[PPT] - Rebalancing Growth Rebalancing Growth in Asia in Asia Masahiro PowerPoint Presentation

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Rebalancing Growth Rebalancing Growth in Asia in Asia

Masahiro Kawai Masahiro Kawai

Dean and CEO Asian Development Bank Institute

“The World Economy Asia Lecture”

University of Nottingham Kuala Lumpur, 14 January 2010

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Kawai - Rebalancing Growth in Asia

Outline Outline

1. Introduction
2. The Global Imbalance and

Crisis

3. Economic Analysis of Growth

Rebalancing

4. Policies to Rebalance Growth
5. Conclusions

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Kawai - Rebalancing Growth in Asia

1. Introduction
1. Introduction
What is the rebalancing of growth? Is

it needed?

Has the pattern of Asian growth been
ut of balance?
Was the pre-crisis global imbalance

an important cause of the global financial crisis?

What does growth rebalancing

achieve?

Are policies effective in inducing

growth rebalancing?

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Kawai - Rebalancing Growth in Asia

Why rebalancing is important Why rebalancing is important

The global imbalance may have been a

factor behind the development of 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

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Kawai - Rebalancing Growth in Asia

2 2. . The G The Global lobal I Imbalance mbalance and Crisis and Crisis

(1) The global payments imbalance (2) The imbalance and the crisis: A causal link? (3) The US and European economies in crisis (4) Impact of the crisis on Asian economies

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(1) The g (1) The global lobal p payments ayments i imbalance mbalance

What is the global payments imbalance?

Large current account deficits in the U.S.

financed by capital inflows

Large current account surpluses in East Asia

(Japan, China, NIEs and ASEAN)

Large surpluses by oil producing countries
Europe as a whole has a relatively balanced

current account (though there are intra-regional imbalances)

Many emerging East Asian economies are

rapidly accumulating foreign exchange reserves

Kawai - Rebalancing Growth in Asia

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Kawai - Rebalancing Growth in Asia

Global current account imbalance 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, WEO October 2009

2.0
1.5
1.0
0.5

0.0 0.5 1.0 1.5 2.0 2.5 1980 1985 1990 1995 2000 2005 2010 Rest of the world Other industrial countries Other emerging Asia Middle East China Russia Japan United States

Percent of World GDP

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Current accounts of the US, Japan, Current accounts of the US, Japan, China and oil exporting countries China and oil exporting countries

900
800
700
600
500
400
300
200
100

100 200 300 400 500 1990 1995 2000 2005

US Japan China Oil Exporting Countries

Billion US dollars

Source: IMF, International Financial Statistics

Kawai - Rebalancing Growth in Asia

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Current accounts of the US, Japan, Current accounts of the US, Japan, China, Asian NIEs, ASEAN, Euro area China, Asian NIEs, ASEAN, Euro area

Source: IMF, International Financial Statistics

Kawai - Rebalancing Growth in Asia

20
15
10
5

5 10 15 20 25 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

United States Euro area Japan China Asian NIEs ASEAN-5 Middle East

Current Account/GDP (%)

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Savings-investment imbalances,

r income-expenditure gaps
US spends more than it earns—low household

savings and large fiscal deficits

Japan spends less than it earns—high

corporate sector savings (despite large fiscal deficits and declining household savings)

China’s surge of savings (and investment, but to

a lesser extent) by both corporate and household sectors

ASEAN’s sharp drop in investment in the post

1997-98 crisis

Oil producing countries’ sharp rise of savings

(oil revenues) due to oil price hikes

Kawai - Rebalancing Growth in Asia

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Savings and investment in the US Savings and investment in the US

Kawai - Rebalancing Growth in Asia

10 12 14 16 18 20 22 1980 1985 1990 1995 2000 2005

Gross Domestic Capital Formation Gross Domestic Saving

Percent of GDP (%)

Source: IMF, World Economic Outlook, October 2009

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Savings and investment in Japan Savings and investment in Japan

Kawai - Rebalancing Growth in Asia

Source: IMF, World Economic Outlook, October 2009

20 22 24 26 28 30 32 34 1980 1985 1990 1995 2000 2005

Gross Domestic Capital Formation Gross Domestic Saving

Percent of GDP (%)

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Savings and investment in China Savings and investment in China

