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

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

Outline Outline 1. Introduction 2. The Global Imbalance and Crisis 3. Economic Analysis of Growth Rebalancing 4. Policies to Rebalance Growth 5. Conclusions 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 out 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? 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 Kawai - Rebalancing Growth in Asia

2. . The G The Global lobal I Imbalance mbalance 2 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 Kawai - Rebalancing Growth in Asia

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

Global current account imbalance Global current account imbalance 2.5 Percent of World GDP 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 -2.0 1980 1985 1990 1995 2000 2005 2010 Rest of the world Other industrial countries Other emerging Asia Middle East China Russia Japan United States Note: (1) Data for 2009 and beyond are IMF projections (2) Unlike the original IMF data, other emerging Asia includes Asian NIEs Kawai - Rebalancing Growth in Asia Source : IMF, WEO October 2009

Current accounts of the US, Japan, Current accounts of the US, Japan, China and oil exporting countries China and oil exporting countries 500 Billion US dollars 400 300 200 100 0 -100 -200 -300 -400 -500 -600 -700 -800 -900 1990 1995 2000 2005 US Japan China Oil Exporting Countries Source : IMF, International Financial Statistics Kawai - Rebalancing Growth in Asia

Current accounts of the US, Japan, Current accounts of the US, Japan, China, Asian NIEs, ASEAN, Euro area China, Asian NIEs, ASEAN, Euro area 25 Current Account/GDP (%) 20 15 10 5 0 -5 -10 -15 -20 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 Kawai - Rebalancing Growth in Asia Source : IMF, International Financial Statistics

Savings-investment imbalances, or 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

Savings and investment in the US Savings and investment in the US 22 20 18 16 14 Percent of GDP (%) 12 10 1980 1985 1990 1995 2000 2005 Gross Domestic Capital Formation Gross Domestic Saving Kawai - Rebalancing Growth in Asia Source : IMF, World Economic Outlook , October 2009

Savings and investment in Japan Savings and investment in Japan 34 Percent of GDP (%) 32 30 28 26 24 22 20 1980 1985 1990 1995 2000 2005 Gross Domestic Capital Formation Gross Domestic Saving Kawai - Rebalancing Growth in Asia Source : IMF, World Economic Outlook , October 2009

Savings and investment in China Savings and investment in China 50 Percent of GDP (%) 48 46 44 42 40 38 36 34 32 1980 1985 1990 1995 2000 2005 Gross Domestic Capital Formation Gross Domestic Saving Kawai - Rebalancing Growth in Asia Source : ADB, Key Indicators , various issues

Savings and investment in Asian NIEs Savings and investment in Asian NIEs 38 Percent of GDP (%) 36 34 32 30 28 26 24 22 1980 1985 1990 1995 2000 2005 Gross Domestic Capital Formation Gross Domestic Saving Kawai - Rebalancing Growth in Asia Source : IMF, World Economic Outlook , October 2009

Savings and investment in ASEAN- -4 4 Savings and investment in ASEAN 35 30 25 20 Percent of GDP (%) 15 1980 1985 1990 1995 2000 2005 Gross Domestic Capital Formation Gross Domestic Saving Kawai - Rebalancing Growth in Asia Source : ADB, Key Indicators , various issues

Savings and investment in Asian NIEs Savings and investment in Asian NIEs 45 Percent of GDP (%) 40 35 30 25 20 15 10 5 0 2 4 6 8 0 2 4 6 8 0 2 4 6 8 8 8 8 8 8 9 9 9 9 9 0 0 0 0 0 9 9 9 9 9 9 9 9 9 9 0 0 0 0 0 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 Gross Domestic Capital Formation Gross Domestic Saving Kawai - Rebalancing Growth in Asia Source : IMF, World Economic Outlook , October 2009

Savings and investment in EU Savings and investment in EU 26 Percent of GDP (%) 25 24 23 22 21 20 19 18 1980 1985 1990 1995 2000 2005 Gross Domestic Capital Formation Gross Domestic Saving Kawai - Rebalancing Growth in Asia Source : IMF, World Economic Outlook , October 2009

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

(2) The imbalance mbalance and the crisis: and the crisis: (2) The i A causal link? A causal link? Two views of the causes auses of the crisis of the crisis: : Two views of the c 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 Kawai - Rebalancing Growth in Asia

US policy rates rose but not the housing mortgage rates in 2004-2006 9 US Interest Rates 8 7 6 5 4 3 2 1 0 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

The validity of the 2 nd 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) 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 Kawai - Rebalancing Growth in Asia

US household debt (total, mortgage) US household debt (total, mortgage) Ratio to Disposable Income, % 140 140 130 130 120 120 110 110 100 100 90 90 80 80 70 70 60 60 50 50 40 40 30 30 20 20 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 Total debt Trend Mortgage Trend Source : FRB Flow of Funds, US BEA Kawai - Rebalancing Growth in Asia

US households suffered a massive loss of wealth, and need to rebuild balance sheets Ratio to Disposable Income, % 800 800 700 700 600 600 500 500 400 400 300 300 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 Total assets Trend Net total assets Trend Source : US Bureau of Economic Analysis Kawai - Rebalancing Growth in Asia