Speech

Conference on Economic Transformation and Inclusive Growth in Frontier Asia

January 28, 2013

It is my honor and pleasure to welcome the Ministers, Governors, and other participants who have traveled to Bangkok to join the Second Joint IMF-JICA Conference on Frontier Asia.

The term “frontier” is used for the group of less-developed countries that have experienced prolonged periods of growth. Indeed, the countries represented at this conference have experienced average growth of 6 percent a year over the past two decades, a performance surpassed only by China and India.

Since the onset of the global financial crisis in 2008, Asia has demonstrated an extraordinary economic resilience, emerging as an important engine of global growth and as a source of stability. While the world’s attention has tended to focus on the region’s largest economies, there has been another important development—the achievements of Frontier Asia, nations that are on a path to writing a new Asian success story. The theme of this conference—“Economic Transformation and Inclusive Growth”—is timely, and I am sure we are all looking forward to tomorrow’s discussion.

We are gathered for this conference with the purpose of sharing experiences and discussing policies that can help accelerate the progress of the countries that are represented. The challenges you face in your work as policymakers are quite varied but there are many common themes. Moreover, it is clear that Asia’s economic fate is increasingly tied to regional cooperation, and I hope that your exchanges here will also help strengthen your ties.

The prospects for Frontier Asia are very good. With a combined population of 350 million people, Frontier Asia is increasingly playing an important role within Asia and the world. The recent political and economic changes in Myanmar have ushered onto the stage another economy with great potential.

The events of the past four and a half years have underscored just how much individual countries are influenced by global economic and financial market developments. This highlights just how impressive your gains have been during this period, but it also suggests that a great deal still depends on events half a world away. So with that in mind, allow me to take a moment to discuss recent trends in the world economy.

The Global Outlook

The IMF has just released the latest update to its World Economic Outlook, and the projections are both heartening and frustrating. They are heartening because the global economy appears to be emerging from the danger zone after a prolonged crisis, and financial conditions are improving. They are frustrating because the recovery remains weak and unsteady.

World growth in 2013 is projected to reach 3.5 percent, which is only a little higher than the 3.2 percent recorded last year and still significantly below previous periods. Policy actions have lowered the acute crisis risks in the euro area, but the ongoing contraction in that region appears to be protracted, and we expect continued recession this year (0.2 percent contraction) instead of the slight recovery we earlier had forecast. In addition, although Japan appears to have returned to recession in 2012, stimulus is expected to boost growth in the near term. The U.S. is likely to achieve about 2 percent growth as consumption firms up in response to the slow turnaround in the housing market and supportive financial markets. But the U.S. continues to face considerable uncertainty because of the continuing political stalemate over long-term fiscal issues.

In emerging markets and developing countries, policies have supported a modest pick-up in growth in some economies, but others continue to struggle with weak external demand and domestic bottlenecks. We believe that these economies are on track to grow about 5.5 percent in 2013—but still not back to the high growth rates that we saw in 2010-2011. Here, too, developments in advanced economies will have a great impact.

Global Policy Priorities

The first priority now must be to follow through on policies that will put these global uncertainties to rest. A key common challenge among advanced countries is restoring fiscal sustainability—introducing medium-term plans to bring down public debt at a pace that is attuned to country circumstances and does not undermine the recovery.

A second priority is to finish the job of financial sector reform. Despite progress, the process has gone on too long, and helps prolong uncertainty. We have seen signs of waning commitment, delays in implementation, and inconsistency of approaches. The ultimate goal is a financial sector that supports growth and the real economy—one that behaves differently from before the crisis.

The third global priority is a new focus on the real economy. For example, the crisis will never be over as long as unemployment remains so high (200 million people are out of work today). We need also growth that is inclusive to combat rising inequalities. Priorities include: shifting from energy subsidies to robust social safety nets, financial inclusion, and minimum wages in certain situations. Growth must also be balanced to continue shifting demand from advanced countries to the emerging markets, and also from an environmental perspective, including by addressing the increasingly important issue of climate change.

