Asia’s Contribution to Global Rebalancing

Adams, Charles; Jeong, Hoe Yun; Park, Cyn-Young Working Paper Asia’s Contribution to Global Rebalancing ADB Working Paper Series on Regional Economic Integration, No. 58 Provided in Cooperation with: Asian Development Bank (ADB), Manila Suggested Citation: Adams, Charles; Jeong, Hoe Yun; Park, Cyn-Young (2010) : Asia’s Contribution to Global Rebalancing, ADB Working Paper Series on Regional Economic Integration, No. 58, Asian Development Bank (ADB), Manila, https://hdl.handle.net/11540/1944 This Version is available at: https://hdl.handle.net/10419/109560 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. http://creativecommons.org/licenses/by/3.0/igo Asia’s Contribution to Global Rebalancing Charles Adams, Hoe Yun Jeong, and Cyn-Young Park No. 58 | September 2010 ADB Working Paper Series on Regional Economic Integration ADB Working Paper Series on Regional Economic Integration Asia’s Contribution to Global Rebalancing Charles Adams,+ Hoe Yun Jeong,++ and Cyn-Young Park+++ No. 58 September 2010 The paper was prepared initially to provide support for the Presidential Committee for the G-20 Summit, Republic of Korea. We thank Jong-Wha Lee, Srinivasa Madhur, Peter Morgan for their valuable insights and comments. Thanks also go to Rogelio Mercado and Theresa Robles for their excellent research assistance. All remaining errors are ours. +Charles Adams is Visiting Professor at Lee Kuan Yew School of Public Policy, National University of Singapore, 469C Bukit Timah Road, Singapore 259772. Tel +65 6516 6193. [email protected] ++Hoe Yun Jeong is Economist, Office of Regional Economic Integration, ADB, 6 ADB Avenue, Mandaluyong City, 1550 Metro Manila, Philippines. Tel + 632 632 4126. [email protected]. +++Cyn-Young Park is Principal Economist, Office of Regional Economic Integration, ADB, 6 ADB Avenue, Mandaluyong City, 1550 Metro Manila, Philippines. Tel +632 632 5473. [email protected] The ADB Working Paper Series on Regional Economic Integration focuses on topics relating to regional cooperation and integration in the areas of infrastructure and software, trade and investment, money and finance, and regional public goods. The Series is a quick-disseminating, informal publication that seeks to provide information, generate discussion, and elicit comments. Working papers published under this Series may subsequently be published elsewhere. Disclaimer: The views expressed in this publication are those of the authors and do not necessarily reflect the views and policies of the Asian Development Bank (ADB) or its Board of Governors or the governments they represent. ADB does not guarantee the accuracy of the data included in this publication and accepts no responsibility for any consequence of their use. By making any designation of or reference to a particular territory or geographic area, or by using the term ―country‖ in this document, ADB does not intend to make any judgments as to the legal or other status of any territory or area. Unless otherwise noted, $ refers to US dollars. © 2010 by Asian Development Bank September 2010 Publication Stock No. Contents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Abstract iv 1. Introduction 1 2. Global Imbalances and Asia 2 3. Domestic Rebalancing 3 4. Regional Rebalancing 5 4.1 Increasing Spending in Both Home Goods and Imports 6 4.2 Trade and Investment Facilitation/Liberalization 7 5. Conclusion 9 References 15 ADB Working Paper Series on Regional Economic Integration 16 Figures 1. World Current Account Balance (% of world GDP) 11 2. Savings Rates of Individual Asian Economies 11 3. Investment Rates of Individual Asian Economies 12 4. Current Account Balance (% of GDP) 12 5. Gross International Reserves (% of regional total) 13 6. Composition of Savings—People's Rep. of China (% of GDP) 13 7. Export Dependence and Exposure (%) 14 Abstract Developing Asia remains at the core of global payment imbalances. While the geographical concentration of current account imbalances is rather significant, with the People’s Republic of China accounting for the lion’s share of the region’s current account surplus, how Asia contributes to global rebalancing also depends critically on the NIEs and larger ASEAN economies. Given the region’s huge diversity, the necessary national macroeconomic and structural policies will vary significantly across Asia’s emerging economies. Whereas near-term rebalancing efforts will be driven primarily by macroeconomic and exchange rate policies, mediumto long-term measures will involve policies and structural reforms directed to boost domestic and regional demand as a source of economic growth. In this paper, we argue that regional rebalancing will depend critically on the adoption of deeper and more comprehensive structural reforms and further trade liberalization that promote domestic spending—thus reducing Asia’s high dependence on extra regional demand. Priority policies should include infrastructure