IMF's prescription for Asia
Deja vu or the key to growth? (06-06-07)
By Jon Fernquest[Introduction|Vocabulary|Article]
[Reading Questions|Answers]
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Less reliance on exports and more reliance on domestic demand is necessary to stimulate economic growth in Asia. This was the message from the top IMF official in Asia in a speech yesterday.
China's sheer size seems to be what worries western countries the most. The IMF speech was addressed to all of Asia though. UC Berkeley economist Brad DeLong has an interesting proposal for alleviating some of this fear of Asian economic might. [Links and quote]
Calls for reducing export reliance have a strange resemblance to Thaksin's policies of the not so distant past. Like the IMF, Thaksin's economic policies called for shifting reliance on exports to domestic demand. In 2001 when Thaksin and Somkid laid out their economic policy:
"Their aim was to move away from an 'East Asian Economic Model' that was 'overly dependent upon export produced by foreign technology brought in by foreign investors with low value-added content and relying mainly on cheap labour. As a result, Thailand's economy was extremely vulnerable to fluctuations in the global economy." (Pasuk Phongphaichit and Chris Baker (2004) Thaksin: The business of politics in Thailand, Chiang Mai: Silkworm Books, page 104)
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"...by targeting funds mainly to the rural grassroots, [Thaksin] hoped for a strong [Keynesian] multiplier on grounds villagers would immediately spend any extra income rather than saving it, and would spend a high proportion on goods produced domestically." (Pasuk and Baker, 2004, 108)Thaksin's programmes increased household consumption but they also increased levels of household debt dramatically.
Despite all these changes, Thailand's economy is as heavily reliant on exports as ever.
It's worth asking whether reliance on exports is just a fact of life that every emerging market has to face. Both Japanese and South Korean economic development after World War II were driven by exports. It's difficult to find examples of countries that became rich by focusing on domestic demand.
For further reading, read the full text of the speech on the IMF's website.
Read the full text of a speech last month by David Burton the 10th anniversary of the Asian economic crisis.
Reading Questions
Here are some questions to guide your reading (See answers at end):1. What speech is the article about? Who gave the speech? What organisation does the speaker work for? Where did he give the speech?
2. What policy change is necessary for contnued growth in Asia, according to the speaker?
3. What is necessary to sustain growth in the long-term, according to the speaker?
4. When did the baht plunge, sending the Thai economy into the 1997 economic crisis? How many years ago was this?
5. How does current foreign investment in Asia compare with pre-1997 crisis levels?
6. What began the 1997 economic crisis?
7. What other countries were severely affected by the 1997 economic crisis?
8. What was the impact of the 1997 economic crisis on Asian economies?
9. What local domestic factors contributed to the 1997 economic crisis?
10. What improvements in Asian economies will help regain foreign investment, according to the speaker?
11. What effect did the 1997 crisis have on China?
12. What challenges does the Chinese economy currently face, according to the speaker? (Skim rest of article, looking for challenges)
13. How have production and export patterns changed in China recently?
Bangkok Post Article June 6, 2007
Asia urged to trim heavy reliance on exports
Region needs more investment - IMF GILLIAN WONGSingapore - Asia must reduce its heavy reliance on exports and attract more foreign investment if it wants to sustain its robust turnaround after the 1997-98 financial crisis, an International Monetary Fund expert said yesterday.
"Asia continues to rely heavily on net exports as an engine of economic expansion," David Burton, director of the IMF's Asia-Pacific Department said.
"Over time, greater reliance on domestic demand will be needed to assure a more balanced and sustainable pattern of growth," he said in a speech to the Singapore Press Club that addressed challenges facing Asia 10 years after the financial crisis, which erupted on July 2, 1997, the day the Thai baht plunged.
Burton said one way to address the problem would be to bolster foreign investment, which hasn't recovered strongly in the region - except for China - following a sharp decline 10 years ago.
"While pre-crisis levels of investment were certainly excessive, the limited recovery is puzzling," Burton said.
The crisis started when foreign capital flows, which had sustained investment in property and other projects, rushed out of Thailand, leading to a rapid devaluation of the baht. The crisis spread through the region, with Indonesia and South Korea also falling into recessions.
Contributing factors to the crisis were the lack of transparency and weaknesses in the corporate and banking sectors, Burton said.
He said improving corporate governance and macroeconomic policy frameworks and broadening and deepening financial systems would help support investment and rebalance growth.
The IMF bailed out Thailand, Indonesia and South Korea with billions in emergency loans, but later came under criticism for imposing harsh conditions - raising interest rates, cutting public spending - that many believe exacerbated the crisis.
In China, which was largely untouched by the Asian financial crisis, investment and exports have expanded rapidly, but more needs to be done to boost domestic consumption, Burton said.
He said Beijing could do that by strengthening the country's social safety nets and redirect public spending toward social needs.
"Asia also needs to continue to adapt to evolving production and export patterns," Burton said.
"China is one example of how the supply chain changes: the country is increasingly using domestically sourced rather than regionally imported inputs in its assembly of final goods," he said.
"The key to continued adaptation to this type of challenge will be to increase the flexibility of economies, so that they remain competitive and responsive," Burton said, adding that Asian countries could further develop their capital markets, increase labour market flexibility and improve their business climate.
The region also continues to grapple with how to deal with surges in capital inflows - a reflection of the growing desire of residents in Asian countries to invest outside their home countries. But these surges could potentially contribute to asset price bubbles and create a risk that funds might flow out even more quickly, Burton said.
