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Global Imbalances and Asias Financial Architecture by Levone

VIEWS: 3 PAGES: 28

									   Global Imbalances and
Asia’s Financial Architecture
          Masahiro Kawai
      Asian Development Bank
  “Global Imbalances and Their Impacts on
       Emerging Market Economies:
           Issues and Challenges”
               Bank Indonesia
         16-17 November 2006, Bali
               Outline
1. Introduction: Key Issues
2. Regional Economic Integration in East
   Asia
3. Global Payments Imbalances
4. Is Bretton Woods System II
   Sustainable?
5. Prospects of Regional Exchange Rate
   Policy Coordination
6. Concluding Remarks
       1. Introduction: Key Issues
• What is the global payments imbalance and what
  factors are contributing to the imbalance?
• Is Bretton Woods System II sustainable?
• How should East Asian economies respond to the
  unwinding of the payments imbalances?
• Is it desirable for East Asia to collective appreciate
  their currencies while maintaining intra-regional
  exchange rate stability?
• If so, which currency should assume a nominal
  anchor role in East Asia, the yen, the yuan, the dollar,
  or a currency basket?
• If an East Asian currency zone is to be created, what
  are the required steps?
 2. Regional Economic Integration in
              East Asia
Market-driven Integration
• Since 1980, FDI inflows into East Asia (including
  Japan) have more than quadrupled reaching 21% of
  world FDI inflows recently.
• East Asian FDI outflows increased from 5% to 14%
  of world outflows, and much of this was intra-
  regional—from Japan & NIEs to China and ASEAN,
  and from ASEAN to ASEAN and to China
• Total East Asian trade grew faster than world trade
  and the intra-regional trade share increased from 35%
  in 1980 to 55% in 2005 (vs. 46% in NAFTA region
  and comparable to EU before the 1992 Maastricht
  Treaty)
 East Asia’s Growing Importance in
           Trade and FDI
      Share in World Exports, in %         Share in FDI Inflows, in %
100                                  100
              25.2            26.9             18.9
 80                                   80                     33.7

 60                                   60       46.5
              43.2            37.5                           30.3
 40                                   40
                              9.1                            14.8
              11.3                             23.3
 20                                   20
              20.3            26.5                           21.2
                                               11.3
  0                                    0
             1990            2004              1990          2004

            East Asia       USA               East Asia    USA
            EU              Others            EU           Others
  Source: UNCTAD Database
                  Rising Intra-regional Trade
               Intra-Regional Exports                                            Intra-Regional FDI Flows
                              % Share                                                              % Share
60                                                                       90
                                                                55.2     80
50
                                                                         70
                                                                                                                               75.8
40                                                                       60
                                                                38.5     50
30
                                                                         40
                                                                                                                               44.2
20                                    East Asia - 15
                                                                         30
                                                                                       East Asia - 15
                                                                         20
                                      ASEAN+3
10                                                                                     From ASEAN+3
                                                                         10

0                                                                        0
                                                                              1995

