Policy Issues Pertaining to Rebalancing

This section identifies policy options the Asian tigers need to adopt to realize the process of rebalancing their economies. It is important to note at the outset that boosting domestic demand through structural reforms in these economies would not necessarily require abandoning the export-led growth strategy or turning back from economic openness. Rather, it is a policy imperative for the Asian tigers to remain open to trade and capital flows for the following reasons: Firstly, exports and output often mutually reinforce each other. For instance, exports are known to enhance long-run growth potential by accelerating the process of human capital accumulation which in turn fosters growth (see Chuang, 1998). Secondly, with reference to endogenous growth models, imports also tend to have a positive impact on labor productivity. It is well recognized that imports act as an important channel for foreign technology and knowledge (Grossman and Helpman, 1991). Thirdly, retaining a degree of openness would encourage foreign direct investment inflows that contribute to domestic economic growth through channels such as the injection of greater competitive forces, the introduction of managerial innovations, and the restructuring of underperforming firms.⁹

Notwithstanding the need to remain integrated with the world economy, it is in the interest of the Asian tigers to increase their resilience against a possibly protracted period of subdued global demand conditions. After all, the unwinding of the huge global imbalances will likely require a prolonged period of adjustment to the global structure of supply and demand. The resolution of the imbalances does not imply the Asian tigers should all attempt to achieve balanced current accounts. Rather, what is required are policies that facilitate a more balanced structure of demand and growth within the economies. Given the mismatch between what the Asian tigers produce and what they consume, such rebalancing will require major adjustments to their underlying economic structure. The rebalancing of growth towards domestic demand will thus be a complex structural process that is not only difficult but also time consuming (Adams and Park, 2009). Nevertheless, there is scope for policy adjustments in the Asian tigers in view of their strong economic fundamentals, fiscal latitude and sound financial systems.

Furthermore, as pointed out by Li (2002), the erstwhile largely complementary economic relationship between the Asian tigers and PRC—in the form of the former supplying capital while the latter providing cheap labour—is likely to evolve into a more competitive relationship in the future as PRC moves up the value chain and progresses to higher value-added industries. This suggests the Asian tigers would also need to identify new areas of comparative advantage as well as seek out new areas of complementarities, especially those that would help them reduce their reliance on extra-regional demand.

As the income level in PRC rises, there is a growing culture of consumerism with shifts in spending patterns leading to higher consumption of luxury goods and services. For instance, strong demand from PRC has been driving the recent recovery in the retail of branded watches and jewelry, while tourist arrivals in the Asian tigers from PRC have been growing rapidly (He et al. 2007). In fact, this shift towards consumption whereby goods and services that had previously been regarded as luxuries are now viewed as necessities is also evident amongst the young urban generation in many traditionally thrifty societies in the region. The Asian tigers should continue to position themselves to capitalize on such ongoing increases in intra-regional demand by re-orientating their economic structures in such a way that taps into the changing spending patterns of prospering Asian countries.

In this regard, the Asian tigers could maintain their dynamic and niche-based competitiveness by focusing on services exports particularly through building up ancillary capabilities. Services sector productivity in Hong Kong, China; Korea; Singapore; and Taipei,China stand at approximately 84, 27, 58 and 53, respectively, on a scale of 1 to 100, where 100 represents the productivity level in the US services sector. This suggests there is ample room for further developing the services industry and there is a need to eradicate existing policy distortions that favor the manufacturing industry.

Regulatory reforms in the services sector of the Asian tigers would not only boost productivity in this sector but also generate large gains in overall economic growth. Policy initiatives such as funding the upgrading of workers' skills and expertise would result in a more knowledgeable and experienced workforce that would enhance the quality of services. Moreover, policies that induce firms to innovate their work processes and incorporate the use of technology would lead to the improvement of work practices. Business investments targeting higher valued-added exportable services industries such as financial services, medical tourism, and tertiary education should also be encouraged, perhaps by offering tax breaks and incentives for regional expansion.

Apart from tradable services, service sector companies in the Asian tigers that provide lower-value home-grown services such as retail; food and beverages; and personal grooming should also be granted greater tax incentives and a reduction in start-up costs. These industries are important for the stimulation of local consumption as they generate employment and income for the majority of the unskilled population. It follows that the long held bias in favour of the production of tradables over non-tradables in these economies has to be reduced to bring about an increase in domestic consumer demand.¹⁰

Meanwhile, demand side policies for reducing the mismatch between output and demand structures should aim to narrow the income gap or at least arrest any further worsening of the income distribution.¹¹ In particular, wage levels at the lower end of the income scale should be raised to alleviate the financial insecurity felt by local residents. Of course, this should be matched by an increase in their productivity such as through retraining efforts. For instance, in the case of Singapore, the authorities have begun to slow the upsurge of low skilled migrant workers as their hitherto easy availability removes the incentives for companies to upgrade and places downward pressure on wages of the lower skilled domestic workforce.