Kawai - Rebalancing Growth in Asia

Source: ADB, Key Indicators, various issues

32 34 36 38 40 42 44 46 48 50 1980 1985 1990 1995 2000 2005

Gross Domestic Capital Formation Gross Domestic Saving

Percent of GDP (%)

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Savings and investment in Asian NIEs Savings and investment in Asian NIEs

Kawai - Rebalancing Growth in Asia

Source: IMF, World Economic Outlook, October 2009

22 24 26 28 30 32 34 36 38 1980 1985 1990 1995 2000 2005

Gross Domestic Capital Formation Gross Domestic Saving

Percent of GDP (%)

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Savings and investment in ASEAN Savings and investment in ASEAN-

4

4

Kawai - Rebalancing Growth in Asia

Source: ADB, Key Indicators, various issues

15 20 25 30 35 1980 1985 1990 1995 2000 2005

Gross Domestic Capital Formation Gross Domestic Saving

Percent of GDP (%)

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Savings and investment in Asian NIEs Savings and investment in Asian NIEs

Kawai - Rebalancing Growth in Asia

Source: IMF, World Economic Outlook, October 2009

5 10 15 20 25 30 35 40 45

1 9 8 1 9 8 2 1 9 8 4 1 9 8 6 1 9 8 8 1 9 9 1 9 9 2 1 9 9 4 1 9 9 6 1 9 9 8 2 2 2 2 4 2 6 2 8

Gross Domestic Capital Formation Gross Domestic Saving

Percent of GDP (%)

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Savings and investment in EU Savings and investment in EU

Kawai - Rebalancing Growth in Asia

Source: IMF, World Economic Outlook, October 2009

18 19 20 21 22 23 24 25 26 1980 1985 1990 1995 2000 2005

Gross Domestic Capital Formation Gross Domestic Saving

Percent of GDP (%)

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Why was the imbalance considered undesirable?

The large, persistent imbalance was deemed to

be unsustainable due to the risk of: (1) rising protectionism in the US and (2) eventual loss of confidence on the US ability to repay external debt, leading to a collapse of the value of the US dollar

The second risk above is still small because of

the near-zero balance of interest income payments, but will be serious over time

If left unaddressed, there could be a disorderly

unwinding of the imbalance, with a sharp decline in the US dollar, negatively affecting East Asian economies

Kawai - Rebalancing Growth in Asia

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Kawai - Rebalancing Growth in Asia

(2) The i (2) The imbalance mbalance and the crisis: and the crisis: A causal link? A causal link?

Two views of the c Two views of the causes auses of the crisis

f the crisis:

: Policy mistakes in crisis countries (US, Europe)

Failure of macroeconomic policy, particularly

monetary policy, to contain a buildup of domestic financial vulnerabilities and systemic risk

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”) suggest that East Asia supplied ample liquidity to the US and kept the US long-term interest rate too low

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US policy rates rose but not the housing mortgage rates in 2004-2006

1 2 3 4 5 6 7 8 9

2000M1 2000M6 2000M1 2001M4 2001M9 2002M2 2002M7 2002M1 2003M5 2003M1 2004M3 2004M8 2005M1 2005M6 2005M1 2006M4 2006M9 2007M2 2007M7 2007M1 2008M5 2008M1 2009M3

FEDERAL FUNDS RATE GOVT BOND YIELD: 3 YEAR GOVT BOND YIELD: 10 YEAR MORTGAGE RATE US Interest Rates

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Kawai - Rebalancing Growth in Asia

The validity of the 2nd view is weaker:

The deficit was concentrated in the US while

there were many surplus countries

Concentration of the crisis in the US and

Europe

Not all countries had housing bubbles (eg,

Australia and Canada managed well)

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Kawai - Rebalancing Growth in Asia

(3) The US and European (3) The US and European economies in crisis economies in crisis

Severe economic recession

Bursting of the housing bubble and

excess household debt

Loss of household assets
Rising unemployment
Consumption and imports of the US

likely to return to long-term trend

This suggests sluggish recovery and

lower potential growth in the post-crisis period

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US household debt (total, mortgage) US household debt (total, mortgage)

Source: FRB Flow of Funds, US BEA

Kawai - Rebalancing Growth in Asia

Ratio to Disposable Income, %

20 30 40 50 60 70 80 90 100 110 120 130 140 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 20 30 40 50 60 70 80 90 100 110 120 130 140 Total debt Trend Mortgage Trend

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Kawai - Rebalancing Growth in Asia

US households suffered a massive loss of wealth, and need to rebuild balance sheets

Source: US Bureau of Economic Analysis

Ratio to Disposable Income, %

300 400 500 600 700 800 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 300 400 500 600 700 800 Total assets Trend Net total assets Trend

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US and EU unemployment rates rising US and EU unemployment rates rising

Source: CEIC Note: EU15 before 2000: EU27 from 2000.

