The IMF on Asia's Recovery and its Sustainability
Update 2: Mr Singh has left a comment below in response to my piece. Go check it out.
Update: Mr. Singh posts the third and, as far as I know, last installment in the series on Asia's outlook written on the basis of the Regional Economic Outlook for the Asian and Pacific Region. The topic is perhaps the most interesting of all aspects of Asia's aggregate economy, the high prevalence of savings and its excess over investment which produces a corresponding external surplus which, I'd might add, is structural at this point. See below for more comments.
In case you had not noticed, the IMF is blogging and it is not "merely" the garden variety IMF staffers they are rolling out to fill the pages; nope here we are treated to the likes of Blanchard, Atkinson, Lipsky, Cottarelli and a host of other of the Fund's A-listers. Consequently, it would seem that in an already (over)crowded world of econblogging, the IMFdirect blog merits more than a little bit attention.
In the past week, the dual post coverage by Mr. Anoop Singh of the recent Regional Economic Outlook for the Asian and Pacific Region caught my attention in particular. In the first, Mr. Singh invokes among other things the puzzle of Asia's relatively sharp recovery given the notion that the region is largely dependent on exports to grow. Two reasons especially are important here. One is the simple fact that as these economies moved into the crisis with bulging coffers (especially on the reserves vis-a-vis the rest of the world), the room for fiscal manoeuvre was greater and it was used decisively. According to calculations by the IMF, the collective stimulus programs in the Asia-Pacific region added 1.75% to GDP growth in the first half of 2009 and it makes the programs even more generous than those observed in the OECD and other emerging markets. Secondly, Asian economies has benefited from the, so far, V-shaped comeback by part of the global economy and key regions who are likely to grow smartly in h02-2009.
In general, Mr. Singh's analysis appears cautiously tied to the great unknown of 2010 where it appears that we will see whether all those battered economies of the world will be able to hold their own in a world where quantitative easing from central banks and lax fiscal policies are withdrawn rather than enacted. Here, Singh's remarks echo the general discourse where the the underlying tone is one of skepticism. A long period of risky asset buoyancy coupled with upbeat economic data releases have proved before to be crying wolf of an impending recovery and policy makers are advised to take this into account.
It is hard for me to disagree with Mr. Singh that the green shoots observed in the Spring of 2009 seem way too shaky a foundation on which to build a narrative of recovery. Yet, this is exactly what has happened and the famous inflection point will be reached when we discover that the recovery observed thus has been because of and not despite monetary and fiscal stimulus which makes the enforcement of exit strategies going into 2010 a very interesting experiment in the making. Some will make it, some won't and some will inevitably fall back into recession (not just in Asia).
However, the most important part of Singh's argument and indeed the most important part of IMF's analysis in general is the question of whether Asia's economic trajectory, in a post stimulus/recovery context, will be driven by domestic demand or not? To put it in the most reductionist form. Will Asia be a provider of net capacity to the global or economy or not? If yes, it would mean that a post crisis Asia had truly emerged as something new in the form of a force of a real addition to total demand. If not, it would mean that Asia would revert to old tricks and habits of relying on exports and foreign asset income to propel growth in national income.
Now, leaving the question of the number of export dependent economies the world economy can muster neatly to the side, I am not so optimistic here on Asia's contribution to the rebalancing of global imbalances through a net expansion of domestic demand. Yet, let me also immediately qualify here that I am not very comfortable with talking about Asia/Pacific in one both because of the obvious heterogeneity amongst the economies, but more importantly; also because I am not really an expert here. I have done the analysis on Japan though and on this I can say with unequivocal certainty that we won't we seeing any provision of excess domestic demand from this side.
Ultimately of course, Japan is of little real importance here and so is the rest of Asia really. What really matters on this topic is China and all the hopes currently pinned on her shoulders in the form of the ability of the economy to pull the global economy out of the mire. Traditionally, this has boiled down to a rather technical discussion about the RMB and an almost perennial Becketian wait for the shackles to break and an appreciating RMB to solve all problems. While I concede that the RMB should rise, it won't solve any of the underlying problems inherent in China's investment driven economy. Basically, chalk it down to culture and institutional specificity in the origin, but the simple fact remains I believe that just as China may evolve to become the economy we all hope and believe her to become (say in a 2020 context) the one child policy will have done its work so to speak and China will be sporting an OECD like age structure and is likely to even surpass many of OECD's economies.
This is no recipe for an axis of rebalancing and although China will be the main story to follow for the immediate future I think we should look elsewhere to find the potential rebalancing candidates. This may indeed involve other parts of Asia (India for instance and Indonesia), but in the current discourse the likes of China, Japan (and Korea) hold little promise in terms of providing a decisive engine for rebalancing through sustainable growth in domestic demand which exceed the investment rate.
In this sense I remain cautious on the overall sustainability of the recovery in Asia mainly because of my skepticism towards the sustainability of overall global momentum where I acknowledge that I may be very wrong. Watch out for 2010 and all those exit strategies is what I say and particularly for the "post fiscal stimulus" world. This also means that I am more than a little bit skeptical on the prospects of a sustained recovery across Asia driven by domestic demand, especially in relation to Japan and China.
At least, this would be my humble argument here a murky Monday morning in Copenhagen. In any case, you might want to punch the IMFdirect blog into your RSS reader, just to make sure that you know what the IMF is up on a daily "research" basis.
It is interesting that Mr. Singh chooses to put his focus on corporate governance and, by derivative, the inability of Asian households to extract value from companies through dividends (because companies pay none) and the reluctance of households to leverage their assets to consume. The solution, according to Mr. Singh, is an improvement in institutional quality and essentially a two-pronged strategy in which corporate governance and financial market development are evolved, essentially, into a more Anglo-Saxon variety (or at least, this is underlying narrative I take from it).
This is also where I have, rather decisively, to part ways with Mr. Singh. It is not that I don't recognize the basic intuition but the implicit idea that it would serve Asia, and the rest of us through rebalancing, better by moving in the way of an Anglo-Saxon institutional setting is too simple a discourse; in fact, I think it is flawed.
Consequently, I think it is important to note that while it sure may seem inefficient for all these savings to be sitting around in the coffers of companies as well as in the asset holdings of households, they do actually serve a purpose. More specifically, they finance investment elsewhere and through this, they act as an important contribution to national output in the absence of growth in domestic demand. Now, I am full well aware that it is exactly this we would like to change, but can we?
To some extent I am sure we can, but for example in Japan I can tell you that you better forget, very quickly, about any kind of surge in domestic demand (because of demographic reasons) and in this way, the excess savings over investment become important for the maintanance of output growth. Is this the same for China?
Hardly at this point, but the inflection point is coming nearer due to the one child policy.
In fact, if you extrapolate to the entire Asian edifice I think it is safe to say that if you peel away the excess investment that creates the external surpluses the nature and momentum of growth that could be sustained on the basis of domestic demand alone would dissappoint and make Asia's recovery, well not a recovery at. And in this of course lies the rub.