He suggested a combination of exchange rate flexibility and limited intervention to smooth exchange rate movements as a possible short-term response. AP
Vocabulary (in discussion above)
reliance on x - need x, must have x
sustain - keep it going, continuing for a long time
robust - strong and healthy
turnaround - a recovery, economy gets better after downturn
robust turnaround - economy gets stronger after downturn
engine of economic expansion - something causing growth in economy (for example an increase in exports)
David Burton - director of the IMF's Asia-Pacific Department
Singapore Press Club - networking organisation for journalists in Singapore founded in 1971 (See website)
address the problem - think about how to solve the problem
bolster - add to, increase
recovered - became well again
puzzling - confusing, difficult to understand or figure out
foreign capital flows - investment entering and leaving the country in response to promising returns, some of it long-term investment by large institutional investors or Foreign Direct Investment by multi-nationals setting up offshore factories, some of it short-term speculative flows responding to small opportunities for profits such as interest or exchange rate differentials
contributing factors - things that effect an event or situation (for example, daily exercise is an important factor in personal health)
lack of transparency - what is actually happening is hidden (See Wikipedia on transparency)
corporate governance - the running of a public corporation by a board of directors, including standards for proecting the rights of shareholders and other stakeholders in the corporation (See Wikipedia)
bailed out - providing money when someone has a money problem
exacerbated - made worse
boost - increase
boost domestic consumption - make people save less and consume more (by definition income is split between saving and consumption)
social safety nets - social insurance, social security, government programmes that protect citizens from things they can't prevent like accidents, sudden unemployment or sickness
redirect - change direction
redirect public spending - change what the government is using its money for
the supply chain - the flow of materials, information, and finances as they move in a process from supplier to manufacturer to wholesaler to retailer to consumer. Many organizations are looking to supply chain optimization as a means of gaining significant competitive advantages (Source and Wikipedia)
domestically sourced - bought domestically, look for and buy within the country
continued adaptation to this type of challenge - changing to solve problems that you face
labour market flexibility - where people work determined mostly by supply and demand
the business climate - how easy it is for businesses to do business (are there lots of government regulations?, is it hard to get loans?, are interest rates high?, are prices for inputs such as oil, labor, and raw materials predictable or jumping around all over the place?)
grapple with how to deal with x - think about how to solve problem x
surge - sudden increase
* surges in capital inflows
asset price bubbles - when asset prices increase through speculation far beyond what they are usually worth to people (See The Economist and glossary)
exchange rate flexibility - when the government allows the exchange rate to move up and down in response to market forces, nowadays the exchange rate is not completely flosting or completely fixed (See The Economist)
intervention - when the government buys and sells in foreign exchange markets to prevent the exchange rate from moving up and down too much (See glossary)
limited intervention - only a small amount of government buying and selling in foreign exchange markets (exchange rate floats without a lot of control)
Answer Key:
1. What speech is the article about? Who gave the speech? What organisation does the speaker work for? Where did he give the speech?
The speech was given by David Burton, director of the IMF's Asia-Pacific Department, at the Singapore Press Club.
2. What policy change is necessary for contnued growth in Asia, according to the speaker?
a. Reduced reliance on exports to fuel economic growth.
b. More foreign investment.
("Asia must reduce its heavy reliance on exports and attract more foreign investment if it wants to sustain its robust turnaround after the 1997-98 financial crisis, an International Monetary Fund expert said yesterday...'Asia continues to rely heavily on net exports as an engine of economic expansion...'")
3. What is necessary to sustain growth in the long-term, according to the speaker?
Sustained growth will have to rely on domestic demand more.
4. When did the baht plunge, sending the Thai economy into the 1997 economic crisis? How many years ago was this?
July 2, 1997.
Almost exactly 10 years ago.
5. How does current foreign investment in Asia compare with pre-1997 crisis levels?
Compared with pre-1997 levels foreign investment in Asia has "not recovered strongly."
This implies that foreign investment is not as high as expected, but not that it is lower than before. Foreign investment in Asia was growing with an upward trend.
[Library or internet research; Find statistics to prove this]
6. What began the 1997 economic crisis?
Foreign capital flowed quickly out of Thailand, the baht quickly fell in value, and the investment, which sustained high property values and many other projects, no longer existed.
7. What other countries were severely affected by the 1997 economic crisis?
South Korea and Indonesia.
8. What was the impact of the 1997 economic crisis on Asian economies?
Asian economies fell into a deep recession.
9. What local domestic factors contributed to the 1997 economic crisis?
a. Lack of transparency
b. Weakness in the corporate and banking sectors.
10. What improvements in Asian economies will help regain foreign investment, according to the speaker?
a. Improved corporate governance.
b. Improved macroeconomic policy frameworks
c. Broadening and deepening financial systems.
11. What effect did the 1997 crisis have on China?
Not much, China was left "largely untouched by the Asian Financial crisis."
12. What challenges does the Chinese economy currently face, according to the speaker? (Skim rest of article, looking for challenges)
a. Need to boost domestic consumption.
b. Strengthen country's social safety nets.
c. Redicrect public spending towards social needs.
d. Needs to adapt better to changing production and export patterns.
e. Increased flexibility of economy to remain competitive and responsive to changes in international markets.
f. Increase labor market flexibility.
g. Improve business climate (less government regulation)
h. More exchange rate flexibility
i. Only limited intervention to smooth exchange rate movements.
13. How have production and export patterns changed in China recently?
China is increasingly using locally produced rather than regionally imported intermediate goods in the assembly of final goods.