Kawai - Rebalancing Growth in Asia

Unemployment Rate, %

3 4 5 6 7 8 9 10 11 12 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 3 4 5 6 7 8 9 10 11 12 US EU

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Share of consumption & imports in Share of consumption & imports in US GDP likely to return to LT trend US GDP likely to return to LT trend

Source: CEIC

Kawai - Rebalancing Growth in Asia

Share of real GDP, %

58 60 62 64 66 68 70 72 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 4 6 8 10 12 14 16 18 Consumption Imports (RHS)

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Kawai - Rebalancing Growth in Asia

Consequently, US households Consequently, US households’ ’ savings savings rate needs to rise, and spending slow rate needs to rise, and spending slow

Source: US Bureau of Economic Analysis

2

2 4 6 8 10 12 14 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08

2

2 4 6 8 10 12 14 Disposable income (LHS) Consumption (LHS) Savings rate (RHS) Y/y% %

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Kawai - Rebalancing Growth in Asia

(4) Impact on Asia (4) Impact on Asia

Export collapse due to excessive dependence
n the US and European markets for exports,

particularly Japan, Asian NIEs, and export dependent middle-income ASEAN countries (like Malaysia and Thailand)

Some limited 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

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Final demand for Asian exports still comes Final demand for Asian exports still comes from the advanced economies from the advanced economies

Source: ADB, Asian Development Outlook

Final demand composition of Asia’s export in 2006

Kawai - Rebalancing Growth in Asia

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Japan Japan’ ’s industrial structure recently s industrial structure recently shifted to the shifted to the tradables tradables sector sector

Source: Cabinet Office, National Income Account

Kawai - Rebalancing Growth in Asia

90 100 110 120 130 140 150 160 1980 1985 1990 1995 2000 2005 non-tradables/tradables (nominal) non-tradables/tradables (real) trend (nominal) trend (real)

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China China’ ’s industrial structure has also s industrial structure has also shifted to the shifted to the tradables tradables sector sector

Source: World Bank, World Development Indicators

Kawai - Rebalancing Growth in Asia

100 120 140 160 180 200 220 240 260 1980 1985 1990 1995 2000 2005 non-tradables/tradables (nominal) non-tradables/tradables (real) trend (nominal) trend (real)

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while the US industrial structure has while the US industrial structure has shifted to the shifted to the nontradables nontradables sector sector

Source: Council of Economic Advisors, Economic Report of the President

Kawai - Rebalancing Growth in Asia

90 100 110 120 130 140 150 160 170 180 190 200 210

1980 1985 1990 1995 2000 2005 non-tradables/tradables (nominal) non-tradables/tradables (real) trend (nominal) trend (real)

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Asian policy responses to the crisis

Aggressive easing of monetary and fiscal

policy, made possible because of ample policy room due to earlier prudent management

Supported by strong fundamentals
Improved monetary policy frameworks
Strengthened balance sheets and

reduced currency risk

High foreign exchange reserve levels

Kawai - Rebalancing Growth in Asia

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Kawai - Rebalancing Growth in Asia

3 3. . Economics of Growth Economics of Growth Rebalancing Rebalancing

(1) Current account adjustment (2) A CGE simulation analysis (3) Demand side factors, and inclusiveness and sustainability of growth

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Kawai - Rebalancing Growth in Asia

(1) Current account adjustment (1) Current account adjustment

The tradables and nontradables model

An intertemporal optimizing model of

consumers (Figures 1-4)

Firm behavior of investment can be

easily incorporated, but not essential in this analysis

There are no distortions that impede

resource shifts between tradable and nontradable production

Important role of the relative price of

nontradable to tradable goods

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Tradables C1 , Y1

N N

p1

N

p1

N

N Nontradables T Q1 C1 C1

T

Y1

Current account Deficit in period 1

T

Kawai - Rebalancing Growth in Asia

US CA deficit in period 1

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Tradables p2

N

N Nontradables Q2

T

C2

Current account surplus in period 2

C2 Y2

T

p2

N

C2 , Y2

N N

Kawai - Rebalancing Growth in Asia

To be matched by a US CA surplus in period 2

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E N Tradables Nontradables T pN