spending, competition, trade, financial development, investment, immigration, and other social policies to reduce national savings. Keywords: global imbalances, Asia, rebalancing JEL Classification: F42, F43, E61 Asia’s Contribution to Global Rebalancing | 1 1. Introduction Developing Asia remains at the core of global payment imbalances. Globally, its net current account surplus accounted for more than 30% of the world current account balance in 2008, while averaging about 50% of the global GDP during the past decade (Figure 1). As a result, the region also accumulated sizable—and in some cases excessive—foreign exchange reserves since the late 1990s.1 The bulk of the remaining current account surpluses were in the Middle East and the Commonwealth of Independent States (CIS). On the other side of the ledger, the United States continues to be home for the lion’s share of global current account deficits.2 The geographical concentration of current account imbalances is rather significant in developing Asia, with the People’s Republic of China accounting for the lion’s share of the region’s current account surplus. The most significant surpluses have been in the People's Republic of China (PRC), with its current account surpluses accounting for 61.2% of Asia’s 2008 total. Excluding Japan, where surpluses have been large but stable, the PRC’s share of the region’s current account surplus is nearly 80%. The PRC’s contribution to the region’s reserve accumulation has been even larger—its reserves now account for over 50% of emerging Asia’s total. Then follow the four newly industrializing economies (NIEs) of Hong Kong, China; Republic of Korea (Korea); Taipei,China; and Singapore, and other large Association of Southeast Asian Nations (ASEAN) economies.3 In contrast several emerging Asian economies—including India and Viet Nam—have been running current account deficits, while many others have been relatively balanced. While how emerging Asia contributes to global rebalancing depends critically on the PRC, the NIEs and larger ASEAN economies will also have to contribute depending on the size of their surpluses. The region’s economic diversity requires a wide-ranging set of policy measures to tackle the problem of domestic, regional, and global imbalances. The PRC needs to play a critical role in the region’s contribution to global rebalancing—given the increasing size of its economy and external imbalances.4 But, the NIEs and larger ASEAN economies will also have to contribute depending on the size of their surpluses. Many of the region’s smaller economies also face country-specific external imbalances, even if their 1 Gross reserves can be increased either through current account surpluses (―own‖ reserves) or through financial and capital account surpluses (―borrowed‖ reserves). 2 Given international current account asymmetry, surpluses and deficits across economies do not add to zero. 3 ASEAN-4 comprises Indonesia, Malaysia, Philippines, and Thailand. 4 See ADB 2009. 2 | Working Paper Series on Regional Economic Integration No. 58 contribution to the overall global imbalance remains negligible.5 Understanding these different policy requirements is essential to achieve more harmonious global, regional, and domestic rebalancing. Ultimately, a concerted and coordinated regional approach will be key to an orderly global rebalancing process. Concerted policy adjustments can potentially reinforce this process through two key channels. First and foremost, there are important positive spillovers when countries work together to boost demand while avoiding unnecessary adverse movements in intraregional exchange rates. Second, enhancing intra-regional trade offers each of the region's economies a high degree of trade openness—with all associated benefits— even as the region as a whole becomes less dependent on extra-regional demand. 2. Global Imbalances and Asia Although there is no single explanation for international payment imbalances, the underlying cause appears to be the stark differences in saving and investment behavior6 across economies. The striking differences in national saving and investment behavior must reflect the different macroeconomic and exchange rate policies, along with structural factors (Figures 2 and 3). In Asia, large current account surpluses also derived from the success of outward-orientated growth strategies that supported high levels of extra-regional exports at the expense of bolstering domestic demand. The region’s substantially large external imbalances also reflect its post 1997/98 crisis efforts to build strong international reserves. In many of the region’s economies, imbalances have also come from a determined effort to build large stockpiles of (gross) international reserves.7 In response to the 1997/98 Asian financial crisis, authorities sought self-insurance against the kinds of capital flow reversals that occurred then and during other episodes of systemic stress. This was also done with an eye to better manage stress in international financial markets. Nonetheless, the aggregate Asia’s picture masks important differences in external positions across the region and over time. 5 In some cases, for example, in Brunei Darussalam and Timor-Leste, current account surpluses have been over 50% of GDP. Given their small size and resource-based economies, the contribution of these economies to the region’s overall current account surpluses has been negligible. 