Shopping mall in Shanghai, China. Encouraging domestic demand is essential for continued strong, inclusive growth in Asia (Chen Fei/Xinhua/Corbis)
IMF CONFERENCE
“Emerging Asia would be strongly impacted in the event of a downside scenario in Europe or the United States, ” said Anoop Singh, Director of the IMF’s Asia and Pacific Department, adding that Asia should be prepared with a policy response in case of a global shock.
The conference was jointly organized by the IMF and the Stanford Center for International Development in Palo Alto on September 9, to foster an exchange of views on key policy issues for emerging Asia between Fund staff and the academic community.
Among the participants were the former chairman of the U.S. Council of Economic Advisors, Michael Boskin; Andrew Crockett, former chairman of the Bank for International Settlements; China specialist Barry Naughton; John Pencavel, former editor of the Journal of Economic Literature; Huang Yiping of Peking University; Li Shi of Beijing Normal University; Sudarno Sumarto of Indonesia’s Social Monitoring and Early Response Unit research institute, and several other prominent people.
Policy responses
Increasing global economic uncertainty in recent weeks has prompted a heated debate in Asian economic circles about whether Asian countries should pause in their efforts to normalize macroeconomic policy stances, which were loosened in response to the global financial crisis.
Several speakers suggested that many countries in emerging Asia still face overheating and inflation risks, and they should continue with policy normalization at this point.
Should a renewed global slump occur, Singh said that much of Asia has the ability to redeploy monetary and fiscal policy to combat it.
China’s response, as the region’s largest economy, would be particularly important. Most of the conference attendees agreed that China could, and would, respond in a timely manner following such a downturn.
But they warned that the region’s largest economy would not be able to respond as forcefully as it did in 2008. “It is unlikely that China could save the world again, if indeed it even saved the world the first time,” said one participant.
Effectiveness of fiscal policy
As well as discussing the near-term macroeconomic outlook, the conference also discussed how financial policies could facilitate medium-term sustainability, with some warning against excessive optimism about the effectiveness of fiscal policy.
Fiscal stimulus is sometimes warranted, noted some participants, but they called for a sense of realism about the benefits of stimulus bearing in mind the need to ensure the credibility of medium-term fiscal policy.
Rebalancing Asia
A discussion on rebalancing in Asia was dominated by the subject of China. Many conference attendees noted that China’s situation differed from that of many other countries in the region. China needs to raise private consumption while for others the priority is to raise private investment.
While there was broad agreement that the world’s second largest economy was set on rebalancing its economy, views differed on how urgent this need was. One argument was that China’s high and rising investment share of GDP—and low and falling consumption share―was simply the normal development path.
Others pointed to the role of financial repression in explaining low consumption, and the importance of political economy considerations in understanding the rebalancing effort.
Discussion also centered on the role of “megaprojects” particularly in high-technology sectors―such as electronics, mobile communications, aerospace, and alternative energy―in forming part of China’s rising share of investment.
The conference also debated the pressing need for socially inclusive development. High and rising inequality is a significant challenge across Asia. Structural change, including migration from agriculture to industry, was identified as one cause for the rise in inequality, but unequal opportunities also play a role, suggested the participants. Policies to foster competitive and inclusive growth and improve connectivity could have a significant payoff, they suggested.
Overall, at this difficult time for the world economy, Singh emphasized the need for global cooperation in meeting the challenges and the fact that Asia, by its policy responses, can also play a key role in helping to address the global challenges.