                                                                                     1996

                                                                                            1997

                                                                                                   1998

                                                                                                          1999

                                                                                                                 2000

                                                                                                                        2001

                                                                                                                                2002
        1990

                1992

                       1994

                               1996

                                       1998

                                              2000

                                                         2002

                                                                  2004




     Source: IMF Direction of Trade Statistics, UNCTAD
2. Regional Economic Integration in
             East Asia
Production Networks and Supply Chains
• The rise of production networks underlies Asia’s
  industrial growth, export and integration
• Multinational corporations’ strategy to locate
  different sub-processes in different Asian countries
  according to comparative advantage and to re-
  integrate them
• Asian NIEs was the first to be part of such networks,
  followed by ASEAN, and now China is rapidly
  participating in the networks.
• As a result, much of the region’s trade is between
  MNCs in parts, components, semi-finished and
  finished goods.
2. Regional Economic Integration in
             East Asia
Financial Integration
• Financial integration has progressed in East
  Asia through financial market liberalization
  and opening, as well as through capital account
  liberalization, as part of the general trend of
  financial globalization
• But the degree of financial integration remains
  low in East Asia
• The degree of market opening and capital
  account liberalization varies across countries
2. Regional Economic Integration in
             East Asia
Macroeconomic Interdependence
• Major East Asian economies—Japan, Korea, Taiwan,
  Singapore, Malaysia and Thailand—show strong
  macroeconomic co-movements among themselves,
  with Indonesia and the Philippines beginning to join
  the group. But not China or CLMV yet.
• These East Asian economies do not show strong co-
  movements with the US, the European economy,
  India, New Zealand or Australia.
• They are subject to common supply shocks, which are
  different from shocks hitting the US, European,
  Indian or Australasian economy.
                                                     Table 1.
  Correlation Coefficients between the First Principal Component Scores for East Asia
                              the Individual Economy Data (1980-2002)


                                Growth of Real Economic Activity                  Price Inflation
Countries/Regions             GDP        Consumption      Investment   GDP             CPI          WPI
                                                                        Deflato
                                                                           r
USA                           0.01           -0.32           -0.41     0.17            0.85         0.30
EU-15                         0.01           -0.18           -0.14     0.10            0.78         -0.01
Australia                     -0.16          -0.15           -0.20     -0.02           0.31         0.00
New Zealand                   0.27           -0.04           0.19      -0.07           0.40         0.22
India                         0.09            0.01           -0.03     0.06            0.63         0.34
Japan                         0.58            0.39           0.41      0.15            0.90         0.46
Korea                         0.71            0.78           0.67      0.27            0.89         0.48
China, People's Republic of   0.07           -0.14           -0.26     -0.40           0.15          --
Taipei, China                 0.51            0.28           0.28      0.35            0.85         0.50
Hong Kong, China              0.74            0.63           0.58      -0.06           0.80          --
Singapore                     0.77            0.76           0.59      0.08            0.87         0.45
Malaysia                      0.90            0.87           0.95      0.40            0.79         0.68
Thailand                      0.89            0.92           0.88      0.54            0.87         0.70
Philippines                   0.33            0.31           0.55      -0.06           0.57         0.27
Indonesia                     0.89            0.65           0.89      0.99            0.21         0.92
  3. Global Payments Imbalances
What is the Global Payments Imbalance?
• Large current account deficits in the U.S., financed
  by capital inflows
• Large current account surpluses in East Asia
  (Japan, China, NIEs and ASEAN)
• Large surpluses by oil producing countries
• Europe as a whole has a relatively balanced
  current account
• Many emerging East Asian economies are rapidly
  accumulating foreign exchange reserves
Current Account Balance (% of world GDP)
1.5


1.0     Middle East
                                                                                                                                                               0.93
                                          Asia
0.5                                                                                                                                                            0.41
                                                 EU
                                                                                                                                                               0.12
0.0                                                                                                                                                            0.07

                                                                                                                             Latin America
-0.5


-1.0


-1.5                                                                                                                         US

                                                                                                                                                               -1.83
-2.0
       1980                        1985                          1990                          1995                          2000                         2005
Sources: International Financial Statistics Online (International Monetary Fund), World Development Indicators Online (World Bank), World Economic Outlook ( World
Bank), and Key Indicators (Asian Development Bank).
US Current Account Balance ($ millions)
200
100                                           Current Account Less Net Fuel Exports
  0
-100
-200                                                             Current Account
-300
-400
-500
                                                                                                                                                     -544
-600
-700
-800                                                                                                                                                 -805
-900
       1980                       1985                        1990                        1995                        2000                        2005

Sources: International Financial Statistics Online (International Monetary Fund), Commodity Trade Statistics Online (United Nations), and CEIC.
    3. Global Payments Imbalances
Savings-Investment Imbalances, or Income
  and Expediture Saps
• US spends more than it earns—declining household
  savings (reflecting rising household wealth) and
  large fiscal deficits
• Japan earns more than it spends—rising corporate
  sector savings (despite large fiscal deficits declining
  household savings rates)
• China spends less than it earns—very high
  investment rates, but even higher savings rates (both
  corporate and household sectors)
• Oil Producing Countries—large oil revenues
 Gross Domestic Investments (% of GDP)
50                        48.5