6 The current account for any country is approximately equal to the difference between its domestic saving and investment. 7 Reserves can be either owned or borrowed and it is only in the former case that their accumulation will require a current account surplus. Asia’s Contribution to Global Rebalancing | 9 steps in this direction. Given the region’s heterogeneity, different economies will benefit more from different kinds of liberalization. Some will gain more from liberalizing one particular service than another. Thus, regional support for trade liberalization must ensure that national approaches to trade liberalization are broad and comprehensive, with enough room to eventually bring about a region-wide FTA. 5. Conclusion Regional rebalancing will depend importantly on the adoption of deeper and more comprehensive structural reforms. The longer-term reforms should aim not only to facilitate needed private expenditure increases and shifting expenditures across sectors, but also to make economies less dependent on external demand. As a result, reforms can contribute to improving the region’s resilience to external shocks. A check list of reforms would include but not be limited to the following areas and issues:  Infrastructure Spending. Adequate infrastructure is mandatory—not only for trade but also to accelerate growth in the non-tradable sector and internal distribution networks. Policies that focus mainly on infrastructure for special export zones, for example, should be pared with greater attention to industries and sectors that can potentially serve domestic as well as foreign markets. Given the huge infrastructure needs across the region, infrastructure investment can potentially be useful for applying Asian savings toward Asian investment.  Competition Policy. While the international market is highly competitive, domestic sectors of many economies in the region are not characterized by high levels of competition and, in several cases, have monopolistic or oligopolistic structures. National authorities could usefully explore competition policies for the non-tradable domestic sector—retailing, construction, financial services, and telecoms, among others—including breaking down monopolistic structures and/or expanding international trade in services. In principle, a level playing field across the domestic economy and for exports needs to be built in an economy. Using tax and subsidy schemes can be one way. These measures should be broadly neutral and not provide artificial incentives for exports over production for the domestic market.  Financial Development Policy. The region’s bank-dominated financial systems have made considerable progress in strengthening risk management and broadening credit allocation beyond traditional business (Adams 2008). During the past decade, there has also been significant progress developing regional capital markets and, in particular, local currency bond markets. Less progress has been made, however, in ensuring access of SMEs outside the export sector to bank or nonbank financing—or in consumer credit. National 10 | Working Paper Series on Regional Economic Integration No. 58 authorities could usefully identify and address impediments to this type of finance as part of the effort to achieve better balanced economic structures.  Trade Policy. Continued behind the border restrictions on trade in goods and services also contribute to unbalanced economic structures. Prudent liberalization of formal or informal restrictions on trade can play a potentially important role in encouraging competition in local markets and improve economic efficiency. As part of a broad-based regional strategy, this liberalization will also open up other markets for the more efficient provision of goods and service across the region.  Investment Policy. Foreign or local investment geared toward local markets would have important payoffs and play an increasingly important role as economies mature. With growing income and expanding middle classes across the region, the demand curve for final consumer goods will naturally shift over time, bringing growth to domestic markets, especially for higher-end consumer goods and services. Efforts should also be made to identify and address factors that weaken investment in the five 1997/98 crisis-affected countries.  