"Fulfilling the Asian Dream—Lasting Growth and Shared Prosperity" By Christine Lagarde, Managing Director, International Monetary Fund

April 7, 2013

Remarks by Christine Lagarde, Managing Director, International Monetary Fund
Boao Forum for Asia Annual Conference
Hainan, China, April 7, 2013

As prepared for delivery


Good evening. 晚上好 Thank you very much Mr. Secretary General, Ambassador Zhou for your warm introduction and for inviting me here. It is a real pleasure to attend my first Boao Forum for Asia.

I enjoy coming to this part of the world where new chapters of prosperity and opportunity seem to unfold continuously before us.

Now is a particularly exciting time. The central theme for this year’s Forum captures the spirit of the moment: Asia Seeking Development for All.

President Xi Jinping’s allusion to the “China Dream” also captures this sense of renewed vision. As he has put it: “The China dream is, at its root, the people’s dream, it must closely rely on the people to be achieved, and it must continue to benefit the people.”

The IMF is your partner in this endeavor. Just as China is changing to fulfill its dream, we are changing too—so that we can be even more effective in our support. We believe that we have a lot to give—our global experience and technical expertise. But we also have a lot to learn from Asia’s remarkable success story.

It is in that spirit that I would like to share with you some thoughts about the next steps in fulfilling Asia’s dream—lasting growth and prosperity for all.

Let me begin with the current global economic perspective, but with an Asian-biased angle.

The Current Global Economic Perspective

I dare not imagine where the world economy might be today without Asia. This region has been the consistent global growth leader—driving an astonishing 2/3 of total growth in the five years since the crisis hit.

Yours has been a symbiotic success: it has helped you, it has helped the world—and it was achieved by being open to the world.

Asia now sits squarely at the cross-roads of global trade. This is good news. But it can also expose Asia to changing fortunes in other parts of the world. At no time was this clearer than when growth tumbled by more than 10 percent in a number of Asian economies in the few months following the Lehman collapse.

The question now is whether global prospects are tilted to the upside or the downside. The IMF will be releasing its updated global forecasts next week. Let me give you a little preview without disclosing numbers:

A substantial portion of the global economy looks better today than it did last year. Growth continues to strengthen and broaden among the emerging and developing economies. And we are beginning to see momentum pick up in the United States.

Again, this is good news. But at the same time, we must not lull ourselves into a false sense of security that all risks have passed. That would be a mistake.

What are the risks?

(1) Patchy recovery: Low and lopsided growth is not enough. It is not enough of a real recovery; it is not enough of a global recovery.

Worries about low growth naturally center on Europe. The continuing recession there reflects the very difficult conditions that persist in the smaller periphery countries as well as some weakness in the core of the Eurozone.

While there has been progress on a number of fronts, policy solutions will take time to be completed and effective—including tough adjustments in some individual countries. At the area wide level, the main issue is to push ahead with banking union.

(2) Fiscal Exposure: Fiscal risks in some major advanced economies are also weighing on the recovery. In the United States, for example, the spending cuts—known as the Sequester—will take some shine off growth this year. And failure to raise the debt ceiling could derail the recovery.

The bigger issue is uncertainty about the future of fiscal policy. Yes, the fiscal cliff has been avoided. But a credible medium-term roadmap to bring down debt remains a key challenge to be addressed if U.S. growth is to be placed on a much more sustainable path.

I would add that Japan faces a similar medium-term challenge in devising a durable fiscal solution.

Talk of fiscal risks has become a familiar drum beat. Let me say a word or two about possible monetary risks.

(3) Monetary Exposure: Monetary policies—including unconventional measures—have helped prop up the advanced economies, and in turn, global growth. The reforms just announced by the Bank of Japan are another welcome step in this direction.

There is, however, a limit to how effectively monetary policy can continue to shoulder the lion’s share of this effort. Lending, for example, will be hamstrung without real progress on balance sheet repair. There could also be unintended consequences—including from exit—that policymakers need to plan and watch for. This also comes back to the fiscal uncertainties that are weighing on growth, as well as the need to push ahead with comprehensive structural reforms that can help kickstart growth.

What does this mean for Asia?

We expect the region to grow by close to 6 percent this year—an enviable performance by any measure.

Asian economies have demonstrated their ability and agility to adjust to externalities. Their business has evolved, as demonstrated by a sharp reduction in some of their economies’ current account.

Resilient domestic demand, backed by supportive macroeconomic policies, has been the lynchpin of this success. Easier global financial conditions and the resumption of capital inflows have also helped contain the aftermath of the global crisis.

But there is another side to this. Strong credit growth has seen the build-up of financial imbalances and rising asset prices in some economies. The hot Hong Kong property market is one example.

