Investing in a Rebalancing of Growth in Asia

IMF Blog, October 25, 2010

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Medium-term challenge: the need to rebalance economies in the region away from heavy reliance on exports by strengthening domestic sources of growth.
Rebalancing Asia is presented against a backdrop of the need to rebalance global growth emphasized by the ministers of the Group of Twenty.
Publication metadata preserved from source: Anoop Singh, October 25, 2010; launch of the October 2010 Regional Economic Outlook: Asia and Pacific.

Overall observation: Across the region, investment could play a bigger role in driving growth in three respects.
Regional differences:
- Some parts of Asia—“the leading economies of the Association of Southeast Asian Nations (ASEAN)”—appear to have overall investment that is low.
- 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.
Consequences of skewed composition:
- Crowding out of domestically-oriented and labor-intensive enterprises.
- Rapid growth has stretched existing infrastructure to the point where it severely constrains activity.

1. Subdued private investment over the past decade or so, reflecting:

Lower returns.
Greater uncertainty and mixed perceptions about the ease of doing business particularly since the Asian financial crisis in the late 1990s.
Financial constraints, especially for small and medium enterprises (SMEs) and firms operating in the services sector, including in Japan and Korea.
Implication: need to modernize bank credit practices (including more risk-based financing) and ease restructuring of SME finances to reduce impediments to investing in services.

2. Shortfalls in infrastructure, which suppress private investment spending:

Most pronounced in the ASEAN region and low-income economies.
With most infrastructure provided by governments, greater private participation through public-private partnerships (PPPs) may help address bottlenecks and reduce pressures on public coffers.

Financial-sector and market reforms:
- Modernize the ways banks extend credit (including more risk-based financing).
- Make it easier to restructure finances of SMEs.
Infrastructure financing:
- Increase private participation through public-private partnerships to address critical bottlenecks while reducing fiscal pressures.
Business environment improvements:
- Ease restrictions on foreign investment in services.
- Create “one-stop shops” for investors to reduce administrative delays.

Japan and Korea:
- Improving the financial infrastructure for smaller and more service-oriented firms through reforms in collateral laws.
- Creating a market for distressed corporate assets.
Indonesia and Malaysia:
- Easing restrictions on foreign investment in the services sector.
- Creating “one-stop shops” for investors to reduce administrative delays.
Many countries, including low-income ones:
- Making greater use of public-private partnerships to promote critical investment in infrastructure.

Rebalancing requires both boosting consumption and strengthening investment; the role of investment is equally important and should not be overlooked.
Policy reforms need steadfast implementation and time to boost investment and rebalance growth.
Strengthening domestic engines of growth is crucial because Asia’s economies will be primary beneficiaries of reduced exposure to global shocks.

Source: Investing in a Rebalancing of Growth in Asia — Anoop Singh, October 25, 2010