The Great Rebalancing Act: Can Investment Be a Lever in Asia?

IMF Working Papers, February 1, 2011

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Ensuring stable growth in the postcrisis world economy will require a rebalancing of economic activity in several countries.
In Asia’s export-dependent economies, this entails relying more on private domestic demand as a driver of growth.
While some countries need to raise consumption, several need to raise investment or reorient it from tradable to nontradable sectors.
These changes in investment could be facilitated by financial reforms that enhance domestically oriented firms’ access to credit, stronger incentives for corporate restructuring, policies to bolster the business climate and reduce uncertainty, and by improvements in infrastructure that raise the returns to private investment.

Rebalancing in Asia requires shifting the growth mix toward private domestic demand in export-dependent economies.
Investment adjustments needed include:
- Raising investment levels in several countries.
- Reorienting investment away from tradable sectors toward nontradable (domestically oriented) sectors.
Constraints and frictions identified:
- Limited access to credit for domestically oriented firms.
- Weak incentives for corporate restructuring.
- Business climate deficiencies and elevated uncertainty.
- Infrastructure shortfalls that lower returns to private investment.

Financial reforms to enhance domestically oriented firms’ access to credit.
Stronger incentives for corporate restructuring to improve resource allocation.
Policies to bolster the business climate and reduce uncertainty for private investors.
Improvements in infrastructure to raise the returns to private investment and attract reoriented investment into nontradable sectors.