Thailand's macroeconomic future
By Jon Fernquest[Introduction | Vocabulary | Article | Reading Questions | Answers]
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Last week's coup started just as the annual IMF meetings in Singapore were drawing to a close.
Today's article is a recap of the macroeconomic challenges that lie ahead for Thailand and other countries in Asia.
The article introduces the issues in a much larger IMF report available for free online. Issues discussed include:
1. Microfinance to help people raise themselves out of poverty with small businesses
2. Labour market duality with people migrating from rural agriculture areas to urban manufacturing areas in developing countries
3. Financial protection like the Chiang Mai initiative created as a sort of Asian lendor of last resort and alternative to the IMF after the 1997 Asian financial crisis.
The article is written by David Burton, the director of the Asia-Pacific Department for the International Monetary Fund.
Reading Questions
Here are some questions to guide your reading (See answers at end):1. When was the last time the annual IMF meetings took place in Asia?
Where were they last held in Asia?
2. What economic changes has Asia undergone in the last decade?
3. What are the future prospects for growth and inflation in the region?
4. What happened in May and June of this year and how did Asia respond to these events?
5. What about prospects for capital flows into the region?
6. What impact could rising oil prices possibly have?
7. What changes in the way growth is generated will have to be made to sustain growth?
8. What changes in America, Europe, and Asia will lead to a more balanced global economy?
9. What are the past and likely future trends in consuimption in Asia? What causes these trends?
10. What government policies could reduce the need for precautionary saving?
11. What type of company has had trouble drawing adequate investment?
12. What can help generate more investment for SMEs?
13. How is Southeast Asia moving towards regional financial integration?
14. Together with rapid growth have the emerging economies of Asia experienced increasing or decreasing income equality?
15. What problems can income equality create for continued growth in an emerging economy?
16. What can help reduce income inequality?
Bangkok Post Article: September 22, 2006
The challenges ahead for Asia
BY Invitation DAVID BURTONThis week's World Bank-IMF annual meetings in Singapore were the first to take place in Asia since the Hong Kong meetings nearly a decade ago. As global financial leaders gathered, the contrast for the region could hardly be starker. In the intervening nine years, Asia has recovered from a financial crisis and re-established itself as the most dynamic and rapidly growing region in the global economy. As the IMF's current Asia and Pacific Regional Economic Outlook shows, prospects continue to look good. Economic growth in emerging and industrial Asia is expected to reach 7.5% this year, and remain at about 7% in 2007. Inflation should also remain well contained. Indeed, Asia has shown considerable resilience, reflected by its quick recovery from global financial market volatility in May and June. Prospects for capital flows to support investment are solid.
It is true that the global economic environment presents real risks for Asia. Growth in the United States, in particular, remains critical to the region's prospects. Higher oil prices could also reduce growth and push up inflation. And a more fundamental turn away from investment in emerging markets than seen in the middle of the year could slow growth and weaken regional financial markets. On the whole though, the region is well placed to deal with any risks.
Looking to the next decade, Asian policymakers will face new challenges, as they seek to maintain economic momentum and extend the benefits of rapid growth to all. The IMF's current Regional Outlook focuses on several of these challenges.
First, sustaining Asia's impressive economic performance over the medium term will require a rebalancing of growth, away from a heavy dependence on exports and toward more autonomous domestic demand. Such rebalancing would also contribute - along with structural reforms in the EU, fiscal consolidation in the US, and increased exchange rate flexibility in Asia - to an orderly unwinding of global imbalances.
Consumption in emerging Asia has failed to keep up with rapid GDP growth, reflecting in part its still young population, which favours saving for the future. Indeed, the prospective aging of much of Asia, which will bring many of its own challenges, should raise consumption over the medium term, in some cases dramatically.
But policies can help. While the right approach will vary from one country to the next, reducing the need for precautionary savings - by ensuring adequate provision of education, health care and social safety nets - and enhancing household access to bank lending and capital markets can play a significant role.
Investment also continues to lag in some countries, in particular for small and medium-sized enterprises producing for domestic markets.
Again, expanding access to bank lending - for example by improving information on credit risk - and developing capital markets, including for corporate bonds, would help.
Second, as suggested above, continued development of Asian financial sectors is critical for sustaining rapid growth. Asia's economies have become increasingly integrated with world financial markets, and this has played an important role in the development of its capital markets.