                                                                                                                             46.0
45
                                    Singapore
40                                                                                                       PRC

35
                                                                                                                  Korea      29.3
30

25
                                        Hong Kong, China                                                                     21.0
20
                                                                                                                            18.6
15

10
     1980                        1985                     1990                       1995                  2000           2005

Sources: World Development Indicators Online (World Bank) and Key Indicators (Asian Development Bank).
 Gross Domestic Investments (% of GDP)
50

                                                                                    43.6

40

             Malaysia
                                                                                                                                   32.0
30                                                                                                                   Thailand


                                                                                                                                   23.4
20                                                                                                                                20.7
                                                                                                                                   15.7
                                             Philippines                              Indonesia
                                                                                                              11.4
10
      1980                      1985                       1990                       1995                    2000              2005

     Sources: World Development Indicators Online (World Bank) and Key Indicators (Asian Development Bank).
Total International Reserves (excluding gold, $ billions)
                          2000            2001            2002            2003      2004    2005
United States               57              58              68              75        76      54
EU                         354             322             364             371       382     331
Middle East                 76              76              83              94       101     110
Latin America              152             152             154             189       213     245
Asia                     1,059           1,177           1,419           1,889     2,424   2,677
   Japan                   355             395             461             663       834     834
   PRC                     168             216             291             408       614     822
   ASEAN10                 188             184             205             238       285     297
   NIES                    310             336             395             480       564     592
   India                    38              46              68              99       127     132
TOTAL                    1,698           1,785           2,089           2,618     3,195   3,417
Source: International Financial Statistics Online (International Monetary Fund).
   3. Global Payments Imbalances
Why Is the Imbalance Undesirable?
• The current pace of imbalance is unsustainable due
  to the risk of (1) rising protectionism in the US or
  Europe and (2) eventual loss of confidence on the
  US ability to repay external debt
• The second risk is still small because of the near-
  zero balance of interest income payments, but will
  be serious over time
• Possible consequences if left unaddressed—
  Disorderly unwinding of the imbalance, with a sharp
  decline in the US dollar, asset price collapse, higher
  US interest rate and economic slowdown
• Impact on East Asia—The slowing down of US
  economic growth and US dollar decline will
  negatively affect East Asian economies
     3. Global Payments Imbalances
What Should Be Done to Reduce the
 Imbalances?: A Shared Responsibility
 (Communiquè IMFC)
• US—raising national savings, with measures to reduce
  the budget deficit and spur private savings
• Japan—further structural reforms including fiscal
  consolidation
• Europe—implementing structural reforms to sustain
  growth potential and boost domestic demand
• China—allowing greater exchange rate flexibility
• Oil Producers—promoting efficient absorption of
  higher oil revenues
• IMF multilateral policy dialogue process is
  potentially useful in resolving the imbalance
   3. Global Payments Imbalances
How Should East Asia Respond to Global
  Payments Imbalances?
• Stimulating consumption (Japan, China)
  and/or investment (Japan, ASEAN)
• Exchange rate appreciation
• Recycling of regional savings for regional
  investment through better investment
