, from transport and local distribution cost to language and currency barriers, Frontier Asia can embed itself in regional supply chains, move up the value-added ladder, and thus fully reap the benefits of globalization. Several participants also emphasized the importance of creating conditions for small and medium-sized enterprises to thrive.
Deep, wide, stable financial sector
The financial sector, policymakers agreed, represents both an opportunity and a risk. Financing that is readily available to a wide array of consumers and investors is a prerequisite for strong and inclusive growth. At the same time, if credit grows too rapidly, it can destabilize the economy—a memory from the Asian economic crisis of the late 1990s that was still fresh on many of the policymakers’ minds.
Striking the right balance between financial deepening and financial stability depends on country circumstances, delegates heard. The IMF’s Singh warned that in a few frontier economies it was already time to step on the brakes, for example by using macroprudential tools that limit credit growth.
In other countries, however, there still is much room to deepen and widen the financial sector. A paper by IMF economists Era Dabla-Norris and Yasuhia Ojima showed how this can be done. In addition to a stable macroeconomic environment, the economists highlighted the following enabling financial sector policies:
• Overcoming scale barriers through, for example, cell phone banking;
• Operational reforms such as interbank markets, as recently developed in Nepal;
• Addressing information gaps through mechanisms such as credit registries; and
• Increasing financial literacy.
