Kawai - Rebalancing for Sustainable Growth A Joint Conference of ADBI and RIS on Sustainable Growth and Enhancing Integration in Asia Masahiro Kawai Dean and CEO Asian Development Bank Institute New Delhi 15 September 2010

Kawai - Rebalancing for Sustainable Growth Outline 1.The Challenges for Asia 2.Asian Growth and the Global Imbalance 3.Crisis Impacts 4.Balanced and Sustainable Growth 5.An Agenda for Rebalancing for Sustainable Growth 6.The Path to Sustainable Growth

Kawai - Rebalancing for Sustainable Growth 1. 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 Global Imbalance The global payments imbalance The imbalance and the crisis: A causal link?

Kawai - Rebalancing for Sustainable Growth (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 NIEs Source: IMF, World Economic Outlook database

Kawai - Rebalancing for Sustainable Growth (ii) The imbalance and the crisis: A causal link? 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 risk Regulatory 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 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 rebounded Export Growth in East Asia (in %) Source: CEIC database

Kawai - Rebalancing for Sustainable Growth Asian real GDP growth pattern similar Real GDP Growth in East Asia (in %) Source: CEIC database

Kawai - Rebalancing for Sustainable Growth 4. Balanced and Sustainable Growth 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 Stimulating 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 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 Rebalancing for Sustainable Growth Improving macroeconomic stability Rebalancing production Enhancing social protection Deepening the financial sector Forging regional cooperation

Kawai - Rebalancing for Sustainable Growth Improving 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 production Objectives Enhance human capital investment, technological innovation, and productivity Promote the service sector and green growth Liberalize trade and investment globally and regionally Improve cross-border infrastructure connectivity Policy measures Provide workers with high quality education and marketable skills and invest in R&D Remove obstacles to investment, entry, and businesses; and promote energy efficiency and environmental protection Support the World Trade Organization Doha round and regional FTAs Invest in regional infrastructure

Kawai - Rebalancing for Sustainable Growth Enhancing social protection Objectives Strengthen social protection programs and provide support to the vulnerable Improve targeting of social protection programs Ensure sustainability and adequacy of social benefits Policy measures Design cost-effective social protection programs and reform pension systems In low-income countries, focus on extreme poverty, basic health, and nutrition Provide capacity building to improve governance and administrative efficiency

Kawai - Rebalancing for Sustainable Growth Social protection expenditure as % of GDP Source: ADB, Social Protection Index for Committed Poverty Reduction, Volume 2: Asia, 2008

Kawai - Rebalancing for Sustainable Growth Deepening the financial system Objectives Broaden and deepen financial markets while maintaining financial stability Increase the ability to prevent and manage financial crises Improve efficiency of regional financial intermediation Enhance financing for SMEs Policy measures Create effective frameworks for financial regulation and supervision, including adoption of macroprudential supervision and resolution regimes Promote local-currency bond markets; and improve market infrastructure Develop credit databases; and raise accounting standards and services

Kawai - Rebalancing for Sustainable Growth Forging regional cooperation Objectives Strengthen regional 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 Growth 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 you For more information: Dr. Masahiro Kawai Dean& CEO Asian Development Bank Institute