But regional financial integration remains much less advanced, and more progress in this area would provide further stimulus for capital market development. Broader development of capital markets would also produce more balanced growth. More people would have access to the savings generated, and be able to share in rapidly growing corporate profits through equity markets.
Regional integration is progressing well. Countries are developing domestic bond markets, strengthening market infrastructure, harmonising rules and practices, removing impediments to cross-border capital flows, and providing financing through the Chiang Mai initiative. But greater integration also brings new risks, which will place a premium on better risk-based supervision and more international co-operation and supervision.
Third, Asia is facing a growing divide between rich and poor. For many years, emerging Asia experienced the best of both worlds - rapid growth and increased equality - but more recently the region has seen steadily rising inequality and growing polarisation. This has been prevalent along both geographic and urban and rural lines. This matters, because rising inequality makes it more difficult to reduce poverty, and also because large income disparities can make it harder to achieve consensus on good policies.
These disparities only make for a more volatile macroeconomic environment, and lower economic growth over the longer term. No single factor can explain the rise in inequality. It is a global phenomenon, and no single policy measure can reverse it. But governments interested in spreading economic opportunity may need to consider increased and more effective education spending, providing economic infrastructure, especially in lagging regions, and reforms to eliminate both labour-market dualism and barriers to financial-sector access by the poor.
Asia's leaders are well aware of these challenges, each of which will require considerable attention in coming years. Others, perhaps not yet anticipated, may also arise. But the region appears well equipped to meet these challenges and to continue its role as a global leader in the decade ahead.
David Burton is director of the Asia-Pacific Department for the International Monetary Fund.
Vocabulary
microcredit, microfinance - providing loans to poor people so they can start their own business and work their way out of poverty (See Wikipedia on microcredit and microfinance)
starker - more unpleasant and harsh
IMF Asia and Pacific Regional Economic Outlook, IMF's current Regional Outlook - a regular IMF publication that discusses the recent economic history of the Asia-Pacific region and likely future developments
resilience - able to recover quickly from damaging events such as an economic crisis
volatility - more unpredictable up and down movement of prices
prospects - chances that something will happen
fundamental turn away from - changed and won't go back
emerging markets - economies between fully industrialized economies and developing economies (See Wikipedia on emerging markets)
well placed to - well prepared to
maintain momentum - keep growing quickly like they currently are
autonomous - by itself, not originating from other causes
structural reforms - structural adjustments, elimination of government regulations, trade barriers, privatisation of government owned businesses (See Wikipedia on structural adjustments)
fiscal consolidation - eliminating government deficit
unwinding of global imbalances - solving global econmomic problems
prospective - likely to be
precautionary savings - money saved to protect a family against emergencies in the future like paying for the hospital or finding a new job
social safety nets - insurance provided by the government to protect citizens against unforeseen events like unemployment, disability after accidents, and also pensions upon retirement, think of a "safety net" that catches you when you fall (See social security in Wikipedia)
a lag in, lagging - delayed
small and medium-sized enterprises (SMEs)-
credit risk - the risk that someone will not pay back the moeny they owe
regional financial integration - when the different countries work together more and pool their savings and capital to protect them from events outside their region
equity markets - stock markets
market infrastructure - the necessary support services that create orderly markets for financial instruments like stocks, bonds, options, and futures contracts, this includes things like a computerized exchange, market makers (people who step in and buy and sell when there are no buyers or sellers), well-defined uniform commodities that can be traded, computerized clearing and settlement facilities, etc.
impediments - barriers, laws and regulations that make it more difficult
capital flows - investment coming into and going out of a region
Chiang Mai Initiative (CMI) - a precautionary network of currency swap arrangements created by the members of ASEAN+3 (ASEAN + China, Japan, Korea) on May 6 2000 in Chiang Mai, Thailand to provide liquidity for countries that experience short-run balance of payment deficits in order to prevent a crisis and failure in those countries and subsequent regional contagion. Similar to a regional lender of resort.
place a premium on - make more important
polarisation - people increasingly fall in two very different groups, here poor and affluent
prevalent - is common, exists widely
disparities - differences
a global phenomenon - a situation that exists all over the world
economic infrastructure - the basic services necessary for everyday life and business, like electricity, water, roads, telephones, internet, etc.
Labour market dualism - developed economies are usually split into two sectors: 1. a traditional, agricultural, and rural sector, and 2. a modern, industrial, and urban sector.
