Asia told to rely less on exports as growth driver

Asian countries should rely less on exports and depend more on local consumption as a major growth driver if they want to be able to cope with the region’s next challenge following the US-led global economic crisis, experts said. In the December issue of the International Monetary Funds’ (IMF) Finance & Development magazine, Asian economists also said the region should further diversify its markets, manage dollar reserves more effectively and strengthen banking regulation. "[Asian countries] should try to rebalance growth by reforming their policies and adjusting development strategies to rely less on exports and to depend more on internal demand," said Yung Chul Park, research professor and director of the Center of International Commerce and Finance at the Graduate School of International Studies, Seoul National University. At this stage, however, governments do not seem to have any idea how they should go about restructuring the economy to boost domestic demand as a major source of economic growth, he pointed out. The IMF magazine interviewed five leading Asian voices on the region’s fragile rebound. They were asked about the longer-term changes and challenges that Asia faces as a result of the global economic crisis. Park said the most significant challenge that Asian policymakers will face is dealing with fiscal policy management. Sooner or later, he said, the effects of fiscal stimulus packages will wear off, and governments will have to think of ways to sustain reasonable growth rates. "My concern is that they may turn to export promotion again, which is really something that they should try to avoid, if they are serious about resolving global imbalances," Park said. In the IMF Q&A, Singapore Finance Minister Tharman Shanmugaratnam said Asian economies have to manage problems in the short term — particularly unemployment — as well as they can. "But how we manage the short term, and how we exit from fiscal stimulus packages, must depend on what we want to see over the long term," he pointed out. "If we focus only on the short term, we risk undermining our chances for self-sustaining growth beyond the current recovery," he added. Investments vs taxes Shanmugaratnam said the key objective should be to see private investments grow, which should be the basis for long-term growth. This means Asian governments should not raise income taxes to raise more fiscal revenues, and certainly not corporate income taxes. "Fiscal exit strategies must reflect that objective. The aim is not just to reduce fiscal deficits and to prevent public debt from going out of control, but to do so in ways that give incentive for private investment to grow," he pointed out. Shanmugaratnam said East Asia’s growth will depend increasingly on how much demand it generates within the region itself, given that the US consumer could no longer drive future demand. "But it would be a mistake to move away from global markets," he argued. He noted that the real source of East Asian growth over the last three decades has been the remarkable gain in knowledge and techniques, obtained by plugging into global markets — whether through exports or imports. "Global markets spur the spread of knowledge. If we give that up, and focus production on home markets, we are going for lower long-term growth in East Asia—and globally," Shanmugaratnam said. The real challenge, he added, must be to grow East Asian demand and allow for increased imports. "Abandon export subsidies, but don’t abandon exports." Raghuram Rajan, a professor at the University of Chicago and an economic adviserr of the Prime Minister of India, agreed that over the longer term, Asia would look a little more inward rather than outward for growth, which means not just locally but also to each other. Despite the changes that have been taking place over the years, Asian exports to one another are still relatively limited compared to what they could be, he said. "I think economies will try [to] sell to each other more, which will be an interesting change. But I also think the shift in demand toward the emerging markets, toward Asia, is going to produce a whole set of new, interesting opportunities [that]companies in the region, but also companies from outside, can exploit," he said. This, Rajan said, could be a new source of growth. "This is growth targeted at the bottom of the pyramid." Ajith Cabraal governor of the Central Bank of Sri Lanka, said Asian governments should think of diversifying their markets more. "Also, our reserves management has to look at better positioning of reserves vis-à-vis where they are invested as well as their accumulation," he said. Strengthening the financial system also means stronger regulation. He also said Asian countries must look at longer-term maturities as far as debt is concerned. Likewise, they have to ensure that the capitalization of their banks is at an even higher level. While the Asian banking sector came up quite resilient, it has to strengthen itself a little more so it can absorb financial shocks more easily. "These are good lessons for us. One of the problems is that when problems ease, everything is forgotten, and people think there has been a strong recovery—faster-than-normal recovery—and they are back to business. That can lead to a false sense of complacency. We need to guard against that," he said. Victor Abola, an economist at the University of Asia and the Pacific, said much of Philippine growth is already consumption-driven. Money sent home by Filipinos working abroad stimulates spending, while government infrastructure projects also stimulate the economy. “We have not really been relying on exports. New drivers of growth are government spending especially on infrastructure, and private investments. The emphasis has been on domestic consumption," he said in an interview. The country, he said, must attract both local and foreign investments. “Even if we have strong consumption, if investments are low, the recovery will not be robust," Abola said. He said the Philippines already has good macroeconomic fundamentals apart from the widening fiscal gap. The country, he added, could achieve as much as 7 percent growth if it would adopt the right policies and practice good governance. He also agreed that it would be foolish to totally abandon exports. Instead, the Philippines should increase trade with others in the region and with Latin American countries where there are a lot of opportunities, Abola said. — Norman P. Aquino, GMANews.TV