Immigration Policy. Further relaxation of the relatively tight immigration policies in several countries in the region could play a role in rebalancing. Initially, this might involve allowing only short-term employment, but in increasing cases it could involve longer-term contracts. In addition to allowing countries to get the labor required for new sectors, liberalizing immigration accelerates growth of services such as tourism and expands the range of potentially tradable goods and services.  Other Social Policies to Reduce National Savings. Authorities should identify the factors contributing to the very high national savings rates beyond what’s considered optimal in several countries—including savings rates in households and businesses. Where high personal savings reflect high precautionary saving, policies to ensure adequate social insurance or, alternatively, private insurance could be strengthened. Thus, when surges in corporate savings lie behind very high national savings rates, consideration could be given to corporate governance and related reforms to help ensure that corporate profits can spillover into the households to support private consumption. Asia’s Contribution to Global Rebalancing | 11 Figure 1: World Current Account Balance (% of world GDP) -2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 United States Japan China, People's Rep. of Russia Middle East Rest of Developing Asia Other industrial countries Rest of the World Source: Asian Development Outlook 2009 Figure 2: Savings Rates of Individual Asian Economies NIEs = newly industrialized economies. Source: Asian Development Outlook 2009. 12 | Working Paper Series on Regional Economic Integration No. 58 Figure 3: Investment Rates of Individual Asian Economies NIEs = newly industrialized economies. Source: Asian Development Outlook 2009. Figure 4: Current Account Balance (% of GDP) -0.6 13.6 9.6 -11.8 0.6 6.2 18.6 2.2 17.5 3.2 0.0 -2.5 -15 -10 -5 0 5 10 15 20 25 Viet Nam Thailand Taipei,China Singapore Philippines Malaysia Korea, Republic of Japan Indonesia India Hong Kong, China China, People's Republic of 2008 2009 2010Q1 GDP = gross domestic product. 1Excludes China, People's Republic of; Hong Kong, China; India; Malaysia; Philippines; and Viet Nam for 2010Q1. Source: Asian Development Outlook 2010, ADB; International Financial Statistics, International Monetary Fund; CEIC; and national sources. Asia’s Contribution to Global Rebalancing | 13 Figure 5: Gross International Reserves (% of regional total) 010 20 30 40 50 60 Viet Nam Thailand Taipei,China Singapore Philippines Malaysia Korea, Rep. of Indonesia India Hong Kong, China China, People's Rep. of 2009 2008 2007 2006 2005 Note: Gross international reserves include US dollar value of foreign exchange reserves, special drawing rights, reserve position in the International Monetary Fund, and gold at the end of a given period. Source: Asian Development Outlook 2010. Figure 6: Composition of Savings—People's Rep. of China (% of GDP) 0 10 20 30 40 50 60 1995 1997 1999 2001 2003 2005 Households Corporations Government National savings rate Figure XX. Composition of Savings—People's Rep. of China (% of GDP) Source: Asian Development Outlook 2009. 2006 Source: Asian Development Outlook 2009. 14 | Working Paper Series on Regional Economic Integration No. 58 Figure 7: Export Dependence and Exposure (%) Malaysia Japan Korea, Rep. of China, People's Rep. of Thailand Singapore Philippines Indonesia Taipei,China 0 10 20 30 40 50 60 70 80 010 20 30 40 50 60 70 80 90 100 Dependence Exposure Note: Export exposure is defined as the share of exported value-added in total value-added; export dependence is the contribution of export value-added to growth. The gray line indicates the OECD average for export exposure. Source: Regional Economic Outlook: Asia and the Pacific 2010, International Monetary Fund. Asia’s Contribution to Global Rebalancing | 15 References C..Adams. 2008. Emerging East Asian Banking Systems Ten Years After the Crisis. ADB Working Paper Series on Regional Economic Integration. No. 16. Manila: Asian Development Bank. 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Regulatory Reforms for Improving the Business Environment in Selected Asian Economies—How Monitoring and Comparative Benchmarking Can Provide Incentive for Reform. ADB Working Paper Series on Regional Economic Integration. No. 40. Manila: Asian Development Bank. 16 | Working Paper Series on Regional Economic Integration No. 60 ADB Working Paper Series on Regional Economic Integration* 1. ―The ASEAN Economic Community and the European Experience‖ by Michael G. Plummer 2. ―Economic Integration in East Asia: Trends, Prospects, and a Possible Roadmap‖ by Pradumna B. Rana 3. ―Central Asia after Fifteen Years of Transition: Growth, Regional Cooperation, and Policy Choices‖ by Malcolm Dowling and Ganeshan Wignaraja 4. ―Global Imbalances and the Asian Economies: Implications for Regional Cooperation‖ by Barry Eichengreen 5. ―Toward Win-Win Regionalism in Asia: Issues and Challenges in Forming Efficient Trade Agreements‖ by Michael G. Plummer 6. ―Liberalizing Cross-Border Capital