What does this mean for Frontier Asia?

Many of these global issues are relevant for Frontier Asia policymakers in the room today.

Although Frontier Asia is not a homogenous group and includes commodity-rich countries, manufacturing exporters, and some remittance-dependent economies, there are a number of common macroeconomic, financial, and structural challenges.

What are the key challenges for Frontier Asia? Let me highlight three:
• The need to accelerate reforms: Economic development critically involves the dynamic reallocation of resources from less productive to more productive sectors. In the past, broad-based liberalization efforts (including trade liberalization and accession to WTO) facilitated, for example, the shift from agriculture to manufacturing, which in turn was accompanied by rapid growth. However, to sustain high growth rates reforms must be intensified without delay, including the strengthening of institutions. The transformation of economic sectors that allow countries to move up the value chain should be continued, and full advantage should be taken of new production possibilities.
• Another challenge will be to ensure that financial development does not create vulnerabilities. Frontier Asia has experienced strong credit growth over the last decade. While financial sector development is beneficial, it can lead to stresses in the financial system and a misallocation of resources that can undermine stability and the growth prospects of these countries. Among other measures, this will require financial sector regulation and supervision to keep up with the changing landscape of the financial sector.
• And the third challenge is to ensure that all citizens benefit from economic growth. Despite strong economic growth, income inequality in Frontier Asia has increased significantly. And despite financial sector deepening, a large share of the population still does not have access to financial services, with negative consequences for poverty reduction and inclusiveness of growth.

As I said earlier, you have made many impressive gains. But you are also looking at ways to mitigate not just the impact of the problems in advanced economies, but also of the slower growth that emerging market economies have been experiencing. The goal is clear: to join the next generation of emerging markets. But moving to that stage of development presents many challenges. Some of these issues are the focus of this conference, and we will come back to them tomorrow.

The IMF as a Partner

The success of Frontier Asia depends first and foremost on the efforts of each country—its government, its business sector, its people. But the outside world has can contribute as well. This includes donor communities, which can continue providing the assistance that is so crucial to development, both in terms of financing and know-how. In this regard, Japan has been a very active partner in the region, as already mentioned by Vice President Kodera.

The IMF also stands ready to be a partner, together with JICA and other development agencies, in assisting you in putting in place the conditions for continued economic progress. Our primary objective is well known to you: to assist the region in entrenching macroeconomic stability and implementing the reforms that will enhance growth, for the benefit of all citizens.

In pursuit of these goals, we are strengthening engagement with Frontier Asia through increased bilateral and cross-country analysis and well-tailored policy advice. We are also seeking ways to enhance your efforts to strengthen regional cooperation, and are looking for your ideas of how best to do this.

One area the IMF has expanded is our technical assistance and training programs. We have increased our technical assistance delivery to Frontier Asia over the last couple of years, and recently opened our regional technical assistance office for Myanmar and Lao here in Bangkok. I would like to express our gratitude to the Bank of Thailand for its support and collaboration in setting up the office. Also, we continue to offer a range of programs at our training facility in Singapore, in which many of your colleagues have participated over the last 15 years. I would like to assure you that we are committed to continuing to provide capacity building support to Frontier Asia and are seeking ways to expand our technical assistance capacity.

Let me also point out that the 2009 reforms of the IMF’s lending facilities for low-income countries created new lending facilities that could be useful for the Frontier Asia. A couple of countries are already taking advantage of them. These facilities are more flexible and better-tailored to the increasingly diverse needs of the developing countries. Depending on the circumstances and nature of the balance of payments difficulties, the facilities can be useful to support structural reforms over the medium-term, or to provide precautionary financing to reinforce effective policies, or to respond to shocks such as those related to sudden increases in food and fuel prices or natural disasters.

I hope that these discussions can build upon our exchanges in Tokyo in 2011. And I believe that we can take important steps here in Bangkok toward creating the progress that is essential to the prosperity and well-being of your countries.

I would like to once again thank you for joining us for this important conference, and I look forward to working with you in the future. Thank you!