Rebalancing Asia: Rebalancing Asia: Implications for Inclusive Implications for Inclusive

and Green Growthand Green Growth

Masahiro KawaiMasahiro KawaiDean & CEO

Asian Development Bank Institute

Overseas Development Institute

London13 March 2013

OutlineOutline

1.1. IntroductionIntroduction

2.2. Impact of GFC on AsiaImpact of GFC on Asia

3.3. Regional Economic Integration as Regional Economic Integration as a Vehicle for Growth Rebalancinga Vehicle for Growth Rebalancing

4.4. Post-crisis Challenge: Rebalancing Post-crisis Challenge: Rebalancing with Inclusive and Green Growthwith Inclusive and Green Growth

5.5. ConclusionsConclusions

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1. Introduction1. Introduction• Asian economies developed rapidly and achieved

dramatic reductions in poverty using the export-led growth model, but side effects included: Increasing income inequality Environmental degradation, high energy use

• Moreover, Asian economies were hit hard by the decline in export demand due to the GFC

• Prospect of sustained slower growth in advanced economies highlights needs for a new growth model

• Asia can intensify regional cooperation to achieve greater reliance on domestic and regional demand

• This demand shift can be supported by greater inclusion and greener growth

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2. Impact of GFC on Asia2. Impact of GFC on Asia

• Export collapse due to excessive dependence on the US and European markets for export, particularly in Japan, Asian NIEs, and export dependent middle-income ASEAN countries

• Some limited financial contagion, particularly in Korea which almost had a currency crisis

• Loss of business and consumer confidence, GDP contraction or growth slowdown

• But quick policy response with countercyclical fiscal and monetary policy, plus currency depreciation

• Beginning of the adjustment of global current account imbalances

4

Crises exposed risks of Crises exposed risks of Asia’sAsia’s excessive excessive dependence on US marketsdependence on US markets

Source: CEIC

Export Growth (y-o-y) Real GDP Growth (y-o-y)

5

Shrinkage of Current Account Balances Shrinkage of Current Account Balances after GFC (% of GDP)after GFC (% of GDP)

6Source: WEO IMF October 2012

3. Regional Economic Integration a 3. Regional Economic Integration a Vehicle for Growth RebalancingVehicle for Growth Rebalancing

• One of the main engines of growth and development in Asia has been the expansion of trade

• Since the late 1980s, the region has experienced the emergence of production networks and supply chains through the “FDI-trade nexus”—a mutually reinforcing process of manufactured trade and FDI

• As a result, intraregional trade has expanded considerably

• Since the turn of the century, the region has embarked on many initiatives for formal trade integration through Free Trade Agreements (FTAs)

• Greater regional integration of trade and investment can help rebalance growth toward domestic and regional demand 7

Emergence of the global factoryEmergence of the global factory

Source: Emerging Asian Regionalism (ADB 2008)

• Outward-oriented policy, supported by conducive business environment, infrastructure, logistics and educated labour created supply chains – forming factory Asia

• These boosted productivity and cut costs; enticing investment and technology transfer.

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East Asia’s intra-regional trade East Asia’s intra-regional trade dependence rising over time, 1980-2011dependence rising over time, 1980-2011

Source: International Monetary Fund, Direction of Trade Statistics

30

35

40

45

50

55

60

65

70

1980 1985 1990 1995 2000 2005 2010

East Asia EU-15 EU-27 NAFTA

Rapid spread of FTAs in AsiaRapid spread of FTAs in Asia

Source: ADB’s Asia Regional Integration Center (ARIC) FTA Database (www.aric.adb.org), data as of February 2012.

Note: Concluded FTAs include those that are in effect and those that have been signed but are not yet in effect.10

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2000 Concluded FTAs 2012 Concluded FTAs

(Number of concluded FTAs by country)*

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Benefits of Creating a Large Asia-Wide Benefits of Creating a Large Asia-Wide MarketMarket

• Important to form an integrated market for goods, services and finance with active FDI which would create a bigger market for Asia

• This can enable Asians to produce and consume more and recycle domestic savings for infrastructure and other productive investment in other parts of Asia

• An Asia-wide FTA (such as RCEP for ASEAN+6 countries) can generate large benefits for Asia and globally

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However, final demand for Asian exports However, final demand for Asian exports still mainly from advanced economiesstill mainly from advanced economies

Source: ADB, Asian Development Outlook

Final demand composition of Asia’s export in 2006

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4. Post-crisis Challenge: Rebalancing 4. Post-crisis Challenge: Rebalancing with Inclusive and Green Growthwith Inclusive and Green Growth

