Payments Imbalances Expose Structural Weaknesses, ADB President Tells Governors' Seminar

HYDERABAD, INDIA - The flip side of Asia’s burgeoning current account surpluses are structural imbalances in country investment and saving rates, ADB President Haruhiko Kuroda told the Governors’ Seminar on A Shared Responsibility: Fixing Global Payments Imbalances.

Speaking on the second day of the 39th Annual Meeting of the Board of Governors, Mr. Kuroda noted that across much of East and Southeast Asia investment rates remain stunted following the 1997 financial crisis.

In the People’s Republic of China (PRC), lofty saving and widening disparities in income levels are keeping consumption in check. While welcoming steps towards greater currency flexibility in the region, Mr. Kuroda looked forward to further moves and stressed that measures were needed to rebalance domestic economies.

“Higher investment rates and better infrastructure would do much to ensure the sustainability of future growth and, more immediately, to balance demand in countries where net exports are surging,” he said. Although lifting investment will require mobilizing more public sector resources this will not be enough.

Ways will also have to be found to allow the private and public sector to partner more effectively. Mr. Kuroda stressed that the success of these efforts will hinge on improved performance by the public sector, strengthened governance and a better business investment climate.

Mr. Kuroda noted that the PRC’s circumstances were different. In the PRC, “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,” he said.

Mr. Kuroda added that the development of pension and social protection measures would help cut savings, allowing domestic demand play a bigger role in supporting the PRC's growth.

In the wider region, fast official reserve accumulation is symptomatic of another broad challenge – the need for deeper and more efficient domestic and regional capital markets, Mr. Kuroda said. “Cross-border investment originating in Asia is still predominantly directed to the United States and Europe,” he said. Asia's surplus savings are not finding their way into productive investment outlets at home or within the region.

More efficient use of surpluses will require deepening of the private sector's role in domestic and regional capital markets. This in turn will require legal, regulatory, and other reforms whose success will also turn on improved governance, he said.

"In tackling this difficult structural agenda and in addressing the risks posed by imbalances, regional cooperation initiatives will be critical," Mr. Kuroda said.

The Governors’ Seminar featured presentations by P. Chidambaram, Chair of the Board of Governors of ADB and ADB Governor for India; Sadakazu Tanigaki, Minister of Finance and ADB Governor for Japan; Timothy Adams, Undersecretary for International Affairs, Treasury, United States; Li Yong, Vice Minister of Finance and ADB Alternate Governor for the PRC; and Wolfgang Morke, Director, International Relations Department, Deutsche Bundesbank and Alternate Director, Bank for International Settlements. The event was moderated by Martin Wolf of the Financial Times.

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