Kawai - Rebalancing Growth in Asia

CA in balance

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T Tradables Q2 C2

T

Y2

T

p2

N

p2

N

C2 , Y2

N N

Current account surplus in period 2

E N Q1 p1

N

p1

N

C1 Nontradables C1

T

Y1

T

C2

Current account Deficit in period 1

C1 , Y1

N N

Kawai - Rebalancing Growth in Asia

CA adjustment in periods 1 & 2

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(2) A CGE simulation study (2) A CGE simulation study

Model assumptions

Reduction of US consumption by 5% of GDP,

which will induce US current account adjustment through real depreciation of the US dollar against the rest of the world

US GDP potential growth declines by 1% point
Exchange rate adjustment by non-US

economies with constant bilateral real exchange rates among them, or exchange rate adjustment by East Asian economies only

Current accounts endogenously adjusted
Long-run full employment

Kawai and Zhai (2009)

Kawai - Rebalancing Growth in Asia

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Evaporation of US consumption Evaporation of US consumption (together with US growth slowdown) (together with US growth slowdown) induces trans induces trans-

Pacific adjustment

Pacific adjustment

CA (change as % of GDP) Terms of trade (% change) Real private absorption (change as % of GDP) China

2.7 [-8.8]

1.2 [4.0] 3.6 [10.9] Japan

1.1 [-3.6]

1.8 [5.7] 1.7 [5.3] Korea

2.0 [-5.8]

1.1 [3.1] 2.5 [7.2] Taipei,China

2.6 [-7.9]

1.0 [2.7] 3.8 [10.8] Indonesia

1.8 [-7.5]

0.9 [3.8] 2.3 [9.3] MYS&SGP

2.1 [-12.2]

0.4 [1.6] 4.7 [22.1] Philippines

2.6 [-7.6]

0.7 [2.5] 3.5 [9.9] Thailand

2.5 [-8.0]

0.5 [2.0] 3.2 [10.4] Vietnam

5.4 [-15.5]

0.8 [2.8] 4.9 [15.5] USA 4.0 [4.0]

6.4 [-6.4]
6.9 [-6.9]

Note: Numbers in [ ] are the case of Asia-only adjustment. Source: Kawai and Zhai (2009)

Kawai - Rebalancing Growth in Asia

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Asia Asia’ ’s output adjustment differs s output adjustment differs across countries and sectors across countries and sectors

Percentage change in output

Note: Numbers in [ ] are the case of Asia-only adjustment. Source: Kawai and Zhai (2009)

East Asia China Japan Korea Taipei, China ASEAN6

Agriculture

1.2 [3.7] 1.0 [ 3.0] 1.9 [6.2] 1.1 [2.9] 3.1 [8.4] 0.6 [2.2]

Manufacturing

1.8

[-4.9]

2.2

[-6.0]

1.8

[-5.2]

1.4

[-4.2]

1.7

[-4.5]

1.0

[-2.0]

Textile

2.7

[-9.4]

3.6

[-12.7] 0.1 [-1.6]

2.2

[-7.7]

2.0

[-6.6]

3.0

[-7.9]

Apparel

3.0

[-7.6]

3.9

[-11.9] 2.5 [5.7]

0.1

[1.4]

2.4

[-3.9]

6.3

[-11.7]

Vehicles

2.9

[-7.4]

0.7

[-1.6]

4.2

[-10.7]

2.2

[-6.7]

0.8

[-1.7] 0.9 [3.3]

Electronics

1.9

[-5.0]

2.9

[-6.9]

1.8

[-5.4]

1.5

[-5.0]

1.9

[-5.6]

1.0

[-1.1]

Machinery

2.3

[-5.9]

2.1

[-5.1]

2.9

[-8.1]

1.7

[-5.3]

0.7

[-4.1]

1.0

[-0.8]

Services

0.2 [0.6] 0.6 [1.5] 0.2 [0.4] 0.2 [0.6] 0.3 [ 0.6] 0.4 [0.9]

Kawai - Rebalancing Growth in Asia

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Findings of the CGE model simulation

There will be a switch away from domestic

demand-led growth to export-led growth in the US, and a switch away from export-led growth to domestic demand-led growth in non-US (particularly East Asian) economies