• Growth rebalancing Asia’s focus on domestic & regional demand, and

development of competitive services sectors• Inclusive growth for equity & social stability Key for socially sustainable growth in Asia Social sector protection• Green growth for environmental sustainability New sources of growth and environmental sustainalibity International support needed for technology transfer,

financial assistance, capacity building• Regional cooperation to integrate Asian

markets and promote these goals

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A: Current account rebalancingA: Current account rebalancingSavings and investment in Japan and ChinaSavings and investment in Japan and China

Source: Word Bank, Word Development Indicators; IMF, WEO Database, September 2011

Japan China

20

22

24

26

28

30

32

34

1980 1985 1990 1995 2000 2005 2010

Gross Domestic Capital Formation Gross Domestic Savings

30

35

40

45

50

55

1980 1985 1990 1995 2000 2005 2010

Gross Domestic Capital Formation Gross Domestic Savings

(% of GDP) (% of GDP)

14

Asian NIEs AEAN 5

22

24

26

28

30

32

34

36

38

1980 1985 1990 1995 2000 2005 2010

Gross Domestic Capital Formation Gross Domestic Savings

15

20

25

30

35

1980 1985 1990 1995 2000 2005 2010

Gross Domestic Capital Formation Gross Domestic Savings

(% of GDP)

(% of GDP)

Source: Word Bank, Word Development Indicators; IMF, WEO Database, September 2011

Savings and investment in Asian NIEs & ASEANSavings and investment in Asian NIEs & ASEAN

15

Sluggish US and EU demand prompting Sluggish US and EU demand prompting rebalancing towards regional demandrebalancing towards regional demand

Source: ADB Asia Economic Integration Monitor July 2012

Destination of Asia’s Exports by Stage of Production (% of total), 2000 and 2010

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B: Inclusive growthB: Inclusive growth

Inclusive growth promotes access to opportunities for all and spreads the benefits of growth more equitably among all segments of people and businesses

• It addresses poverty reduction (i.e., for the poor to get out of abject poverty)

• It supports low-income people aspiring to join the middle class as well as the middle class people aspiring to further improve their quality of life

• It attempts to address inequity (unfavorable initial conditions) and income insecurity, through Greater access to opportunities (education, jobs, markets,

finance, and unbiased laws and regulations) Provision of cushion against economic volatilities and

unexpected contingencies (social safety nets) Social security system (old-age pension, health, etc)

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Inclusive growth for a changing societyInclusive growth for a changing society

• Success of poverty reduction, and a rapid decline in the number of poor

• A shift of population from poor to low-income (with $1,000-$5,000 per year) households, and to the middle class (with $5,000-$35,000)

• The resulting demand for diverse needs of society, not simply poverty reduction

• Expansion of policymakers’ attention from “poverty reduction” policies to more comprehensive policies supporting the diverse needs of low-income and middle-class households

• Inclusive growth policy supports healthy developments of the middle class & consumer society

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A rise of low-income and middle class A rise of low-income and middle class households in East Asia (% of population)households in East Asia (% of population)

