Kawai - Rebalancing for Sustainable Growth A Joint Conference of ADBI and RIS A Joint Conference of ADBI and RIS on on Sustainable Growth and Sustainable Growth and Enhancing Integration in Enhancing Integration in Asia Asia Masahiro Kawai Masahiro Kawai Dean and CEO Asian Development Bank Institute New Delhi 15 September 2010
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Kawai - Rebalancing for Sustainable Growth A Joint Conference of ADBI and RIS on Sustainable Growth and Enhancing Integration in Asia Masahiro Kawai Dean.
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Kawai - Rebalancing for Sustainable Growth
A Joint Conference of ADBI and RIS onA Joint Conference of ADBI and RIS on
Sustainable Growth and Sustainable Growth and Enhancing Integration in AsiaEnhancing Integration in Asia
Masahiro KawaiMasahiro KawaiDean and CEO
Asian Development Bank Institute
New Delhi15 September 2010
Kawai - Rebalancing for Sustainable Growth
OutlineOutline
1.1. The Challenges for AsiaThe Challenges for Asia
2.2. Asian Growth and the Global Asian Growth and the Global ImbalanceImbalance
3.3. Crisis ImpactsCrisis Impacts
4.4. Balanced and Sustainable GrowthBalanced and Sustainable Growth
5.5. An Agenda for Rebalancing for An Agenda for Rebalancing for Sustainable GrowthSustainable Growth
6.6. The Path to Sustainable GrowthThe Path to Sustainable Growth
Kawai - Rebalancing for Sustainable Growth
1. The Challenges for Asia1. The Challenges for Asia• Despite many improvements, Asia was still
vulnerable to the global financial crisis• The pre-crisis global imbalance may have
contributed to the global financial crisis• US and European demand for Asian export
products is likely to remain subdued• Asia needs to rely more on domestic and
regional demand for growth• What policies are effective in reducing a
large global payments imbalance?• How can Asia’s growth be made more
balanced, inclusive and sustainable?
Kawai - Rebalancing for Sustainable Growth
2. Asian Growth and the 2. Asian Growth and the Global ImbalanceGlobal Imbalance
• The global payments imbalance
• The imbalance and the crisis: A causal link?
Kawai - Rebalancing for Sustainable Growth
(i) Global current account imbalance(i) Global current account imbalance
Note: (1) Data for 2009 and beyond are IMF projections (2) Unlike the original IMF data, other emerging Asia includes Asian NIEsSource: IMF, World Economic Outlook database
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
United States
Japan
Russia
PRC
Middle East
Other emerging Asia
Other industrial countries
Rest of the world
Kawai - Rebalancing for Sustainable Growth
(ii) The imbalance and the crisis:(ii) The imbalance and the crisis:A causal link?A causal link?
Three major causes of the crisis:Three major causes of the crisis:Macro policy mistakes in crisis economies (US,
Europe)• Failure of monetary policy, to contain a buildup of
domestic financial vulnerabilities and systemic riskRegulatory failures in crisis economies• Flaws in financial regulation and supervision• Weak global financial architecture
* IMF, “Initial Lessons of the Crisis for the Global Architecture and the IMF” (February 2009).
Global payments imbalance• The arguments by Greenspan (“conundrum”) and
Bernanke (“savings glut”) suggested that East Asia supplied ample liquidity to the US and kept the US long-term interest rate too low
Kawai - Rebalancing for Sustainable Growth
The importance of the third cause is less:• The current account deficit was concentrated
in the US while there were many surplus countries
• The financial crisis was concentrated in the US and Europe
• Not all countries had housing bubbles or crises (eg, Australia and Canada managed well)
Kawai - Rebalancing for Sustainable Growth
3. Crisis Impacts3. Crisis Impacts• Export collapse due to the excessive
dependence on the US and European markets for exports, particularly in Japan, Asian NIEs, and export dependent middle-income ASEAN countries (like Malaysia and Thailand)
• Some notable financial contagion, particularly in Korea, which almost had a currency crisis
• Loss of business and consumer confidence• GDP contraction or slowdown• But quick reaction with countercyclical fiscal
and monetary policy
Kawai - Rebalancing for Sustainable Growth
Asian exports plunged, then reboundedAsian exports plunged, then reboundedExport Growth in East Asia (in %)
Source: CEIC database
-60
-40
-20
0
20
40
60
Jan-06
Apr-06
Jul-06
Oct-06
Jan-07
Apr-07
Jul-07
Oct-07
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
Apr-10
PRC Japan NIEs ASEAN 5
Kawai - Rebalancing for Sustainable Growth
Asian real GDP growth pattern similarAsian real GDP growth pattern similar
Real GDP Growth in East Asia (in %)
Source: CEIC database