  climates and better financial intermediation
  such as Asian local-currency bond markets
• Stronger regional financial cooperation
     4. Is Bretton Woods System II
              Sustainable?
• There is a need to clearly understand the difference
  (and the relationship) between issues of current
  account imbalances and reserve accumulation.
• Bretton Woods System II is supported by exchange
  market interventions by China—and, to a lesser
  extent, by other emerging East Asian economies—to
  prevent currency appreciation vis-à-vis the US dollar
  and, thus, to finance US current account deficits
• Without global payments imbalances, Bretton
  Woods System II would be sustained without much
  problem.
        4. Is Bretton Woods System II
                 Sustainable?
China’s Perspectives
• Given the growing pace of global payments imbalances,
  Bretton Woods System II is not likely to be sustainable,
  particularly from the perspective of China’s domestic
  macroeconomic management.
• Accumulation of large-scale reserves will eventually have
  serious domestic monetary consequences as the effectiveness
  of sterilization diminishes over time. Growing domestic
  liquidity can feed into further over-investment and overheating
  of the economy, with damaging implications for the banking
  system.
• The quasi-fiscal costs associated with sterilization operations
  can rise over time. The risk of capital losses on reserves will
  mount.
      4. Is Bretton Woods System II
               Sustainable?
A Case for Collective Exchange Rate Appreciation
• China plays a crucial role in anchoring many emerging
  East Asian currencies and China’s regime choice affects
  those of other economies’ in the region.
• If BWS II is to collapse, East Asian authorities had better
  allow collective appreciation of their currencies vis-à-vis
  the dollar, while keeping relative stability of intra-
  regional exchange rates. This reduces adjustment costs.
• For this purpose, China must move by increasing further
  exchange rate flexibility and pace of appreciation.
• But exchange rate flexibility is not a panacea for
  resolving payments imbalances; it prevents reserve
  accumulation, restores monetary independence and
  facilitates adjustment.
5. Prospects of Regional Exchange Rate
         Policy Coordination
 Dollar, Yen or Yuan for East Asia?
 • Relying solely on the dollar is not desirable due to the
   lesson learned from the 1997-98 currency crisis.
 • The yen or the yuan alone cannot assume a nominal
   anchor currency role.
 • The yen, the yuan and other important currencies can
   share the nominal anchor role for East Asia.
 Currency basket system
 • G3 currency basket (dollar, euro and yen)—simple
 • Dollar-euro-ACU—A Singapore model
 • ACU—complex and hard to achieve
5. Prospects of Regional Exchange Rate
         Policy Coordination
Three Steps toward Asian Monetary Union
• Loose coordination: institutional cooperation
  - Strengthening ASEAN+3 finance ministers’ and
  EMEAP central bankers’ process
  - Real sector integration (a single East Asian FTA)
  - Initial exchange rate coordination (creation of ACU,
  introduction of a currency basket system)
• Tight coordination
  - Intra-regional exchange rate policy coordination,
  based on a multi-track, multi-speed approach
  - This is possible only after sufficient economic
  convergence and with strong political commitment.
• Complete coordination: feasible only in the long run
        6. Concluding Remarks
• The current pace of global payments imbalance is
  unsustainable
• If left unaddressed, serious consequences may ensue,
  such as a US economic hard-landing
• An international consensus exists for faster resolution
  of the imbalance, and concrete action is needed
• East Asia can respond by (1) increasing domestic
  demand (investment and/or consumption), (2)
  preparing for appreciation of the currency, and (3)
  regional financial cooperation (policy dialogue,
  reserve pooling, and Asian bond market
  development).
         6. Concluding Remarks
• The unwinding of global payments imbalances can
  accelerate the process of forming an East Asian
  monetary zone.
• If East Asia must accept currency appreciation vis-à-vis
  the US dollar, it should pursue collective appreciation
  while maintaining intra-regional rate stability.
• It is desirable to begin with choosing a currency basket,
  like a G3 basket or a dollar-euro-ACU basket, as
  monetary policy anchor.
• After sufficient convergence and with strong political
  commitment, East Asia may move to intra-regional
  exchange rate stabilization based on ACU and/or
  through an Asian Snake or ERM.
             Thank You
            Masahiro KAWAI
      Special Advisor to the President &
Head, Office of Regional Economic Integration
          Asian Development Bank
         6 ADB Avenue, Mandaluyong City
           1550 Metro Manila, Philippines
                (Tel) 632-632-4900
                (Fax) 632-636-2183
             (E-mail) mkawai@adb.org
                   www.adb.org

								
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