HH Income China India Vietnam Japan

1990 2000 2008 1990 2000 2008 1990 2000 2008 1990 2000 2008

$0-$1,000 64.6 16.4 8.9 28.6 24.6 9.3 95.7 47.2 13.8 0.0 0.0 0.0

$1,000-$5,000 33.6 67.9 56.7 68.4 71.0 71.8 3.9 50.4 71.3 0.6 0.3 0.5

$5,000-$35,000 1.6 5.3 33.0 2.7 4.1 18.2 0.4 2.2 14.2 35.9 22.8 27.4

$35,000- 0.2 0.4 1.4 0.3 0.3 0.7 0.0 0.2 0.7 63.5 76.9 72.1

  Indonesia Malaysia Philippines Thailand

  1990 2000 2008 1990 2000 2008 1990 2000 2008 1990 2000 2008

$0-$1,000 24.3 11.4 3.6 3.9 1.9 2.1 23.8 20.2 6.9 16.0 14.6 4.9

$1,000-$5,000 69.9 83.8 59.4 45.6 28.3 15.6 62.6 60.7 49.5 55.5 54.0 36.2

$5,000-$35,000 5.4 4.5 35.9 48.8 66.3 72.0 13.0 18.3 42.0 27.6 30.4 56.5

$35,000- 0.4 0.4 1.1 1.7 3.5 11.3 0.6 0.8 1.6 0.9 1.0 2.4

  Hong Kong Korea Singapore Taipei,China

  1990 2000 2008 1990 2000 2008 1990 2000 2008 1990 2000 2008

$0-$1,000 0.0 0.2 0.2 0.3 0.1 0.1 0.3 0.4 0.1 0.1 0.1 0.1

$1,000-$5,000 1.4 2.5 1.8 9.7 4.0 2.4 5.1 3.0 1.1 3.8 1.6 1.7

$5,000-$35,000 63.1 33.6 30.9 86.0 79.6 62.6 76.0 34.1 25.9 81.6 58.0 52.7

$35,000- 35.5 63.9 67.1 4.0 16.3 34.9 28.6 62.5 72.9 14.5 40.2 45.5

Source: Author’s computation from Euromonitor International, World Consumer Lifestyles Databook, 2009. 19

C: Environmental sustainability and C: Environmental sustainability and green growthgreen growth

• Asia needs to focus on protecting the environment and improving energy efficiency to achieve a lower-carbon society while pursuing its socioeconomic objectives

• A holistic approach is needed: Mainstream environmental protection, resource use efficiency, and

emission reduction in the development strategy, based on the co-benefits approach

Invest in energy efficiency and renewable energy development, and apply new technologies

Adopt market friendly policies (reducing fuel subsidies and raising energy prices) while paying adequate attention to social protection

• This requires greater prioritization on environmental improvement over “brown” economic activity

• Advanced economies such as Japan, Korea and Singapore are vital in green technology cooperation

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Growth vs Environment Growth vs Environment (Ecological footprint)(Ecological footprint)

Positive relation between income and ecological footprint (pressure).

AustraliaCanada

Chile

China

Indonesia

JapanKorea

MalaysiaMexico

Peru

Russia

Thailand

United States

Viet Nam

-10

12

3

6 7 8 9 10 11lgdppc_ppp

log_eco_footprint Fitted values

Log_eco_footprint = -4.16 + 0.55 Log_GDP_PC; R2 = 0.854

Source: IEA (2010)

Developing Asia’s emissions in Developing Asia’s emissions in comparison with other regionscomparison with other regions

2009 CO2 Emissions(of 28,999 Mt)

2035 CO2 Emissions(of 35,442 Mt)

25 50 75 1000

PRC

PRC

Other regions including US, Europe, etc.

Other regions including US, Europe, etc.

India

India

Non-OECDAsia

OECDAsia

OceaniaPRCPRC

Other regions including US, Europe, etc.

Other regions including US, Europe, etc.

India

IndiaIndia

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Low-carbon green growth can benefit Low-carbon green growth can benefit developing Asia in multiple waysdeveloping Asia in multiple ways

• Many low-carbon policy interventions have important co-benefits for Asia at different levels Enhanced energy security associated with energy efficiency and renewable energy

projects Human health benefits from improved environmental conditions, including lesser air

pollutants Socio-environmental benefits that can be achieved through forestry and agricultural

management, waste reduction programs, smart city

• The new green sectors can create knowledge-intensive employment and international competitive advantage

• Because emerging countries of Asia are likely to suffer disproportionately from the negative impacts of climate change, Asia has strong interests in becoming a leading participant in the global efforts towards mitigation and adaptation

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Regional cooperation to accelerate Regional cooperation to accelerate environmentally sustainable growthenvironmentally sustainable growth

Global Framework:•Industrialized Economies: Deep cut and commitment to transferof technology and financial resources.•Developing Economies: Commitment to Nationally Appropriate Mitigation Actions (NAMA)

Regional Cooperation Programmes•Financial Mechanisms on emission reduction•Green technology transfer through market based mechanisms such as CDM•Public technology pool using publicly owned or funded green technology

Domestic Polices• Eco/carbon tax• Cap & trade with targets and

standards • Liberalization of trade in

environmental goods and services (EGS)

• Direct and indirect support for Research, Development and Deployments (RDD) 24

5. Conclusions5. Conclusions• Asia has been successful in achieving sustained

economic growth, development, and poverty reduction

• Nonetheless, Asia faces enormous challenges of transforming its development paradigm to:

balanced growth towards regional demand inclusive growth (equitable & socially resilient growth) environmentally sustainable growth• This transformation requires institutional and

governance reform at the national level• Regional cooperation for integration is essential,

while working with the global community25

Thank youThank youFor more information:For more information:

Dr. Masahiro Kawai Dean& CEO

Asian Development Bank Institutemkawai@adbi.org +81 3 3593 5527www.adbi.org

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