A rise in household consumption brought about by a reduction in precautionary saving could also be induced through further development of the financial markets in Asian tiger economies. For instance, a wider array of financial products could be offered to provide investment opportunities that give better rates of return. The provision of high yielding saving vehicles would help raise household incomes. Moreover, the introduction of annuity products, health insurance schemes, and education financial assistance programs would help ease the requisite level of saving for retirement, medical, and education purposes. Nevertheless, we note that in response to financial sector reforms in the aftermath of the Asian crisis, consumer credit expanded very rapidly—particularly in Korea and to a lesser extend in Taipei,China—leading to a jump in household delinquencies and nonperforming loans (IMF, 2006a). Hence, it is vital for the supervisory authorities to keep pace with new developments in the financial markets and impose regulatory curbs on excessive consumer lending to ensure financial stability.

The aforementioned policy recommendations apply in general to all the Asian tigers. However, those targeted at boosting domestic demand should be implemented to a greater extent in Korea and Taipei,China. As noted in the earlier section, these larger economies have more scope than the small economies of Hong Kong, China and Singapore to increase their reliance on domestic demand. We now turn our attention to Taipei,China.

The Taipei,China economy, which grew at a rapid 9.2% year-on-year in the fourth quarter of 2009, has not only returned to pre-crisis growth levels but also outperformed the other three Asian tigers, whose corresponding growth figures are 2.6%, 6%, and 3.5% for Hong Kong, China; Korea' and Singapore, respectively.¹² Interestingly, PRC featured prominently in the rapid recovery of Taipei,China, even as exports of final goods to PRC increased from 17.8% of total exports at the start of 2009 to 29.2% in January 2010. As shown in Figure 14d in the previous section, exports for final consumption in PRC have been accounting for a growing share of PRC's trade deficit with Taipei,China over time. This reflects the increased penetration of Taipei,China's goods in PRC's markets. Indeed, economic linkages between these two countries have proliferated since the 1990s.¹³ However, official figures tend to underestimate trade and investment flows between them due to various cross-border restrictions and political reasons. Taipei,China's trade with and investment in mainland PRC have all along been partly intermediated through third parties such as Hong Kong, China; Japan; and Singapore. For that matter, Hong Kong, China also serves as a key intermediary to the rest of the world for PRC's external trade via re-exports and offshore trade, as well as for raising international capital in the form of foreign direct investment, equity and bond financing and syndicated loans to finance PRC's economic boom.

Cheung et al. (2003) assessed the degree of real and financial integration between Taipei,China and mainland PRC (as well as Hong Kong, China) by testing for real interest rate parity, uncovered interest rate parity, and real purchasing power parity. The authors found that these three parity conditions do hold over the long term, thereby providing empirical evidence of real and financial capital mobility as well as goods market integration between the Taipei,China and PRC, notwithstanding the presence of various forms trade barriers and capital controls. As these impediments continue to be lifted, Taipei,China will gain economically through further integrating its economy with PRC. Wang (2003) used a computable general equilibrium model to show the positive effects of a free trade area in the “Greater China” region, comprising mainland PRC, Hong Kong, China and Taipei,China. Furthermore, Zhang and Sato (2007) found increasing structural symmetry amongst these three economies that raises the potential of the region to become a candidate for monetary union. Taipei,China is likely to continue intensifying its economic integration with mainland PRC which will concomitantly reduce its dependence on extra-regional markets, consequently aiding in global rebalancing.

In a similar vein, a way forward to advance trans-Pacific rebalancing is to establish a common market within the region over the long term as this will raise intra-Asian demand and investment (Kawai, 2009). Combining markets in the region could prove an effective strategy given the Asian economies, with few exceptions, do not individually have the scale to transit from externally-driven to internally-driven growth. The market enlargement would also induce growth through greater competition amongst firms that will lead to productivity gains, and through efficiency gains for the consumers (both final and intermediate) by an increase in the range of product choice. Drawing on the European experience with the 1992 European Single Market Programme, measures that would need to taken include the adoption of a trade liberalization programme;¹⁴ lowering barriers to cross border public procurement; enforcement of competition policy in all sectors; and eliminating hindrances to free movement of labor, capital and services across member countries. Clearly, many hurdles to embarking on these initiatives such as historical legacy issues, territorial disputes, structural and institutional heterogeneity and economic diversity exist. Nonetheless, the probable muted recovery in the advanced industrialized countries might just provide the necessary impetus to overcome the political, economic and institutional challenges and accelerate efforts to establish a common market within Asia.

Download this Paper [ PDF 182.3KB| 31 pages ].

Comment(s)

There are [0] comment(s) for this entry. Post a comment.