19th CLSA Investors Forum

[AS PREPARED FOR DELIVERY]

Mr. Chairman,

Excellencies,

Ladies and Gentlemen,

It is a great pleasure for me to be here, and to address you on the global rebalancing, as well as the implications that this rebalancing may have for Asia. 

Of course, there are several kinds of rebalancing that have occurred in recent years.  The first, and perhaps most significant, is the growing shift in the balance of the world economy towards a number of fast-growing developing economies.  This trend has been well-underway for much of the first decade of the new millennium, but it has been further accentuated by the recent financial and economic crisis.  As the crisis originated in the developed countries, these economies suffered deep and potentially permanent economic scars, and their U or even L-shaped 'recoveries' leave them far off their pre-crisis growth trajectories.  Developing countries, in contrast, largely experienced V-shaped recoveries and have in most cases recovered any ground lost in the crisis.  This de-coupling has meant that developing countries, particularly those in the Asian region, have been at the vanguard of the global recovery and have contributed disproportionately to global growth.  These trends have helped to accelerate catching-up processes and are shifting the balance in the world economy.  Indeed, developing countries today account for one-third of global GDP, continuing the strong upward trend that has been in place since 2004.   

The relatively fast recoveries of the developing world, and their role in supporting global growth after the crisis has led some pundits to speculate about a "de-coupling" of the developing world from the developed economies.  However, it remains to be seen how much of the growth drive in the developing world is due to domestic demand, and how much is ultimately still dependent on demand in developed economies. UNCTAD and others must ask the question whether the developing economies are strong enough to sustain the recovery, or whether the risk of contagion from the advanced economies is so high that there is a disruptive "re-coupling" yet to come.   

In this context, UNCTAD research conducted for its Flagship Trade and Development Report shows that the global economy has weakened significantly towards the end of 2011 and despite some tentative stabilization in early 2012, downside risks remain alarmingly high.  The Report, which is being launched in world capitals from today and over the next few days, warns that no country or region will be spared in the case of a new financial shock in the developed countries, as this would provoke a stream of capital flows reversals, shrinking global trade volumes and falling commodity prices with negative consequences for all.  Developing countries, including the relatively robust economies in Asia, will find it difficult to sustain their own growth dynamic, let alone to continue their role of stoking recovery of the global economy.  

Although it remains the fastest growing region, Asia is already experiencing an economic slowdown, with GDP expected to fall from 6.8 per cent in 2011 to slightly below 6 per cent in 2012.  Several countries - including China, India and Turkey - have been adversely affected by weaker demand from developed countries and by the monetary tightening they applied in 2011 to prevent a rise in inflation and asset prices.  Given the headwinds from the international economy, some developing countries have since relaxed their monetary conditions and many of them have applied countercyclical measures that are helping to boost household incomes and to maintain a much-needed shift from external to domestic demand, alongside the role of investment.   China, for example, has played a critical role in global re-balancing, being the chief engine of global growth since 2009 and having reduced its surplus markedly (from 10% of GDP in 2007 to 2% in 2012) as it shifted its economy towards domestic demand. In China and other major economies in the region, however, internal rebalancing remains unfinished as private consumption should take on a greater role relative to investment.  High wage growth will help to support this goal as well as helping to promote further external rebalancing.

High and volatile commodity prices also present a risk to the re-balancing process for the Asian region, because they can be a drag on growth.  Rising oil prices, for example, act as an immediate dampener on aggregate spending in fuel-importing countries, contracting spending more or less immediately, whereas any spending expansion from fuel-exporting countries occurs only after a lag.  However the main risk continues to be concentrated in the developed economies, where UNCTAD has long been concerned that premature and excessive fiscal austerity is choking recovery and growth unnecessarily.  The developing economies in Asia have played a major role stoking the engine of growth since the crisis, but this could be de-railed if there continues to be a decline in consumer demand from their traditional markets in the advanced economies, and the effects of a reduction in this demand would of course have further spill-over effects if it provoked a downturn in Asian household and investment demand.  

And this leads me directly to the second aspect of the re-balancing that has occurred after the crisis, namely the changes in the trade balances.  Global trade rebalancing has been largely due to the decrease in China’s exports and the increase in its domestic demand. Trade imbalances for many other East and South-East Asian countries have not altered significantly.  In 2011, the trade surplus of ASEAN as a whole had recovered to its 2007 level and it is currently similar in size to that of China, at about 100 billion USD. 