Flows: How Effective Are Institutional Arrangements against Crisis in Southeast Asia‖ by Alfred Steinherr, Alessandro Cisotta, Erik Klär, and Kenan Šehović 7. ―Managing the Noodle Bowl: The Fragility of East Asian Regionalism‖ by Richard E. Baldwin 8. ―Measuring Regional Market Integration in Developing Asia: a Dynamic Factor Error Correction Model (DF-ECM) Approach‖ by Duo Qin, Marie Anne Cagas, Geoffrey Ducanes, Nedelyn Magtibay-Ramos, and Pilipinas F. Quising 9. ―The Post-Crisis Sequencing of Economic Integration in Asia: Trade as a Complement to a Monetary Future‖ by Michael G. Plummer and Ganeshan Wignaraja 10. ―Trade Intensity and Business Cycle Synchronization: The Case of East Asia‖ by Pradumna B. Rana 11. ―Inequality and Growth Revisited‖ by Robert J. Barro 12. ―Securitization in East Asia‖ by Paul Lejot, Douglas Arner, and Lotte SchouZibell 13. ―Patterns and Determinants of Cross-border Financial Asset Holdings in East Asia‖ by Jong-Wha Lee 14. ―Regionalism as an Engine of Multilateralism: A Case for a Single East Asian FTA‖ by Masahiro Kawai and Ganeshan Wignaraja Asia’s Contribution to Global Rebalancing | 17 15. ―The Impact of Capital Inflows on Emerging East Asian Economies: Is Too Much Money Chasing Too Little Good?‖ by Soyoung Kim and Doo Yong Yang 16. ―Emerging East Asian Banking Systems Ten Years after the 1997/98 Crisis‖ by Charles Adams 17. ―Real and Financial Integration in East Asia" by Soyoung Kim and Jong-Wha Lee 18. ―Global Financial Turmoil: Impact and Challenges for Asia’s Financial Systems‖ by Jong-Wha Lee and Cyn-Young Park 19. ―Cambodia’s Persistent Dollarization: Causes and Policy Options‖ by Jayant Menon 20. ―Welfare Implications of International Financial Integration‖ by Jong-Wha Lee and Kwanho Shin 21. ―Is the ASEAN-Korea Free Trade Area (AKFTA) an Optimal Free Trade Area?‖ by Donghyun Park, Innwon Park, and Gemma Esther B. Estrada 22. ―India’s Bond Market—Developments and Challenges Ahead‖ by Stephen Wells and Lotte SchouZibell 23. ―Commodity Prices and Monetary Policy in Emerging East Asia‖ by Hsiao Chink Tang 24. ―Does Trade Integration Contribute to Peace?‖ by Jong-Wha Lee and Ju Hyun Pyun 25. ―Aging in Asia: Trends, Impacts, and Responses‖ by Jayant Menon and Anna Melendez-Nakamura 26. ―Re-considering Asian Financial Regionalism in the 1990s‖ by Shintaro Hamanaka 27. ―Managing Success in Viet Nam: Macroeconomic Consequences of Large Capital Inflows with Limited Policy Tools‖ by Jayant Menon 28. ―The Building Block versus Stumbling Block Debate of Regionalism: From the Perspective of Service Trade Liberalization in Asia‖ by Shintaro Hamanaka 29. ―East Asian and European Economic Integration: A Comparative Analysis‖ by Giovanni Capannelli and Carlo Filippini 30. ―Promoting Trade and Investment in India’s Northeastern Region‖ by M. Govinda Rao 18 | Working Paper Series on Regional Economic Integration No. 60 31. ―Emerging Asia: Decoupling or Recoupling‖ by Soyoung Kim, Jong-Wha Lee, and Cyn-Young Park 32. ―India’s Role in South Asia Trade and Investment Integration‖ by Rajiv Kumar and Manjeeta Singh 33. ―Developing Indicators for Regional Economic Integration and Cooperation‖ by Giovanni Capannelli, Jong-Wha Lee, and Peter Petri 34. ―Beyond the Crisis: Financial Regulatory Reform in Emerging Asia‖ by Chee Sung Lee and Cyn-Young Park 35. ―Regional Economic Impacts of Cross-Border Infrastructure: A General Equilibrium Application to Thailand and Lao PDR‖ by Peter Warr, Jayant Menon, and Arief Anshory Yusuf 36. ―Exchange Rate Regimes in the Asia-Pacific Region and the Global Financial Crisis‖ by Warwick J. McKibbin and Waranya Pim Chanthapun 37. ―Roads for Asian Integration: Measuring ADB's Contribution to the Asian Highway Network‖ by Srinivasa Madhur, Ganeshan Wignaraja,and Peter Darjes 38. ―The Financial Crisis and Money Markets in Emerging Asia‖ by Robert Rigg and Lotte Schou-Zibell 39. ―Complements or Substitutes? Preferential and Multilateral Trade Liberalization at the Sectoral Level‖ by Mitsuyo Ando, Antoni Estevadeordal, and Christian Volpe Martincus 40. ―Regulatory Reforms for Improving the Business Environment in Selected Asian Economies—How Monitoring and Comparative Benchmarking can Provide Incentive for Reform‖ by Lotte Schou-Zibell and Srinivasa Madhur 41. ―Global Production Sharing, Trade Patterns, and Determinants of Trade Flows in East Asia‖ by Prema–Chandra Athukorala and Jayant Menon 42. ―Regionalism Cycle in Asia (-Pacific): A Game Theory Approach to the Rise and Fall of Asian Regional Institutions‖ by Shintaro Hamanaka 43. ―A Macroprudential Framework for Monitoring and Examining Financial Soundness‖ by Lotte Schou-Zibell, Jose Ramon Albert, and Lei Lei Song 44. ―A Macroprudential Framework for the Early Detection of Banking Problems in Emerging Economies‖ by Claudio Loser, Miguel Kiguel, and David Mermelstein 45. ―The 2008 Financial Crisis and Potential Output in Asia: Impact and Policy Implications‖ by Cyn-Young Park, Ruperto Majuca, and Josef Yap