Asia urged to focus on domestic demand, capital control
Cynthia J. Kim and Shin Hyon-heeThe Korea HeraldPublication Date : 13-07-2010
Asia needs to shift its focus to domestic demand and tighten controls on risky capital flows as the region emerges as the new center of growth in the post-crisis world, policymakers from Asia and the International Monetary Fund said Monday.
At a conference in Daejeon co-hosted by the IMF and Korea, they highlighted the region’s unrivaled recovery from the worldwide crisis.
“Asia’s time has come. No one can doubt that Asia‘s economic performance will continue to grow in importance,” IMF managing director Dominique Strauss-Kahn said in his opening speech.
He added it must boost investment and consumption as exports can no longer sustain its growth. Citing Europe’s slower growth as a downside risk, he said redirection of short-term investment from Europe to Asia needs to be combated with appropriate policy measures.
“Slow growth in Europe means fewer exports for Asian economies. Little appetite for investment in Europe, Japan and even the US will place a lot of money into emerging markets,” Kahn said.
Describing the region’s domestic demand as its “second engine of growth”, Kahn said that stronger social safety nets will help boost private consumption by reducing the need for precautionary savings.
Korean Finance Minister Yoon Jeung-hyun said the IMF should come up with a detailed plan to tackle dangerous international capital flows and ensure global financial stability.
“I believe the IMF has an important contribution to make, by proposing and enacting concrete and realistic measures to strengthen financial safety nets around the globe,” Yoon told the conference.
The IMF is currently working with Seoul officials to refine the insurance mechanism to present as part of the G20 agenda in the G20 Seoul Summit.
“The IMF will have discussions about it at end of this month, and more for the next three months. We will be ready for the G20 meeting in November,” Kahn said in a news conference later in the day.
First proposed by President Lee Myung-bak, the safety net aims to control extreme migration of foreign capital, which has been pointed out as one of the biggest challenges for export-oriented economies with low dollar reserves.
Kahn said the plans are on the way for a delivery at the G20 Seoul Summit on November 11-12.
Yoon also emphasised the need to share growth experience to help each other in tackling external shocks, which is also a key theme of the G20 meeting.
“They can share their growth models with low income countries in the region, and help those presently poor countries lift themselves out of poverty,” he said.
The two-day conference gathered about 300 business leaders and financial policymakers to discuss Asia’s greater role in global economic policies under the theme of ‘The Asia 21: Leading the Way Forward’.
Speakers included IMF’s economic counselor Olivier Blanchard, Bank of Korea governor Kim Choong-soo, Singaporean finance minister Tharman Shanmugaratnam, CEO of Standard Chartered Plc Peter Sands, and Sakong Il, chairman of the Presidential Committee for the G20 Summit.
In the first-day sessions, participants echoed calls for less protectionism and reforms in Asia to build on domestic demand.
During a session on Asia’s financial resilience, lessons from the past and current challenges, speakers agreed that economies in many Asian countries are strongly in recovery mode, emerging as global economic powerhouses.
Recovery in Asian countries is being driven by two engines — exports and growing domestic demand, noted Eiji Hirano, executive vice president of Toyota Financial Services Corporation and president of Asia Pacific Region from Japan, one of the panelists.
“Asia’s economy is overwhelming,” Hirano said. “Balances in exports and domestic demand will make a constant contribution to Asian economies in the short term,” added Hirano.
However, for many Asian countries, the world recession has highlighted the unsustainability of tying growth too heavily to exports, which account on average for more than 40 per cent of Asian growth, according to the IMF.
A key policy challenge for such countries is to build on domestic demand over the medium term, the organization suggested, making it a more prominent engine of growth and relying less on exports. This would also help manage global imbalances.
Financial Services Commission chairman Chin Dong-Soo said China and India are leading the way in generating growth outcomes on a global scale and are helping pull the world economy out of recession. But the phenomenon is not limited to these two countries, he stressed.
“For the Chinese economy, which is growing very rapidly, balancing is important,” said Gao Xiqing, vice chairman, president and chief investment officer of the China Investment Corporation. “We need to work with other countries to solve problems such as protectionism and a weak social safety net.”
Asian countries should take lessons from the past recessions that domestic protection is simply not enough to endure external shocks, Chin said, emphasising policy reforms.
“We’ll face capital inflows,” he said. “A concept of global financial safety net would contribute not only to ensure growth without being effected by risks, but to continue free trades and free market policies.”
Each country needs a different solution, Strauss-Kahn said. The policy measure will vary — consumption increase, sustained investment, productivity growth, social safety net, or reducing poverty — but all within the framework of greater economic integration in the region.