With the swift recovery of the Asia-Pacific region in 2010, a sense of complacency seems to be taking hold that all was back to business as usual. However, it is important not to lose sight of the challenge of rebalancing Asia-Pacific economies in favour of greater domestic consumption, and investment remains relevant to sustain the region’s dynamism over the medium and long term.
The dynamism of the Asia-Pacific economies over the past decade was significantly driven by debt-fuelled excess consumption in the advanced economies of the West. The rising current account surpluses of east and south-east Asian countries were being recycled to advanced economies, especially the US to fund its growing current account deficit. The rising current account deficit (and fiscal deficit) of the US and rising surpluses of east Asian countries are referred to as global imbalances.
It is now becoming increasingly clear that advanced countries will be restraining their debt-fuelled consumption in an effort to unwind global imbalances. The Economic Reports of the US President clearly indicate the focus of the government in the medium term on raising savings and exports. This means that the growth of imports by advanced economies of Asian products may not go back to its pre-crisis trend. The dynamism of the Asia-Pacific economies will, therefore, have to be supported by new supplementary sources of aggregate demand. These new sources of demand generation will have to be found within the region. In other words, the Asia-Pacific region’s economic growth has to be rebalanced in favour of greater domestic and regional demand over the coming decade.
There are many opportunities for rebalancing the Asia-Pacific economy. The latest Economic and Social Survey of Asia and the Pacific 2011 by the Economic and Social Commission for Asia and Pacific (ESCAP) has pointed to a growing imbalance between the Asia-Pacific sub-regions. In east Asian countries, the share of consumption in growth has declined over time while in south-east Asian countries investment has lagged behind. India is an exception, with growth fuelled by rising domestic consumption and investment. Therefore, east Asian countries will need to enhance consumption and south-east Asian countries will have to promote investment as part of the rebalancing strategy.
Other opportunities for rebalancing include poverty alleviation and closing other development gaps through inclusive policies. With over 950 million people living in poverty, the region has much headroom for generating additional aggregate demand by creating new consumers out of the poor. For this it is important to focus on agriculture in a way that sustains the bulk of the population, especially the poor and vulnerable. In the past two decades, the focus of development policies was on promoting modern sectors such as industry and services as part of the strategy to accelerate growth, while neglecting agriculture. The resultant growth created fewer jobs per unit of investment, given the focus of industry and services on automation. Future growth will have to be made more job-creating. Agriculture and rural development will create jobs and enhance consumption while strengthening food security.
Other policies to enhance domestic demand include financial inclusion and strengthening social protection. By reducing the precautionary motive for savings, social protection helps expand household consumption. An important experiment in this direction is India’s National Rural Employment Guarantee Act, which is strengthening income security of millions of households, thus attacking poverty frontally. Other schemes in the region include conditional cash transfers in Indonesia, the Philippines and so on.
Other opportunities for rebalancing include enhancing investment for closing the gaps in infrastructure development. The ESCAP report presents a composite index of infrastructure development showing wide variations across countries in the region in terms of infrastructure development, with Singapore, Japan, Australia, Republic of Korea and Malaysia occupying the top slots in terms of infrastructure development, with Papua New Guinea among other least developed countries on the other side of the spectrum and other developing countries between the two ends. India occupies a middle slot, which clearly shows large gaps.
Closing the infrastructure gap will require huge investments, which, in turn, will create aggregate demand besides contributing to growth. Recent estimates suggest that the region would need annual investments of $800 billion to close these gaps. India has recently projected the need for investments of the order of $1,000 billion over the 12th five year plan or annual investments of $200 billion.
While these investment requirements appear huge and cannot be funded by existing financial arrangements, there are opportunities for financing them within the region through institutional development. The governments of the Asia-Pacific region now own foreign exchange reserves worth more than $5 trillion, which remain invested in western securities, such as the US treasury bills, because of underdeveloped regional financial architecture. When the region’s governments and companies need to raise capital, they also go to western capital markets. Hence, the intermediation of Asian savings and their investment needs is being done by western capital markets. With the development of regional financial architecture in the Asia-Pacific region, it may be possible to deploy a small part of such reserves to finance infrastructure investment. The development of regional financial architecture to facilitate infrastructure development is, therefore, an important policy priority. ESCAP Secretariat is elaborating elements of such an architecture as part of a mandate given to it by the member states.
Finally, a major challenge for the Asia-Pacific region to sustain its dynamism in the post-crisis era would be rebalancing its economies in favour of itself. Through an emphasis on poverty reduction, job-creating growth and closing the infrastructure development gaps, it would be possible to not only enhance domestic demand but also evolve a more inclusive pattern of development. The other aspect of rebalancing is deepening regional economic integration. That will be discussed in the next column.
The author is chief economist of the United Nations Economic and Social Commission for Asia and Pacific, Bangkok
The views expressed are those of the author and do not necessarily reflect the views of the UN