There is vast diversity across Asia of course—from north to south, east to west, big to small, developed to developing. There is no one-size-fits-all, whether in Asia, or anywhere else.

However, provided the global recovery, albeit patchy, stays on track, many countries in Asia will face the issue of when and how to unwind policy support. This will help them to brace against—or better still, stay ahead of—global and domestic risks.

This should begin with central banks thinking about the timing and pace of withdrawing monetary support going forward. Macroprudential measures will help to safeguard financial stability and can also help manage potentially volatile capital flows.

Eventually, policymakers should aim to return fiscal balances to their healthy pre-2008 levels—that will put Asia in a strong position to withstand any future shocks.

Here, the IMF can help by offering timely analysis and advice—early warning—on risks emerging in different parts of the world, as well as the potential “spillover” effects for Asia.

I know from my conversations with the region’s leaders that they are seized of these issues. I also know that they are focused on one other issue closer to home: more inclusive growth.

Asia has successfully lifted millions of people out of poverty over the past three decades: more than 500 million in China; and another 200 million in other countries.

Yet, despite this success, Asia remains home to more than half of the world’s poor. Equally concerning, for most countries in the region, inequality has increased.

We must not assume that inequality is an unavoidable by-product of Asia’s strong growth. Korea bucked the trend, for example, reducing inequality during its ‘break out’ growth period mainly in the 1980s.

One point is clear: more equal growth is likely to be more durable growth. A number of studies—including from the Fund—have demonstrated this critical finding.

The Path to Lasting Growth and Shared Prosperity: Three Priorities

This brings me back to the broader point I want to discuss with you tonight: fulfilling Asia’s dream—the path to achieving lasting growth and shared prosperity.

Asia’s recipe for growth over the last several decades has served the region well. Yet, like a field that has been farmed year after year, it may need to be rejuvenated. Fulfilling Asia’s dream will rest on identifying this new ground.

Where does it lie? I believe in three key areas:

  1. investing in people;
  2. creating the right climate for investment and growth; and
  3. ensuring that growth is sustainable by protecting the environment.

(1) First, investing in people.

So far, investing in physical capital has been an important part of Asia’s growth success. Now, a new wave of growth can come from investing in what economists call “human capital”- that is people!

Specifically, what does this mean?

First and foremost, it means investing in the health and skills of future workers.

It matters for all countries, but especially for those—like India, for example—that are brimming with a youthful population that needs to be educated and equipped for the modern workplace.

Yet, today, Asia still spends less on education and health than other regions. In some countries, these expenditures have barely budged in many years. At around 4 percent of GDP, health expenditure in populous countries like Indonesia and the Philippines is less than half of what it is in Latin America.

This presents a huge challenge, but also a huge opportunity—to redirect spending toward better investments in people.

Take Indonesia again: the budgetary cost of oil and food subsidies is 4 percent of GDP. This is close to what the government spends on health and education. In a case like this, moving gradually to targeted transfers could benefit the poor and the savings could also help increase spending on education and health.

So “investing in people” means education and training for the workforce.

Secondly, it also means creating the right incentives to join the workforce.

Raising labor market participation is particularly important for countries with ageing populations—and dwindling workforces. We see this already in China, Japan, and Korea. Other economies in Asia may also face this issue in the not so distant future. Thailand and Vietnam, for example, also have relatively low fertility rates.

The main challenge will be to mobilize Asia’s large untapped workforce. This includes workers in the large informal sectors of India or Indonesia.

I mainly have in mind, however, Asia’s greatest untapped resource: women. Across the region, five out of ten women are not part of the work force, compared with just two out of ten men.

More and more empirical evidence shows that by increasing women’s employment rates in line with men, the level of GDP increases as well. One recent study estimates that in Japan, for example, GDP would be 9 percent higher by 2020.

Ageing societies like Japan and Korea have a ready-made workforce in smart, well-educated women. Why waste it? Here, it is important to remove the disincentives for women to join the workforce—including through more and better child care, and tax reform for second earners.

The bottom line: include women. They will transform Asia’s growth model and, after all, it is their “Asian dream” too.

Thirdly, investing in people also means protecting the most vulnerable.

Effective social safety nets are critical. They protect people from sudden changes in fortune, and they ensure that vulnerable groups are not excluded from the region’s economic success.

When we think about China’s vision for a more comprehensive social safety net, including the areas of health and social housing, we know why that matters—particularly to help smooth lengthy transitions from country to urban areas.

So my message here is simple: invest in the future of people-- and they will invest in the future of the economy.

(2) Which brings me to the second of my three priorities: creating the right climate to boost investment and growth.

Asia’s competitive manufacturing and vibrant export sectors have garnered worldwide praise—and for good reason.

