CHINA
22 March 2014
IMF's Lagarde on Asian Dream
Asia needs to rejuvenate its development strategy to fulfil the Asian dream of lasting growth and shared prosperity, according to IMF Managing Director Christine Lagarde.
Asia needs to rejuvenate its development strategy to fulfil the Asian dream of lasting growth and shared prosperity, according to IMF Managing Director Christine Lagarde in an excellent speech to China's "Boao Forum".
Where would the world be today without Asia? As Lagarde said, Asia "has been the consistent global growth leader—driving an astonishing 2/3 of total growth in the five years since the crisis hit".
But Asian economies have been pumped up by welcome and necessary monetary and fiscal stimulus. However, this is not sustainable, and must be unwound.
Comprehensive structural reforms are necessary to drive the next phase of Asian development, to achieve lasting growth and shared prosperity.
Specifically, what does Asia need to do? Lagarde identifies three main areas for reform for Asia to avoid the "middle income trap".
First, Asia needs to shift from investing in physical capital to investing more in human capital, that is investing in people.
Asia still spends less on education and health than other regions. At around 4 percent of GDP, health expenditure Indonesia and the Philippines is less than half that of Latin America.
Asia needs to fully tap its workforce, especially in countries facing ageing populations and dwindling workforces, especially China, Japan, and Korea, but also Thailand and Vietnam in the not so distant future. Women are Asia’s greatest untapped resource, with five out of ten Asian women not in the work force, compared with just two out of ten men. For example, increasing women’s employment rates in line with men could increase Japanese GDP by 9 percent by 2020. The large number of workers in the informal sectors of India or Indonesia are another not fully tapped resource.
Investing in people also means protecting the most vulnerable. Effective social safety nets are critical. They protect people from sudden changes in fortune, and they ensure that vulnerable groups are not excluded from the region’s economic success.
Second, Asia needs to create a better environment for entrepreneurship and innovation such as by opening up opportunities in protected markets and professions, simplifying licensing systems, improving the enforcement of contracts or property rights, and providing adequate physical and financial infrastructure.
Third, Asia needs to improve its environment performance. For example, according to the Chinese Academy of Environmental Planning, in 2010, the cost from pollution and damage to the ecosystem was 1.54 trillion renminbi [$230 billion] or 3.5 percent of GDP, three times that of 2004.
A major enemy of the global environment is energy subsidies which encourage excessive energy consumption. Globally these subsidies amount to a staggering $1.9 trillion; roughly 8 percent of government revenues.
Lagarde's analysis and recommendations may not be very profound or original. But they do provide a powerful warning to China, and the case of its neighbor Japan is very instructive.
Japan, the country that led the renaissance of Asia, has now been in the doldrums for two decades. The main reason is a host of structural weaknesses such as closed and highly regulated domestic markets, a failure to conclude important free trade agreements with many willing partners, disincentives to female participation in the labor market, an inefficient taxation system, a closed mindset reflected in Japan's appalling capacities in the language of global business (namely English), and an inability to attract skilled migrants.
But rather than tackle these structural weaknesses, Japan has persisted in providing fiscal stimulus to its economy, with the result that it has highest public debt of any advanced country, over 200% of GDP. It is now embarking on a monetary stimulus with uncertain results. But its structural weaknesses remain.
China's excellent economic performance over the past decade, and especially through the crisis period, has been lauded by all. But China has also avoided tackling serious structural weaknesses like reform of state-owned enterprises and the banking sector. Like Japan, China has resorted to the public purse to stimulate the economy through infrastructure and other spending over the past five years.
The example of Japan should be a strong warning to China, especially since China is experiencing the effects of population aging much earlier in its ascent that Japan. But the risk is continued complacency and avoiding difficult decisions which would unsettle vested interests.
Executive Director
Asian Century Institute
www.asiancenturyinstitute.com
Where would the world be today without Asia? As Lagarde said, Asia "has been the consistent global growth leader—driving an astonishing 2/3 of total growth in the five years since the crisis hit".
But Asian economies have been pumped up by welcome and necessary monetary and fiscal stimulus. However, this is not sustainable, and must be unwound.
Comprehensive structural reforms are necessary to drive the next phase of Asian development, to achieve lasting growth and shared prosperity.
Specifically, what does Asia need to do? Lagarde identifies three main areas for reform for Asia to avoid the "middle income trap".
First, Asia needs to shift from investing in physical capital to investing more in human capital, that is investing in people.
Asia still spends less on education and health than other regions. At around 4 percent of GDP, health expenditure Indonesia and the Philippines is less than half that of Latin America.
Asia needs to fully tap its workforce, especially in countries facing ageing populations and dwindling workforces, especially China, Japan, and Korea, but also Thailand and Vietnam in the not so distant future. Women are Asia’s greatest untapped resource, with five out of ten Asian women not in the work force, compared with just two out of ten men. For example, increasing women’s employment rates in line with men could increase Japanese GDP by 9 percent by 2020. The large number of workers in the informal sectors of India or Indonesia are another not fully tapped resource.
Investing in people also means protecting the most vulnerable. Effective social safety nets are critical. They protect people from sudden changes in fortune, and they ensure that vulnerable groups are not excluded from the region’s economic success.
Second, Asia needs to create a better environment for entrepreneurship and innovation such as by opening up opportunities in protected markets and professions, simplifying licensing systems, improving the enforcement of contracts or property rights, and providing adequate physical and financial infrastructure.
Third, Asia needs to improve its environment performance. For example, according to the Chinese Academy of Environmental Planning, in 2010, the cost from pollution and damage to the ecosystem was 1.54 trillion renminbi [$230 billion] or 3.5 percent of GDP, three times that of 2004.
A major enemy of the global environment is energy subsidies which encourage excessive energy consumption. Globally these subsidies amount to a staggering $1.9 trillion; roughly 8 percent of government revenues.
Lagarde's analysis and recommendations may not be very profound or original. But they do provide a powerful warning to China, and the case of its neighbor Japan is very instructive.
Japan, the country that led the renaissance of Asia, has now been in the doldrums for two decades. The main reason is a host of structural weaknesses such as closed and highly regulated domestic markets, a failure to conclude important free trade agreements with many willing partners, disincentives to female participation in the labor market, an inefficient taxation system, a closed mindset reflected in Japan's appalling capacities in the language of global business (namely English), and an inability to attract skilled migrants.
But rather than tackle these structural weaknesses, Japan has persisted in providing fiscal stimulus to its economy, with the result that it has highest public debt of any advanced country, over 200% of GDP. It is now embarking on a monetary stimulus with uncertain results. But its structural weaknesses remain.
China's excellent economic performance over the past decade, and especially through the crisis period, has been lauded by all. But China has also avoided tackling serious structural weaknesses like reform of state-owned enterprises and the banking sector. Like Japan, China has resorted to the public purse to stimulate the economy through infrastructure and other spending over the past five years.
The example of Japan should be a strong warning to China, especially since China is experiencing the effects of population aging much earlier in its ascent that Japan. But the risk is continued complacency and avoiding difficult decisions which would unsettle vested interests.
Author
John WestExecutive Director
Asian Century Institute
www.asiancenturyinstitute.com