A decline in US demand leads to structural

adjustment in production and trade in East Asia

East Asia’s manufacturing sectors—such as

vehicles, electronics and machinery—are major losers in the adjustment process, while its agricultural and services sectors are likely to gain from the expanded domestic demand

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Kawai - Rebalancing Growth in Asia

(3) Demand side factors, and (3) Demand side factors, and inclusiveness and sustainability inclusiveness and sustainability

Demand side factors Demand side factors

Household consumption

Level of household income (or discounted

sum of life time income)

Propensity to consume (the rate of time

preference) Corporate investment

Retained earnings (or saving) to be used for

investment

Investment climate

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Asia Asia’ ’s consumption/GDP ratios are low s consumption/GDP ratios are low

30 40 50 60 70 80 90 100 1990 1995 2000 2005 Bangladesh Cambodia China India Indonesia Korea Malaysia Philippines Singapore Thailand Vietnam Hong Kong Japan Pakistan Sri Lanka Taipei, China

Source: ADB, Key Indicators, 2009

Consumption/GDP (%)

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Social spending in Japan and Korea Social spending in Japan and Korea are low among OECD countries are low among OECD countries

5 10 15 20 25 30 Sweden France Austria Denmark Germany Belgium Finland Italy Luxembourg Portugal Hungary Norway United Kingdom Spain Poland Netherlands OECD - Total Greece Switzerland Czech Republic Japan New Zealand Australia Iceland Ireland Slovak Republic Canada United States Turkey Mexico Korea

Old age Survivors Incapacity related Health Family Active labour market programmes Unemployment Housing Other social policy areas

Kawai - Rebalancing Growth in Asia

Source: OECD

Percent of GDP, 2005

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Social protection expenditure as % of GDP Social protection expenditure as % of GDP

0.3% 1.0% 1.1% 1.3% 1.3% 1.4% 1.4% 1.5% 1.6% 1.9% 2.2% 2.3% 2.9% 3.6% 3.9% 4.0% 4.1% 4.5% 4.6% 4.6% 4.8% 5.3% 5.3% 5.7% 6.5% 6.9% 7.5% 9.8% 11.0% 11.1% 13.5% 16.0% Papua New Guinea Tajikistan Vanuatu Lao PDR Tonga Bhutan Cambodia Maldives Pakistan Indonesia Philippines Nepal Fiji Islands Cook Islands Malaysia India Viet Nam Armenia Kazakhstan PRC ASIA Azerbaijan Bangladesh Sri Lanka Nauru Tuvalu Korea Mongolia Kyrgyz Republic Uzbekistan Marshall Islands Japan

Source: ADB, Social Protection Index for Committed Poverty Reduction, Volume 2: Asia, 2008

Kawai - Rebalancing Growth in Asia

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Kawai - Rebalancing Growth in Asia

Inclusive growth, environmentally Inclusive growth, environmentally sustainable growth sustainable growth

Inclusive growth

Inclusive growth promotes access to
pportunities for growth and spreads the

benefits of growth more equitably among all people and businesses

Social sector protection
Support for SMEs

Environmentally sustainable growth

Anti-polution, anti-climate change
Energy efficiency and conservation

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Kawai - Rebalancing Growth in Asia

4

4. Policies to

. Policies to R Rebalance ebalance G Growth rowth

(1) Supply side policy (2) Demand side policy (3) Regional cooperation and integration

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Rebalancing growth Rebalancing growth

Stimulate demand for Asia’s adjustment

Large economies (Japan and China) must

focus on domestic-demand driven growth

Japan must develop its growth strategy by

addressing the challenge of population aging and public debt, and focusing on green growth and cooperation with emerging Asia

China needs to focus on social sectors

(education, health and pension), rural sectors, the environment and energy efficiency

India and ASEAN need to focus on

investment through better investment climate and infrastructure investments

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Kawai - Rebalancing Growth in Asia

(1) Supply side policy (1) Supply side policy

Deregulation of the nontradables sector

(health care, education, social services as well as new services with IT) to promote productivity growth

Reduction of domestic distortions in factor

markets (energy, resources, labor, land, credit, etc) particularly in China

Improvement of financial systems for better

financial intermediation

Promotion of the green industry (energy

efficiency, clean energy, environment)

Investment in human resource

development and knowledge

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Kawai - Rebalancing Growth in Asia

