Mutual Interdependence: Asia and the World Economy, Address By Anne O. Krueger, First Deputy Managing Director, IMF
IMF News, June 30, 2005
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- Authors: Anne O. Krueger
- Published: June 30, 2005
Overview
- Focus: Asia's economic transformation, its role in the world economy, and the reciprocal obligations between Asia and the global economic system.
- Central thesis: Asia's rapid growth depended on domestic policies promoting stability, growth and openness, and successful integration with the international economy; continued progress requires preservation and strengthening of the multilateral trading and international financial systems.
The Asian transformation — findings and key statistics
- Historical context:
- Several Asian economies in 1950 were still worse off than in 1913 (Angus Maddison data).
- In 1820, Japan marginally above world average; China slightly below; Asia excluding Japan about four fifths of world average.
- By 1950, Japan slightly below world average; China little more than a fifth of world average; Asia excluding Japan roughly a third of world average.
- Rapid postwar growth:
- Korea: per capita GDP in 1998 (1990 PPP dollars) almost 16 times its 1950 level; share of world GDP rose from 0.3 per cent in 1950 to 1.7 per cent.
- China: real per capita GDP rose almost eightfold between 1975 and 2003—and fourfold from 1985.
- India: real per capita GDP rose 2.4 times between 1975 and 2003, with most growth after 1991 reforms.
- By historical standards, postwar growth rates were unprecedented: real per capita GDP in Korea, Thailand and Singapore has grown by more than 5% a year, on average, since 1960.
- Since 1990, Asian per capita incomes have grown nearly twice as fast as that of the United States.
Domestic policy framework — drivers of growth
- Core policy elements credited for Asian success:
- Commitment to policies fostering growth, stability and openness.
- Use of traded goods sectors as growth engines; openness to international trade.
- Macroeconomic stability, education, infrastructure, and structural reforms promoting competition and flexibility.
- Trade as critical factor — exact figures:
- Korea: export to GDP ratio rose from 3 per cent in 1960 to 26 per cent in 1975 and 38 per cent in 2003.
- China: export to GDP ratio was 2 per cent in 1970 and rose to 34 per cent in 2003.
- Mechanisms by which trade fosters growth:
- Competition increases productivity, reduces prices, eliminates domestic monopolies, creates employment—especially absorbing unskilled labor into labor-intensive exports—and facilitates skill acquisition to move up the value-added chain.
External environment — multilateral trade and regional arrangements
- Role of multilateral trade liberalization:
- Progressive elimination of tariff and non-tariff barriers under GATT and WTO linked to unprecedented global trade expansion.
- 1947: average tariffs on manufactured imports among industrial countries over 40 per cent; by late 1990s lowered to less than 5 per cent in the EU, the United States, and Japan.
- Start of 21st century: world trade worth around $8 trillion—25 per cent of global GDP—compared with $1.5 trillion in 1970, and 13 per cent of world GDP.
- WTO: volume of world trade in 2000 was 22 times its level in 1950.
- Merchandise exports have grown by 6 per cent a year on average for the past 50 years.
- Last year (relative to speech): global growth was 5%; global trade grew by 8.5%.
- Regional trade arrangements:
- Regional groupings can bring benefits but should complement—not substitute for—multilateral liberalization.
- EU example: tariffs fell by 40 percentage points globally and by 45 percentage points within the Union during integration.
- Doha Round:
- Critical stage; a successful WTO ministerial in December would give fresh impetus to trade expansion.
- Calls for mutual movement: advanced economies must fulfill promises to reduce agricultural and other protection; developing countries must commit to reducing protectionism among themselves.
- Emphasis on agricultural liberalization—industrial countries urged to reduce market restrictions and export subsidies; Asian countries called on to take difficult decisions on agriculture to strengthen bargaining power.
The international financial system — stability, crises, and lessons
- Bretton Woods and adaptability:
- Postwar fixed-but-adjustable exchange rate system fostered stability up to 1971; transition to floating rates in 1971–73 aided flexibility in coping with oil shocks.
- IMF role: providing temporary financial support during balance of payments crises critical to system stability.
- Private capital flows and crises:
- Korea first emerging market to borrow on international capital markets in the 1960s; 1970s banks were major finance source; 1990s saw soaring private international capital flows.
- Financial crises of 1990s illustrated increased exposure of policy mistakes and rigidities as capital moved globally.
- Asian financial crisis (1997–98) — proximate causes and data:
- Sudden reversal of capital flows: net inflows to the Asian crisis countries were roughly 6.3% of their GDP in 1995, and 5.8% in 1996; in 1997 net outflows were 2% of GDP, rising to 5.2% in 1998.
- Rapid credit expansion, rising non-performing loans (NPLs), currency mismatches, and fixed exchange rate pegs amplified financial distress.
- Economic consequences: decades of rapid growth halted; living standards fell and unemployment rose; Korea's GDP returned to pre-crisis levels within two years; Indonesia exited its Fund-supported program at end of 2003.
- Policy and institutional lessons:
- Importance of sound macroeconomic framework and well-regulated financial sector (addressing NPLs, capital adequacy, effective supervision).
- Need for financial institutions to develop credit risk assessment skills and for effective bankruptcy laws balancing creditor and debtor rights.
- Advantages of flexible exchange rate regimes to reduce vulnerabilities from currency mismatches.
- Interdependence of corporate sector health and financial sector soundness—financial reform must address corporate weaknesses.
- Ongoing need for reforms; IMF uses Article IV consultations and other instruments to promote these lessons.
Asia and the world — influence, representation, and leadership
- Asia's rising economic weight has increased its real-world influence, but institutional voice in global economic institutions has lagged.
- IMF position: Fund management supports proposals to rebalance voice and representation to reflect Asia's economic weight; changes require consensus among shareholders.
- Asia's potential leadership roles:
- Model for rapid sustained growth through policy example.
- Leading role in advancing trade liberalization and in pushing Doha negotiations toward agreement.
- Encouraged to ensure regional arrangements complement multilateral approaches.
Conclusion — implications and policy recommendations
- Summation of benefits and obligations:
- Asia's postwar progress is a testament to sound policies, persistent reforms, and trade liberalization; millions have escaped poverty as a result.
- Continued global and Asian progress depends on:
- Preserving and strengthening the multilateral trading system and completing the Doha round to expand markets further.
- Maintaining a stable, adaptable international financial system and completing financial sector reforms domestically.
- Asian countries leading by example through further liberalization (including difficult agricultural reforms) and by resisting protectionism among developing countries.
- Policy recommendations (explicit and implied):
- Advanced economies should fulfill commitments to reduce agricultural and other protectionist measures.
- Developing countries should commit to reducing protectionism against each other.
- Asian countries should pursue further domestic liberalization to strengthen their bargaining power in multilateral negotiations.
- Continue financial sector reforms: resolve NPLs, ensure capital adequacy, strengthen supervision, improve bankruptcy frameworks, and promote flexible exchange rates.
- Use current favorable global climate to pursue reforms that raise potential growth and reduce vulnerability to shocks.
Source: Address by Anne O. Krueger, First Deputy Managing Director, International Monetary Fund, To the Institute for Global Economics, Seoul, Korea, June 30, 2005.