"Asia’s Economic Integration: A Driver of Global Growth in the 21st Century" — Naoyuki Shinohara, Deputy Managing Director, IMF (Speech, Phnom Penh, Cambodia, As Prepared for Delivery, November 20, 2012)
IMF News, November 20, 2012
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- "Asia’s Economic Integration: A Driver of Global Growth in the 21st Century" — Naoyuki Shinohara, Deputy Managing Director, IMF (Speech, Phnom Penh, Cambodia, As Prepared for Delivery, November 20, 2012)
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- Published: November 20, 2012
Overview
- Purpose: Share IMF perspectives on Asia’s changing role and how economic integration can drive global growth in the 21st century.
- Structure: Remarks address three topics—(1) the opportunities and challenges that face Asia today; (2) the importance of trade integration; (3) the importance of financial integration.
- Baseline observation: "The sands of the global economy are shifting to the East. Asia has been, and will remain, a global growth leader."
- Short-term projection: "For 2013 we project Asia’s growth to be close to 6 percent—2 percentage points more than the global average."
- Long-term trend: "In less than two decades, Asia’s economy should be larger than that of the United States and the European Union combined."
Opportunities and challenges facing Asia
- Key challenges identified:
- The hazardous "middle-income trap"—"the risk that development can take you so far, but no further. Many Asian economies are reaching the tipping point at which many countries suffered sustained growth slowdowns."
- Pressures from rising income inequality and rapidly aging populations—"If not managed properly, these pressures could strain the social fabric."
- The need to rebalance growth—shift away from heavy reliance on demand from advanced economies in the West toward greater domestic demand: "Asia needs to rely more on its own people to fuel growth."
Trade integration: status, trends, and implications
- Degree of integration: "The degree of Asian trade integration is already very high."
- Intraregional trade trends:
- "While global trade and Asia’s trade with economies outside the region have doubled since 2000, intra-Asian trade has tripled, and regional trade involving emerging Asia has increased even faster."
- Asia has formed a supply network with China as an assembly hub for final goods exports.
- "For the rest of Asia, the share of intermediate goods exports to China in total exports has doubled over the last decade, and the share of direct consumer goods exports to the United States and Europe has steadily declined."
- "Direct exports to advanced economies have been replaced by indirect exports via China."
- China-specific dynamics:
- Current account adjustment: "China’s current account surplus has declined from a pre-crisis peak of over 10 percent of GDP in 2007 to around 3 percent of GDP in 2011."
- Nature of imbalance: "But this decline is coming from too much reliance on investment, not from the needed shift to consumption."
- Expected rebalancing: "Still, we expect China to rebalance from investment to consumption."
- Implications for partners: winners and losers—partners relying on investment-led growth in China "might face adverse consequences"; gaining access to Chinese consumer goods markets "could offer lasting benefits."
- Policy and market implications:
- Need to promote access to final goods markets and harmonize investment regimes.
- Rising wages in Mainland China create incentives to shift production to ASEAN’s frontier developing economies.
- The formation of the ASEAN Economic Community in 2015 "offers the opportunity of creating a larger common market."
- Regional arrangements should be complemented by multilateral trade liberalization and cover services: "plans for the Trans-Pacific Partnership also have a strong focus on liberalizing trade in services."
Financial integration: current gaps, benefits, and risks
- Current state:
- Financial integration lags behind trade integration, especially for ASEAN economies: "ASEAN economies, which are typically less integrated with their peers than with global financial hubs in the United States, Europe, and Japan."
- Cross-border portfolio patterns: "ASEAN cross-border portfolio investment flows—more than 90 percent of transactions are with advanced economies outside Asia. Asia does not appear to be investing in itself."
- Potential benefits of greater regional financial integration:
- Broader set of instruments and assets to insure against shocks and smooth consumption.
- Strengthen domestic demand—examples: reduce incentives for precautionary savings in China; remove credit constraints on small service sector firms in some ASEAN countries.
- Improved access to financial services for small and medium-sized enterprises and rural households can help reduce income inequality.
- Risks and governance requirements:
- Greater financial integration carries risks if regulation, supervision, and international coordination do not keep pace: "as the global financial crisis has taught us, greater financial integration also comes with risks."
- The challenge of sizable and potentially volatile capital flows:
- Short-term capital flow and macroprudential views are evolving, but "longer-term picture is clear: capital inflows into Asia can help growth and rebalancing."
- Key policy objective: ensure inflows "go to the right place—supporting long-term development rather than just short-term profits."
Policy recommendations and enablers
- Make long-term investment into Asia more attractive by:
- Lowering restrictions on foreign investment in the services sector.
- Harnessing private-public partnerships for infrastructure investment.
- Promoting financial market development.
- Regional financial market initiatives to pursue:
- Integration of ASEAN stock markets.
- Development of a large regional bond market "as envisaged by the Asian Bond Market Initiative."
- Governance and coordination:
- Strengthen financial regulations, supervision, and international coordination of surveillance to keep up with financial development and integration.
- Overall strategic recommendation:
- Deepen economic cooperation and integration and manage it well to strengthen Asia’s domestic engines of growth and "set the path for Asia’s economic leadership in the 21st century and sustain growth across the world."
Naoyuki Shinohara, "Asia’s Economic Integration: A Driver of Global Growth in the 21st Century" (Speech, November 20, 2012).