## The Art of Shifting Gear

_IMF Blog, April 27, 2012_

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## Bibliographic details
- Authors: Anoop Singh
- Published: April 27, 2012

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### Capital inflows
- Author: Anoop Singh  
- Date: April 27, 2012
- Key observations:
  - Asia’s economy remains heavily dependent on events outside its borders; the notion of a full “decoupling” is a fallacy.
  - Two illustrative scenarios highlight interconnectedness:
    - Improved global prospects—following concerted policy actions in the euro area and indications of recovery in the United States—would benefit trade-dependent Asia via a boost in demand, fresh capital inflows, and potential revival of overheating pressures.
    - Escalation and global spread of financial turmoil in the euro area would likely cause a sharp fall in demand for Asia’s exports by advanced economies and a possible retrenchment of credit by stressed foreign banks, severely affecting Asia.
  - Geopolitical shocks that push energy prices sharply higher would force difficult trade-offs between inflationary pressures and budgetary risks from energy and food subsidies.
- Recent developments (as of early 2012):
  - “If the first months of 2012 are anything to go by, then the outlook is favorable.”
  - Capital inflows into emerging Asia rebounded.
  - Stock markets recovered.
  - Most local currencies appreciated against the U.S. dollar.
  - Inflation continued to fall, propelled mainly by the normalization of energy and food prices.
  - Inflation expectations have increased in many countries, while macroeconomic policies remain generally accommodative in the region.

### Global developments
- Policy implications:
  - Asia’s policy choices will be largely determined by the direction of global developments.
  - Under a positive global scenario with improving economic and financial conditions and rising inflation risks, policymakers should consider renewed tightening and continued normalization of monetary policy to pursue sustainable, noninflationary growth.
  - It is “too early to declare victory over the forces of financial volatility and contagion.” The art for policymakers is to be prepared to shift gears if, and when, circumstances warrant.

### Differing by country
- Medium-term priorities vary across countries:
  - China:
    - Needs to continue rebalancing away from investment-led toward consumption-led growth.
    - Continued rebalancing would be beneficial for China and for the world.
    - Contextual note: at the IMF-World Bank Spring Meetings, the Vice-Governor of the People’s Bank of China, Yi Gang, remarked that strolling through shopping malls shows consumption in action.
  - India:
    - Would benefit from improvements in the investment climate and raising its trade integration.
  - ASEAN economies:
    - Public investment in infrastructure—within the framework of medium-term goals—would help attract private investment and promote more broad-based growth.
  - Low-income countries in Asia:
    - Tasked with attracting foreign direct investment (including from other Asian economies) to become part of the Asian growth dynamic.
- Strategic rationale:
  - Rebalancing would make the region less vulnerable to external shocks.
  - Despite interdependence, Asia “continues to have plenty of space and the power to determine the shape of its economies.”

*The Art of Shifting Gear — IMF blog post by Anoop Singh, April 27, 2012*

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## References

- [Asia and Pacific Regional Economic Outlook](http://www.imf.org/external/pubs/ft/reo/2012/APD/eng/areo0412.htm)
- [report](http://www.imf.org/external/pubs/ft/survey/so/2012/CAR042712A.htm)

_Source: https://www.imf.org/en/blogs/articles/2012/04/27/the-art-of-shifting-gear_