"A Shared Responsibility: Resolving Global Payments Imbalances"
Opening and Introductory Remarks by
Haruhiko Kuroda
President
Asian Development Bank
At the Board of Governors’ Seminar
4 May 2006
Hyderabad, India
I. Introduction
Honorable Governors and Alternate Governors, Distinguished Guests, Ladies and Gentlemen,
I would like to welcome all of you to today’s seminar. This is the third year that ADB has organized an open forum for members of the Board of Governors to share their views and insights on a topic of vital importance to the future development of Asia and the Pacific. On behalf of ADB’s Board of Directors, Management and Staff, I wish to express our sincere appreciation to all of you for your participation. We are also fortunate to have as our moderator, Mr. Martin Wolf of the Financial Times.
II. The Payments Pendulum
Ladies and Gentlemen, imagine you had fallen into a long sleep a little over a decade ago and had just woken up. You might be pleasantly surprised to find that Asia’s external payments pendulum had swung from large current account deficits and worrisome external debts, to equally large current account surpluses and unprecedented international reserves.
You would also be impressed by the huge strides that developing Asia had made in poverty reduction, much of it propelled by strong growth. Trends in South Asia would be especially pleasing, and you would marvel at how the PRC had sustained rapid growth throughout. You would be struck by the significance of progress on difficult reforms, the PRC’s accession to the WTO, and growing regional trade integration. You would hear that earlier external imbalances – that were present in the mid 1990s – had led to a crisis in much of East and Southeast Asia, but you would probably agree that the scars are now barely visible if not yet totally healed.
When you ask about what could go wrong, the specter of “global imbalances” would likely be raised. Most likely you would hear how large and rising current account surpluses in Asia now coexist with large and rising current account deficits in the United States. When you ask what caused this; what threats the imbalances pose, and what is being done to resolve the problem you could be forgiven for becoming confused.
Today, we are very fortunate to have with us a distinguished panel of experts who can bring a rich range of perspectives from around the globe to bear on these issues. Before our panel presentations begin, let me touch briefly on what I believe are some of the central challenges for developing Asia that lurk just beneath the surface of this debate on global imbalances.
III. Rebalancing Asia’s Growth
I preface these comments by acknowledging and welcoming moves towards greater flexibility in currency management by both the PRC and Malaysia. This development provides another degree of freedom in pursuing domestic macroeconomic objectives, particularly price stability. But, today, I want to go behind macroeconomic management issues to look at underlying structural dimensions of the story.
The flip side of rising current account surpluses in much of developing Asia, and the fast accumulation of international reserves assets, are imbalances in domestic saving and investment, and underdeveloped domestic and regional capital markets. These manifest themselves in different ways in different parts of the region. And although not all sub-regions are running current account surpluses, these issues have broader relevance.
Outside of the PRC, investment rates in East and Southeast Asia fell sharply after the 1997 crisis and are yet to regain earlier levels. Not only are investment rates low by historical standards, it would seem that they are insufficient to sustain growth and poverty reduction in to the future. Infrastructure gaps are enormous and can be seen everywhere. And private investors are shying away from countries with burdensome regulations, inefficient and corrupt bureaucracies and poor quality public services.
An effective response would include mobilizing more public sector resources to make up lost ground on infrastructure investment, partnering effectively with the private sector to bridge financing gaps, and taking determined steps to improve the business investment climate. Higher investment rates and better infrastructure would do much to ensure the sustainability of future growth and, more immediately, to promote a more balanced demand in countries where net exports are surging.
In the PRC, the underlying imbalance is probably better described in terms of too much saving; saving that entails unnecessary sacrifices today. The recent reform measures and reorientation of the Chinese economy foreshadowed in the Eleventh Five Year Program should go some way to boosting current consumption. But the key to unlocking consumption, as well as ensuring better quality investments, will be reforms of the banking and broader financial system that will allow markets to guide and discipline credit allocation. Investing in institutions and mechanisms that cater to pension and broader social protection needs would also dilute strong self-insurance motives for saving. Such changes would mean that domestic demand could then play a bigger role in supporting the PRC’s growth.
Fast official reserve accumulation across the region is symptomatic of a second broad challenge: the need for deeper and more efficient domestic and regional capital markets. Cross-border investment originating in Asia is still predominantly directed to the United States and Europe. Surplus savings in some Asian regions are not finding their into potentially productive investment outlets either at home or in other countries of the region. A more efficient use of surpluses, and less reliance on central bank intermediation, will require determined efforts to deepen private sector participation in both domestic and regional capital markets. In turn, this will require legal, regulatory and other institutions reforms whose success will hinge on improved governance. In tackling this difficult structural agenda and in addressing the risks posed by imbalances, regional cooperation initiatives will be critical.
Heightened concerns about global economic stability also serve as a timely reminder of the need to continue to buttress social protection and other insurance mechanisms that can mitigate threats to hard won achievements on poverty reduction. The reversals in poverty reduction and in other social achievements that followed Asia’s crisis just under a decade ago caution against complacency.
IV. Conclusions
Ladies and Gentlemen, beyond doubt, an open and vibrant international economy has brought enormous benefits to developing Asia. But global payments imbalances are now leading some to question the basis for these achievements. Within Asia, rising payments surpluses mask imbalances in the sources of growth and weaknesses in capital markets that need to be addressed. But determined action in Asia will have to be matched by adjustments in other parts of the global economy.
As regional development bank, ADB is committed to supporting its member countries in identifying and removing these constraints. But as Asia’s imprint on the global economy increases, it is critical that Asian leaders have their say on global imbalances and other issues. Full ownership of shared solutions will require broad and meaningful participation in their design. This will require more inclusive mechanisms to facilitate effective dialogue, policy coordination and governance at a global level.
And had you fallen asleep in 1995 for twenty years, not a mere ten, my hope would be that you awake to find that the global economic community had come together in a constructive and effective way in 2006 and began an adjustment process that set the scene for another decade of prosperity in the global economy.
With these issues in mind, I look forward to hearing the outcome of today’s deliberations. Thank you, and best wishes for a productive and lively discussion.
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