(2) Demand side policy (2) Demand side policy

Household consumption
Redistribution of income towards low-income

households whose propensity to consume is high

Strengthen social sector protection to provide

greater security thereby stimulating propensity to consume

Investment strategy
Infrastructure investment with public sector support

(enhancing physical connectivity)

Improvement of investment climate
Support of SME development & investment

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Kawai - Rebalancing Growth in Asia

(3) Regional cooperation & (3) Regional cooperation & integration integration

A region-wide FTA

ASEAN+3 or +6 FTA and investment area
Liberalization and harmonization of investment

rules

Financial market integration

More efficient financial intermediation at the

national level

Regional financial intermediation through

financial market integration (Asian Bond Markets Initiatives and Asian Bond Funds, including credit guarantee and investment mechanism)

Macroprudential supervision and regulation

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Kawai - Rebalancing Growth in Asia

Financial safeguards

East Asian economies are reluctant to go to the IMF

because of the bad experiences during the 1997-98 crisis

A credible CMIM needed to convince East Asian economies

to accept growth rebalancing

Flexibility in CMIM use needed—particularly at the time of

the type of the crisis observed in Korea in Oct.-Nov. 2008— in line with IMF FCL

Need to strengthen Chiang Mai Initiative (full multi-

lateralization, IMF delinking, surveillance unit, and eventual creation of an Asian Monetary Fund)

For this purpose, enhance regional surveillance
Involve central bank governors in the ASEAN+3 process
Establish an independent, professional secretariat
Seriously take up the exchange rate issue (ACU)

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Exchange rate policy coordination

An important mechanism of growth

rebalancing through current account adjustment is a change in the relative price of nontradable goods

Such a change can be achieved without

significant economic costs by nominal exchange rate adjustment

As many Asian economies will have to see

real exchange rate appreciation to facilitate growth rebalancing, exchange rate policy coordination will be increasingly needed because of the heightened economic interdependence in the region

This is particularly the case given the rising

inflows of capital into the region

Kawai - Rebalancing Growth in Asia

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A case for collective currency appreciation

To maintain domestic macroeconomic and

financial sector stability in the face of rapid capital inflows, and to facilitate growth rebalancing, a collective currency appreciation vs. the US dollar is desirable.

This policy maintains both the relative

currency stability within the region and national financial and macroeconomic stability while minimizing the loss of price competitiveness

This requires exchange rate policy

coordination, and it can be facilitated by the use of ACU as a monitoring devise

Kawai - Rebalancing Growth in Asia

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Developing Developing/emerging /emerging Asia Asia has has buil built t sizable sizable foreign foreign exchange exchange reserves reserves

500 1000 1500 2000 2500 3000 3500 4000 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

$ billion

Central Asia East Asia South Asia Southeast Asia The Pacific

Sources: IMF, International Financial Statistics; CEIC Data Company, Ltd.

Kawai - Rebalancing Growth in Asia

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REER trends: US rate was not exceptionally high until after 2005

60 70 80 90 100 110 120 130 1990:1 1995:1 2000:1 2005:1 Year/Quarter Index

China United States Kawai - Rebalancing Growth in Asia

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Kawai - Rebalancing Growth in Asia

5. Conclusion
5. Conclusion
In the short run, Asia must shift away from

public demand-driven growth to private sector- led growth

In the longer run, Asia needs to develop a new

growth paradigm: (1) to shift away from external (US&EU)- demand driven growth to domestic and regional demand led growth (2) A greater focus on inclusive growth (equity, access to opportunities) (3) A greater focus on environmentally sustainable growth: a shift from a high- to low-carbon economy

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Kawai - Rebalancing Growth in Asia

5. Conclusion (cont’d)
The global imbalance was a factor behind, even

though not a dominant cause of, the global financial crisis

External rebalancing requires closer policy

cooperation in Asia: structural adjustment, regional market integration, regional infrastructure investment, stronger social sector protection, green growth, regional financial cooperation, and exchange rate policy coordination

East Asia can seize this opportunity by focusing
n inclusive growth: allow both poor and middle-

income people to cope with economic risks, uncertainty and contingencies; empower SMEs

East Asia’s exchange rate management will be

key to not only growth rebalancing but also macroeconomic and financial system stability

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Thank you Thank you

For more information: For more information:

Dr. Masahiro Kawai

Dean& CEO Asian Development Bank Institute

mkawai@adbi.org +81 3 3593 5527 www.adbi.org