At the same time, many Asian economies have now reached a level of development that we have seen before in other countries and regions—where sustained slowdowns in growth are most likely to occur. This is the so-called “middle-income trap”.

The challenge is to create new opportunities for growth so that Asian countries can avoid this trap.

Creating a better environment for entrepreneurship and innovation is one big step. This means opening up opportunities in previously protected markets and professions. It can also help generate better and more affordable products and services for consumers.

There are plenty of examples across the region where steps are being taken to deliver these improvements. Take China’s commitment to open up sectors dominated by state-owned enterprises, and to create an equal playing field for state and private firms.

I am also thinking of steps to simplify licensing systems, or to improve the enforcement of contracts or property rights. In India, for example, where the government is reforming land titling.

The potential for growing urban populations also offers a tremendous potential ‘up side’ to growth. Groups of well-educated and highly skilled people living in the close proximity of an urban setting often become a cradle of ideas and innovation. Think Shanghai, think Shenzhen.

Entrepreneurship and innovation can only go so far, however, if people and businesses cannot rely on road or rail to sell or buy products; or if they cannot rely on telecommunications to deliver or use services; or if they cannot borrow to invest. Adequate infrastructure is essential to reduce Asia’s chances of getting caught in the “middle-income trap”.

This may not be so much the case here in China, but it is particularly important for some other countries in the region. India and Indonesia, for example, produce 6 times less electricity per capita than in Asia’s advanced economies. Just imagine what they might achieve with a little extra generation capacity.

Or think what the region’s smallest and most remote countries in the Pacific could achieve through increased connectivity.

As well as physical infrastructure, of course, there is also a need for good financial infrastructure. Well–functioning and effectively regulated financial markets are pivotal to stable and lasting growth.

And yet, financial development and regional financial integration are lagging the region’s trade openness and integration. In fact, many of Asia’s more advanced economies are more financially connected with the United States than with other Asian economies.

There is incredible scope in Asia for deeper and better integrated financial markets to do more to help support new business, new infrastructure, and new demand.

More integrated and deeper Asian bond markets, for example, could help reduce costs. That would help countries in the region, big and small.

Imagine a business woman in China, a farmer in Malaysia, and family in New Zealand all invest in a fund. That fund then buys a bond in Hong Kong. And the financing supports a solar and wind project in Myanmar. That sets off a chain reaction of opportunities and jobs across the region, and brings green energy to the countryside.

That leads to my third and final priority.

(3) Asia needs an environment that supports sustainable growth.

The environment affects everything. The food we eat, the water we drink, the air we breathe.

More and more, we see environmental issues pressing on economic issues.

Recent estimates by the Chinese Academy of Environmental Planning, for example, paint a stark picture. In 2010, the cost from pollution and damage to the ecosystem was 1.54 trillion renminbi [$230 billion] or 3.5 percent of GDP. This was three times what it was in 2004.

I know environmental issues are on the minds of China’s new leadership. They are on my mind too: because if we exhaust the environment, we might just extinguish the economy.

Unpredictable climate events also often come with heavy costs. I am thinking of the massive floods that hit Queensland, Australia in late 2010/early 2011. The related disruptions to food supplies pushed up inflation and disruptions to mining cut into growth and regional trade.

Too often, environmentally-friendly and strong growth are pitted against each other. Instead they can and should walk hand-in-hand. Green technologies and green industries can be drivers of growth, provided the fiscal incentives are right. That includes getting prices right on energy and pollution.

The IMF recently released a comprehensive analysis of energy subsidies. Globally, these subsidies amount to a staggering $1.9 trillion; roughly equivalent to 8 percent of government revenues. By eliminating those subsidies, we can reduce incentives for excessive energy consumption and that could, in turn, reduce CO2 emissions by about 13 percent.

This gives a sense of how economic policies can make a difference for the environment.

Yes, Asia needs growth. But Asia also needs green growth that respects environmental sustainability and supports economic sustainability.


Let me conclude. The Chinese philosopher Zhuangzi once said: “The wise man looks into space and does not regard the small as too little, nor the great as too big, for he knows that, there is no limit to dimensions.”

No individual is too small to be part of Asia’s success. And no aspiration is too big. Asia’s dream belongs to all Asians.

As the region goes from success to success, I believe that Asia’s leadership in the global economy will go from strength to strength.

Asia has transformed the idea of economic cooperation and partnership. And five years into the crisis, we can see how costly the absence of effective cooperation can be. The rest of the world can learn a lot from what Asia has achieved.

Asia needs the world; but the world also needs Asia. And the IMF needs Asia’s strength and leadership too.

I have every confidence that, in seeking development for all, there is no limit to the dimensions of Asia’s dream.

Thank you. 谢谢


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