Continuing my travels through Asia for the launch of our October 2010 Regional Economic Outlook: Asia and Pacific, I am writing to you today from Singapore. In my last post, I focused on the near-term outlook and challenges for Asia. Today, I turn to the key medium-term challenge—the need to rebalance economies in the region away from heavy reliance on exports by strengthening domestic sources of growth. This is against a backdrop of the need to rebalance global growth that was emphasized over the weekend by the ministers of the Group of Twenty industrialized and emerging market countries.
Heavy reliance, arguably over-reliance, on exports is a common challenge across Asia. Yet, the policies to address it will differ among the countries in the region. Much of the public discussion focuses on ways to increase consumption, and this is something the IMF has written about extensively in the past. But the role of investment in rebalancing growth is equally important and something that should not be overlooked.
Current gaps in investment
Across the region, investment could play a bigger role in driving growth in three respects.
- Overall investment appears low in some parts, but not all, of Asia. This tends to be more of an issue for the leading economies of the Association of Southeast Asian Nations (ASEAN).
- Elsewhere in the region, such as the newly industrialized economies (Hong Kong SAR, Korea, Singapore, and Taiwan Province of China) and Japan, aggregate investment is in line with comparable countries outside the region. But, the composition of investment is skewed toward exporters and capital-intensive firms, which crowds out domestically-oriented and labor-intensive enterprises.
- In addition, rapid growth across the region has stretched existing infrastructure close to the point where it severely constrains activity.
What are the main reasons for this situation, and what can be done about it? Two important factors seem to be at play.
- First, investment in many regional economies has been subdued over the past decade or so. This reflects lower returns, greater uncertainty and mixed perceptions about the ease of doing business particularly since the Asian financial crisis in the late 1990s. However, financial constraints also played a role. In particular, small and medium enterprises, as well as firms operating in the services sector, appear to have limited access to financing, including in Japan and Korea. In these cases, modernizing the ways banks extend credit (including more risk-based financing) or make it easier to restructure the finances of small and medium enterprises, can help reduce the impediments to investing in the services sector.
- The second important factor concerns shortfalls in infrastructure, which also suppress private investment spending. This is most pronounced in the ASEAN region and low-income economies. With most infrastructure in the region provided by governments, greater private participation through public-private partnerships may help address critical bottlenecks while also reducing pressures on public coffers.
Policy actions under way
The good news is that several countries are already taking steps in the right direction.
- Japan and Korea are improving the financial infrastructure for smaller and more service-oriented firms through reforms in collateral laws and creating a market for distressed corporate assets.
- Indonesia and Malaysia have taken steps to improve the business environment by easing restrictions on foreign investment in the services sector and creating ‘one-stop shops’ for investors to reduce administrative delays.
- And many countries, including low-income ones, are making greater use of public-private partnerships to promote critical investment in infrastructure.
Clearly, it will take time and steadfast implementation of reforms to boost investment and, in turn, rebalance Asia’s growth. But the strength with which shock waves from the financial crisis hit markets across Asia—from India to Japan—also remind us that Asia’s economies will be the primary beneficiaries of strengthening their domestic engines of growth. The time has come to invest in a rebalancing of growth in Asia.