The rebalancing of the last three years has been due to a number of factors:

a) the worsening terms of trade, especially for China,

b) the decrease in international demand for products collaboratively (vertically) produced by East Asian countries, and c) the increase in domestic demand in China.

In practice, while China’s trade surplus is largely related to its trade with high income markets, that of other East Asia countries is largely owing to trade with China. Indeed, the trade surplus of ASEAN countries with China has been increasing in the recent years. 

The implications of this rebalancing of trade for Asia are largely related to Chinese imports from the region. In this regard, the increase in Chinese domestic demand and the weak international demand for Chinese manufactures are resulting in a shift in the composition of Chinese imports. In practice, China imports relatively less goods to fuel its export sectors, and more consumption goods to meet the increasing domestic demand. 

In this context, regional partners serving the Chinese export industry (those with vertical supply chain links with China) are likely to continue to be negatively affected as long as demand for Chinese exports remains weak. On the other hand, regional firms serving the Chinese domestic markets are likely to show continuous growth.  However, a caveat is that China’s demand for final goods is still largely met by domestic producers, and thus the increase in domestic demand may not have large external spillovers. 

A reduction in international demand for Chinese exports may also accelerate the transformation of the Chinese manufacturing industry towards higher value added goods. This clearly depends on the extent to which Chinese firms are able to upgrade along the value chain and to capture market share in these segments. If (or when) this occurs, it may have repercussions for the vertical integration of production processes in the region. In practice, Chinese firms could turn from vertically integrated partners into competitors of firms in more advanced countries. On the other hand, the process of manufacturing upgrading may benefit less advanced economies in the region which are presently competitors of Chinese firms. 

Ultimately, what is most important is that regional markets remain open, so that rising domestic demand in each country is met not only by domestic enterprises but also by those operating in other countries of the region. 

Ladies and Gentlemen,

Before closing, allow me to say a few words about two other forms of "re-balancing" in the global economy that deserve our attention, including in Asia. 

The first of these two has been a focus of recent UNCTAD research and concerns domestic income trends.  There has been a growing trend of income inequality and rising imbalances between the richest and poorest income groups within most countries of the world, as well as between them.  Global recovery is also stymied by these trends, which have been rising throughout the world economy over the past 30 years and which are likely to become even worse as fiscal austerity coupled with wage restraint and further "flexibilization" of labour markets causes further economic contraction.  There has been a great deal of debate in the advanced economies in the last year as this long-neglected topic has come to centre stage, and the issue should be of no less concern in the developing countries as well.  

Even in Asia, where inequality of personal income is generally less than in other developing regions, inequality has increased since the early 1980s.  UNCTAD research shows this is evident in both income disparities across all income groups, and in the share of the top income groups in total income.  Greater inequality is particularly evident in India but it has also increased in East and South-East Asia, where 7 out of 9 countries for which data is available saw an increase in personal income inequality during the years 1980 to 1995 and inequality continued to rise in East Asia after 2000, albeit at a slower pace.  In China, a marked rise in inequality has accompanied fast economic growth since the 1980s and this trend has continued in recent years.

Despite rapid growth in the average real wage, the share of labour income in total income has declined and wage disparities have grown between urban and rural areas, interior and coastal regions, and between skilled workers and low-skilled migrant workers.  Even though the levels are low by international comparisons, the share of the "top 1 per cent" of incomes has also risen.  These trends matter, because of the important inter-relationships that we are beginning to understand -- or to re-understand after a long period of forgetfulness -- that exist between inequality and aggregate demand, job creation, and economic and social stability.  Re-balancing takes many forms, and it is not restricted to the more conventional elements such as current account deficits or surpluses, exchange rates or trade balances. 

A final form of re-balancing that continues to pose risks for the Asian region and for the global economy in general relates to the grave deficiencies in global economic governance that continue to exist in international monetary and financial arrangements.  UNCTAD has long been concerned about the dangers of a system where international trade is organized around a multilateral rules-based system, but with no parallel multilateral monetary and financial order.  There may also be risks for developing countries of a lack of balance in terms of access to global crisis support measures, should contagion strike again.  The question of how multilateral funds should be most appropriately used revives the old question of developing country representation in these key international institutions.  Despite the latest adjustment in quotas and voting shares, IMF governance for example, remains out of kilter with the new balance in the global economy.  The re-balancing of the global economy should also be reflected in a re-balancing of the voice of developing countries in global economic governance.

Asian economies stand to gain from greater engagement to support such a rebalancing.

Thank you very much.