Inclusive, Balanced, Sustained Growth in the Asia-Pacific

Executive Summary

xiii Executive Summary The recovery of the Asia-Pacific from the global economic crisis of 2008–09 is underway but incomplete. Despite encouraging progress, major risks remain, ranging from slow growth and persistent unemployment to reemerging global imbalances and renewed financial volatility. The policies that stopped the economic freefall — massive stimulus and financial bailout packages — were urgent, relatively easy to sell politically, and to a large extent forced by circumstances (particularly the fall of Lehman Brothers). Sustained recovery now requires tackling different problems, including international imbalances among the United States, China, and other economies. U.S. consumers are not likely to drive world demand in the medium term, and the slack will have to be taken up in part by Asian consumption and investment. The early policy responses, successful as they were in averting a larger calamity, were not designed to address longer-term issues, and some are even counterproductive from that perspective. INCLUSIVE, BALANCED, SUSTAINED GROWTH This report argues that given the progress already made, inclusive, balanced, sustained growth in the region — in other words, full recovery — is feasible. But renewed growth is not assured and calls for new, difficult policy choices. These include structural reforms that change economic relationships within economies and among them. International cooperation will be essential for forging and implementing this strategy. The term “rebalancing” is now widely applied to policies for sustaining the recovery. This report seeks to bring greater precision to the analysis of these issues, and in particular to policies addressing global imbalances. In 2009, the short-term effects of the crisis brought the current account imbalances of the United States, China and Japan to levels that are generally considered sustainable. But as the recovery proceeds, and assuming no major policy changes, imbalances are again likely to grow. Should markets xiv conclude that imbalances are no longer under control, currency and asset prices would become volatile again, perhaps triggering another downturn. Avoiding market volatility is one important reason for rebalancing. Providing new drivers for demand, given the expected slow recovery of consumption in the United States and Europe, is another. This will also increase expenditures in emerging economies on consumption and social priorities, helping to make growth more inclusive and to spread more widely the benefits of the region’s extraordinary economic gains. The arithmetic of rebalancing appears manageable. In the run-up to the crisis, the “excessive” part of the U.S. current account deficit (the portion above 3 per cent of GDP) amounted to around 1 per cent of the Asia-Pacific region’s GDP. These imbalances, which have exerted great stress on global financial relations, are relatively small when compared to domestic expenditures in large economies. But the arithmetic tells only part of the story; imbalances often reflect deeper distortions within national economies and are therefore politically difficult to solve. STRUCTURAL POLICIES The transition to sustained growth will require economies to exit their stimulus programmes and to replace them with structural reforms that drive growth through the recovery and beyond. Although the common effect of these policies will be to generate adequate, balanced, sustainable demand, their details depend on the structural weaknesses of different economies. For example: • U.S. policies could impose new disciplines on consumer and government spending by reining in excessive borrowing and by increasing taxes. • China’s policies could stimulate domestic demand by improving social safety nets, freeing labour markets in order to raise wages, and opening capital markets to smaller firms. • Japan and other advanced Asian economies could free up service sectors and refocus technological capabilities on growth markets such as aging populations and energy conservation. • Southeast Asia and South America could accelerate investment through measures that improve productivity and the conditions for doing business. xiv Executive Summary xv If these changes in demand are achieved, they will need to be accompanied by parallel changes in supply. Exchange rate flexibility (the appreciation of the currencies of China and other Asian exporters and depreciation of the U.S. dollar) is the least disruptive way to provide incentives for the required resource transfers. GROWTH ENGINES Demand and supply shifts could be further accelerated with high profile Asia-Pacific “growth engines” that address key social and environmental priorities. These could provide a focal point for government investments and incentives, and for support from international institutions such as the Asian Development Bank and the World Bank. Four important areas for such projects are: • Economic integration: investments in...