The agricultural sector has low wages, an surplus of labor, low productivity, and labor intensive production. The modern industrial sector has higher wages, more capital intensive, higher productivity, and greater demand for workers. There is also more investment the profits of owners are reinvested in theie businesses.
If the surplus agricultural labor moves to the industrial sector overall productivity in the economy will increase, eventually, the wage rates of the agricultural and manufacturing sectors will become equal and no further manufacturing sector enlargement takes place as workers no longer have a monetary incentive to transition.
(See Wikipedia on the dual sector model)
not yet anticipated - people do not yet realize they exist, so they haven't planned for them yet
well equipped to - prepared for
Answer Key:
1. When was the last time the annual IMF meetings took place in Asia?
Where were they last held in Asia?
The annual IMF meetings were last held in Hong Kong almost a decade ago.
2. What economic changes has Asia undergone in the last decade?
Asia has undergone two radical changes: 1. Asia recovered from the 1997 Asian financial crisis, and 2. Asia once again became the fastest growing economic region in the world.
3. What are the future prospects for growth and inflation in the region?
Growth will remain about 7-7.5% and inflation will remain well-contained.
4. What happened in May and June of this year and how did Asia respond to these events?
In May and June 2006 there was increased "global financial volatility" which Asia quickly recovered from.
5. What about prospects for capital flows into the region?
Prospects remain solid.
6. What impact could rising oil prices possibly have?
Rising oil prices could reduce growth and increase inflation.
7. What changes in the way growth is generated will have to be made to sustain growth?
In the future, there has to be less reliance on exports and more reliance on domestic demand, that is people inside the country purchasing goods and services.
Thailand with its well-developed tourism sector seems to be uniquely placed for this, because tourists add to domestic demand as well as bringing foreign exchange with them.
Foreign exchange is important in economic development. For example, foreign exchange is needed for purchasing specialized advanced technology and machines that can only be purchased overseas.
One of the main benefits of South Korea's export driven economic growth strategy was the foreign exchange it brought into the country. This foreign exchange was channeled by government policy into strategic industries higher up the value chain like chemicals, ship building, steel, and aerospace (See Wikipedia on Korea's Heavy-Chemical Industry Drive).
8. What changes in America, Europe, and Asia will lead to a more balanced global economy?
A more balanced global economy will result from: 1. "structural reforms" in the EU, 2. "fiscal consolidation in the US" (lower government budget deficit), and 3. "increased exchange rate flexibility" in Asia. Structural reforms or adjustment includes government policies such as privatization, deregulation, and the reduction of trade barriers. (See Wikipedia on Structural Adjustment)
9. What are the past and likely future trends in consuimption in Asia? What causes these trends?
Saving has increased faster than consumption because of a young population. In the future consumption is likely to increase faster than savings because the population will shift to having more older people (a greying of the population). Typically a family saves when they are younger and consumes more later in life when they have children, send them to college, and then retire (See Wikipedia on Intertemporal consumption). Remember that:
GDP = Consumption + Investment + (Exports - Imports)
10. What government policies could reduce the need for precautionary saving?
Providing more subsidies for public education, health care, and "social safety nets" such as unemployment insurance as well as providing greater access to bank credit and capital markets.
11. What type of company has had trouble drawing adequate investment?
Small and medium-sized enterprises (SMEs) producing for domestic markets (See Wikipedia on SMEs).
12. What can help generate more investment for SMEs?
Improved information on credit risk and a more well-developed corporate bond market.
13. How is Southeast Asia moving towards regional financial integration?
a. Developing domestic bond markets
b. Strengthening market infrastructure,
c. harmonising rules and practices between countries
d. removing impediments to cross-border capital flows
e. providing financing through the Chiang Mai initiative
14. Together with rapid growth have the emerging economies of Asia experienced increasing or decreasing income equality?
Decreasing.
15. What problems can income equality create for continued growth in an emerging economy?
Rising inequality makes it more difficult to:
a. Reduce poverty
b. Achieve consensus on good policies (this has been a big problem in Thailand recently).
16. What can help reduce income inequality?
a. Increased and more effective education spending
b. Providing economic infrastructure especially in the less-developed regions of the country.
c. Eliminating labour-market dualism
d. Providing credit access to the poor people so they finance small businesses.
