The IMF needs Asia on its side. As the fastest-growing part of the world economy, the region will wield more clout at global institutions like the IMF and provide more of their funding.
The problem, to put it bluntly, is that Asia does not need the IMF or agencies like the IMF, whose invasive policy prescriptions are blamed in the region for having exacerbated the 1997/98 meltdown. Hence the charm offensive by the fund’s Managing Director, Dominique Strauss-Kahn, at a big conference in the central South Korean city of Daejon recently.
“Let me be candid: we have made some mistakes,” he said. “We have learned the importance of focusing on essential policies, and of protecting the most vulnerable, when tackling a crisis.” Declaring that he wanted Asian countries to see the IMF as a second home, Strauss-Kahn added: “Asia’s time has come in the global economy, and so it must be at the IMF.”
But there was an implicit quid pro quo. In return for a bigger role, Asia had to take more responsibility for reducing global imbalances. Governments had to nurture a “second engine of growth” — domestic demand — instead of relying so much on exports now that Europe and America face years of belt-tightening.
In a nutshell, Strauss-Kahn seemed to be saying, the IMF is ready to change. Is Asia? “The decisions made now will impact Asia’s performance for decades to come,” the IMF chief said. Against that background, it’s reasonable to ask whether Asia will be able to rise to his challenge. Shares in Indonesia are near record highs, reflecting confidence in economic reforms. India and Malaysia have both cut domestic fuel price subsidies to reduce their budget deficits. Yet some contributors to a recent VoxEU.org publication, “Rebalancing the Global Economy: A Primer for Policymaking”, wonder whether Asia really can change its spots.
Poor investment climate
The most striking imbalance in Asia is that it saves too much, and a major reason for that thriftiness is beyond the control of governments: the bulk of Asians are in their prime working years when people salt away money for their old age.
But policymakers could do much more to promote more balanced growth, for example by building social safety nets to lessen the need to save for a rainy day, allowing currency appreciation and reducing corporate savings.
Jong-Wha Lee, chief economist at the Asian Development Bank, said governments should give priority to enhancing the investment climate; Asia’s current account surpluses reflect in part a paucity of domestic investment, especially in long-term infrastructure, he argued.
“The business environment across the region lags behind the world’s competitive economies because of serious shortcomings in regional institutions and skill shortages. Remedying these weaknesses will help translate domestic savings effectively into domestic investment,” Lee wrote. His case is buttressed by a new World Bank report, “Investing Across Borders, 2010”, which examines the openness of 87 economies to foreign direct investment.
East Asia and the Pacific score poorly, with more curbs than any other region in the world on foreign equity ownership, starting a local business and accessing industrial land. Underdeveloped financial sectors are also holding up Asia’s economic transformation. The old model of a bank-dominated financial system that paid depositors a pittance and funnelled cheap loans to exporters and manufacturers is past its sell-by date. People would need to save less if they got higher returns on the money they do save.
“The process of creating diverse financial institutions has happened too slowly relative to the needs of the rising middle class and aging demographics,” Andrew Sheng, an adjunct professor at the University of Malaya and Tsinghua University in Beijing, wrote in the latest East Asian Bureau of Economic Research newsletter.
Deeper foreign exchange and capital markets would also help countries to absorb capital inflows instead of imposing administrative c ontrols on them, as Indonesia and South Korea have done recently.
Linda Lim, a professor of business strategy at the University of Michigan, said financial sector liberalisation had helped Asian rebalancing but was incomplete because of nationalist objections and resistance to increased competition.
One example was the continued dominance of China’s state-owned banks, Lim wrote in the VoxEU.org e-book. “But it is the corporate restructuring necessary to reduce high corporate savings rates that is likely to prove most politically intractable, requiring authoritarian and semi-authoritarian governments to relinquish state control of economic resources and activity on which their political power is partly based,” Lim added.
Lim singled out Singapore, Malaysia and China as countries where there was little political pressure on state-owned and government-linked firms to distribute their income to boost domestic consumption. Yung Chul Park, a professor at Seoul National University, also put economic rebalancing squarely in a political context.
Despite vanishing overseas markets, policymakers would be wary unless they were sure that domestic demand will be as powerful as exports in driving growth.
Rebalancing was a tall political order because it entailed removing tax and other incentives that favour exporters, while pursuing deregulation and market opening steps to boost the inferior productivity of non-export sectors.
“East Asia may have difficulties in finding such measures,” Park concluded drily.
Strauss-Kahn knows all this, of course. But the Daejon meeting was an opportunity to accentuate the positive and not to dwell — too much at least — on the past.
“Rapid growth has turned the region into a global economic powerhouse — and Asia’s economic weight in the world is on track to grow even larger,” he said.