Rebalancing Growth: Ensuring Neutrality of the Incentive System

To sustain robust, long-term growth in Asia, the abovementioned short-term measures need to be carried out in parallel with institutional and policy reforms that will usher in a new development strategy that focuses on internal demand as a source of growth. This is because, with the global economy in deep recession and the rise in trade protectionism, the region cannot export its way out of the crisis. Even when the global economy recovers and financial stability is restored, it may no longer be viable to return to the pre-crisis export-led strategy (Asian Development Bank 2009).

Throughout Asia, there is an emerging consensus that the shortterm stimulus packages should be viewed as the first step toward achieving the goal of rebalancing growth, the key to surviving the global economic crisis. In this policy brief, rebalancing is defined as the process of removing the bias against the non-tradable sector. Countries adhering to an export-led growth strategy are likely to maintain internal terms of trade that are in favor of tradables. In such economies, the relative prices of tradables are kept at artificially higher levels so as to induce the allocation of resources to export-oriented industries. Rebalancing growth will require the elimination of this structural bias so as to facilitate the allocation of more resources to the non-tradable sector. To this end, it is necessary to wind down the incentive schemes for export promotion that often include tax breaks, preferential lending, and other explicit and implicit subsidies to exporters.

In embracing a rebalancing strategy, distinctions should be made between an export-led growth strategy and export-led growth. The former is a strategy in which the underlying incentive structure is biased in favor of exports; this is not the case for export-led growth. Because of comparative advantage and other structural characteristics, some market-oriented open economies may rely more on external demand for growth than others, even though their incentive schemes are neutral, and they may run either deficits or surpluses on their current accounts.² With the exception of the PRC, most East Asian export-oriented economies have phased out the subsidization of exports, including keeping the currency undervalued, and as such they may be classified as export-led growth countries with relatively neutral incentive schemes (Blanchard and Giavazzi 2006).

Since the 1997–1998 Asian financial crisis, weak investment has been one of the major causes of slow growth in non-PRC Asia. Stimulating domestic investment will therefore need to be a top priority for rebalancing growth in the region, in addition to consumption expansion. While reviving investment is critical, it will also have to be managed in a way that will refocus the allocation of investment away from export-led industries and toward the non-tradable sector, improving social welfare education, health care, and the pension system, and protecting the environment. In this regard, the adoption of a low carbon and green growth strategy will help protect the environment and also help boost the domestic demand for a variety of new services that a green growth strategy is expected to generate.

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