-10
-5
0
5
10
15
20
Mar
-05
Jun-
05
Sep-
05
Dec-
05
Mar
-06
Jun-
06
Sep-
06
Dec-
06
Mar
-07
Jun-
07
Sep-
07
Dec-
07
Mar
-08
Jun-
08
Sep-
08
Dec-
08
Mar
-09
Jun-
09
Sep-
09
Dec-
09
Mar
-10
PRC Japan NIEs ASEAN 5
Kawai - Rebalancing for Sustainable Growth
4. Balanced and Sustainable 4. Balanced and Sustainable GrowthGrowth
• Balanced growth that reduces large current account surpluses through less dependence on exports to advanced economies
• Inclusive growth that reaches all segments of society, expands access to opportunities, and also contributes to poverty reduction
• Environmentally sustainable growth that is consistent with long-term environmental and resource constraints, including climate change
Kawai - Rebalancing for Sustainable Growth
(i) Demand side policy(i) Demand side policyStimulating household consumption• Raising the level of household income
- Redistribution of retained earnings (or corporate savings) towards households- Rural sector development to raise farmers’ income
• Raising the propensity to consume (time preference)- Redistribution of income towards low-income households whose propensity to consume is high- Strronger social sector protection to provide greater security thereby stimulating propensity to consume
Promoting corporate & infrastructure investment• Improvement of investment climate• Infrastructure investment with public sector support
(enhancing physical connectivity)
Kawai - Rebalancing for Sustainable Growth
(ii) Supply side policy(ii) Supply side policy• Deregulation of the nontradables sector (health
care, education, social services) as well as business supporting services (with IT) to promote productivity growth
• Reduction of domestic distortions in factor markets (energy, resources, labor, land, credit, etc) particularly in China
• Free trade and investment agreements• Improvement of financial systems for better
financial intermediation• Promotion of the green industry (energy efficiency,
clean energy, environment)• Support of SME development & investment• Investment in human resource development and
knowledge
Kawai - Rebalancing for Sustainable Growth
5. An Agenda for 5. An Agenda for Rebalancing for Sustainable Rebalancing for Sustainable
GrowthGrowth
• Improving macroeconomic stability
• Rebalancing production • Enhancing social protection• Deepening the financial sector • Forging regional cooperation
Kawai - Rebalancing for Sustainable Growth
Improving macroeconomic stabilityImproving macroeconomic stability Objectives• Improve the
effectiveness of macroeconomic policies
• Promote macroeconomic stability
• Facilitate global rebalancing
Policy measures• Secure sufficient policy
space; strengthen coordination of monetary & macroprudential policies to achieve both price & financial stability; and enhance automatic stabilizers
• Exit from easy monetary and fiscal policy when recovery takes hold; accept currency appreciation in response to persistent capital inflows
• Use regional cooperation to provide liquidity in the event of a crisis
Kawai - Rebalancing for Sustainable Growth
Rebalancing productionRebalancing production Objectives• Enhance human capital
investment, technological innovation, and productivity
• Promote the service sector and green growth
• Liberalize trade and investment globally and regionally
liquidity provision, surveillance and macroeconomic policy cooperation
• Integrate regional markets
• Initiate exchange rate policy coordination
• Contribute to reform of global economic and financial architecture
Policy measures• Strengthen the Chiang Mai
Initiative Multilateralization & the ASEAN+3 Macroeconomic Research Office, leading to the creation of an Asian Monetary Fund; establish an Asian Financial Stability Dialogue
• Implement a region-wide FTA, including services and investment
• Create an Asian currency unit to facilitate policy dialogue and bond market development
• Increase Asian voice on global economic & financial institutions
Kawai - Rebalancing for Sustainable Growth
6. The Path to Sustainable 6. The Path to Sustainable GrowthGrowth
• In the longer run, East Asia needs to develop a new growth paradigm:- A shift away from external (US&EU)-demand driven growth to domestic and regional demand led growth- A greater focus on inclusive growth (equity, access to opportunities) - A greater focus on environmentally sustainable growth: a shift from a high- to low-carbon economy
• This requires structural reforms in both the supply and demand sides of the economy- National level measures- Regional cooperation and integration- Asian contribution to reform of global economic and financial architecture
Kawai - Rebalancing for Sustainable Growth
Thank youThank youFor more information:For more information: