Economic Recovery & Future Challenges in Asia & the Pacific

March 2, 2010

Haruhiko Kuroda
, President, Asian Development Bank

Daniel Bases
, Global Investment Correspondent, Reuters

Haruhiko Kuroda of the Asian Development Bank visited Japan Society to discuss the economic challenges ahead for Asia and the Pacific.

"After being hard hit by the global economic crisis, developing Asia is leading the world to economic recovery," Mr. Kuroda said. "The collapse in global demand dealt a harsh blow to Asia's exports," as GDP growth fell from 9.5 percent in 2007 to around 5 percent in 2009. Since then, "rapid monetary and fiscal stimulus measures among Asia's developing economies, alongside other factors," have brought "signs of a V-shaped recovery," and the ADB now predicts that the region's GDP will grow 6.6 percent in 2010.

"Asia learned well from the 1997-98 Asian financial crisis," he continued. "When the global economic crisis struck, its financial systems were well capitalized, budgets for the most part well managed and foreign reserves the highest in the world." China put in place a stimulus package totaling over 15 percent of GDP, which helped raise its GDP growth rate from a low of 6.1 percent in the first quarter of 2009 to 10.7 percent in the fourth quarter of that year. Economic growth in 2009 was down in Hong Kong, Singapore, Taipei, and China and nearly flat in Korea, but these countries "are expected to return to healthy growth in 2010."

"The key challenge now will be to convert the strong rebound into sustained recovery, and to do so in a timely fashion that does not risk reversing the gains made thus far," he said. "Timing may vary from country to country, but, generally, we believe that authorities in the region should maintain accommodative policies for now."

To make up for reduced demand in the developed world, Mr. Kuroda continued, developing Asia must take steps to increase its own regional and domestic demand. This "could involve demand-side policies that encourage households to spend more and companies to invest more, as well as supply-side policies that promote small and medium enterprises and service industries catering to domestic demand."

"More broadly, Asian authorities should seek to remove barriers to intraregional trade, particularly behind-the-border obstacles to freer trade in goods and services, and promote regional cooperation."

To address imbalances, Asian countries need to shift "the composition of foreign capital to less volatile, longer-term inflows," he said. This will entail improving the opportunities and incentives to invest in Asia, strengthening domestic financial markets and supporting the establishment of regional capital markets.

Despite the rise of bodies like ASEAN+3 and the East Asia Summit, "the region is often called 'institution-lite,'" and many of the region's countries "are still more apt to trade with advanced markets in North America or Europe than with each other," he commented. Asian countries "may now need to consider more detailed and formal arrangements." For example, the regional surveillance unit set up to follow through on the Chiang Mai currency-swap arrangements, which is now operated on a multilateral basis, "can serve as the foundation for a cooperative surveillance and liquidity support mechanism to defend against future financial crises."

Mr. Kuroda said he supports "a single, region-wide free trade agreement" to combat "the adverse effects of different or competing tariffs, standards and rules--the so-called 'noodle bowl' effects." And in dealing with the aftermath of the financial crisis, Asian leaders "must not lose sight of the longer-term objectives of inclusive development and poverty reduction," but must invest in education, health, water supply, sanitation and social safety nets. Finally, "numerous gatherings in the period ahead," including APEC and the G20, "will offer opportunities to discuss the issues that will determine Asia's growth path in the medium to long term."

"I am pleased to note that Japan will chair the APEC in 2010, and host a number of APEC meetings, including the Economic Leaders' Meeting in November," Mr. Kuroda concluded. "Aside from addressing the most obvious challenges, such as the threat of protectionism and the lack of trust in financial institutions, these meetings should recognize that 2010 is the deadline for industrialized economies to achieve APEC's Bogor Goals. The goals were set in 1994 to establish free trade and investment in the region, but progress for the past 10 years has been limited. Addressing investment levels and quality will substantially raise the region's medium-term growth prospects."


Moderator Daniel Bases of Reuters asked:

How do Asian countries exit their stimulus programs while maintaining growth and without beggar-thy-neighbor policies? We see inflation in food prices, and there's always a concern that it spins out of control.

"Although exit strategies should be discussed and coordinated by regional countries, exits need not be synchronized," Mr. Kuroda replied. Japan is in deflation and China doesn't appear to have general rising inflationary pressures; however, Vietnam has seen inflation and has already raised interest rates, and India may soon do so as well.

Would you expect any kind of exit strategy or tightening of monetary policy or reducing the fiscal measures to happen in 2011 rather than 2010? And regarding India, what would be the main reason for this inflationary pressure?

"Generally speaking inflation at this stage is not a serious problem, although in some countries, including India, food prices have risen and may show some sign of future inflationary pressures," Mr. Kuroda replied. "Some adjustment is already taken in China, not to address a general price rise but to address some overheated real estate sectors in cities."

Come April, you're going to have a new economic outlook for 2010 and 2011, your initial estimates. What's the estimate going to be?

ADB's initial forecast for 2010 growth in developing Asia was 6.1 percent; the forecast was subsequently raised to 6.4 percent and by December 2009 to 6.6 percent, Mr. Kuroda said. "At this stage the staff is working so I can't say anything concrete, but if you just extrapolate this trend, the forecast could easily reach around 7 percent" for the region overall.

Could you comment on ADB spending this year and next?

In 2009 ADB lent some $16 billion, twice the typical level, he said. This reflected emergency program loans to support aid to the poor, countercyclical stimulus measures and the like. "This year also, some program loans remain, but significantly reduced. Next year, emergency program loans would hopefully completely phase out," and ADB will return to its typical function as a project bank, funding developing countries' improvements in such areas as infrastructure, the environment, and education.

Mr. Kuroda then responded to questions from the audience:

We read dire reports about the Japanese economy, both on the macro- and microeconomic level: aging population, retirement pensions, industry problems, structural problems. How can the Japanese economy contribute in a rather dynamic way, and be actually quite competitive even though it's on a different cycle from say developing countries, in particular China?

Up to now, trade and investment between Japan and China have been complementary due to the differences in the two countries' population structure, capital endowment and technology levels, replied Mr. Kuroda. "I think this situation would continue in the future. But certainly, gradually the Chinese economy would become a high-wage and high-tech economy," and at that point "they might become more competitive rather than complementary," along the lines of the change in Korea's relationship with Japan.

"The Japanese economy already recorded positive growth in the second quarter of last year, much earlier than the U.S. or European economies," he added. "The Chinese economy also recorded substantial acceleration of growth in the second quarter of last year. These are not just coincidences. They are interrelated, Japanese economic recovery and Chinese economic recovery. So I think at this stage the structural differences are just so beneficial for the two economies."

How do you see the environment for exchange rate management evolving over time?

"Even before joining the ADB, I argued for renminbi appreciation, and I still think that is good for the Chinese economy and also good for the regional economies," Mr. Kuroda answered.

Given rapid Chinese productivity growth, "in order to neutralize, equilibrate, the Chinese currency may need to appreciate 6 percent or 7 percent annually, apart from the initial undervaluation," he added. "So the more important point is that the currency system should be flexible, from a macroeconomic point of view as well as more structural and global point of view."

"ASEAN+3 finance ministers have been meeting once a year, discussing a lot of issues, while exchange rate coordination and cooperation have not been seriously tried. But I think it's now time for ASEAN+3 finance ministers to be engaging in serious discussions on exchange rate cooperation."

Is there any crossover to having not just a more comprehensive regional trade policy but also a regional monetary policy?

The "ASEAN+6 framework appears to be moving quite rapidly, because ASEAN has started, some completed, FTA negotiations with Japan, Korea, China, India, and Australia and New Zealand. If this network of ASEAN+1 FTAs are completed, the next step would be to have an ASEAN+6-wide regional FTA. So financial cooperation and trade cooperation are proceeding in slightly different but overlapping groupings," Mr. Kuroda said.

Will the Asian members of the G20 use that as a vehicle for taking more of a global role, or will their focus continue to be regional?

"The G20 has become a premier international forum to discuss global economic and financial issues. And for the time being, I think that will continue to be so," though "I don't think we should fix some forum as the most important forum forever. It's impossible. I think it depends on the issues," some of which are global but others purely regional, he responded.

Given your outlook for Asia, which is one that I think most of us in this room would share, what does that mean for the vision and strategy of ADB going forward? How is it going to change and adapt?

ADB is small, just one-fourth the size of the World Bank in terms of staff and budget though one-third in terms of lending levels, Mr. Kuroda explained, so it focuses on just five sectors: the environment, infrastructure, the financial sector, education and regional cooperation. "Many people criticized why agriculture is not included, why health care is not included," but through infrastructure and environmental support ADB is able to contribute to these areas. In 2009, ADB shareholders agreed to a substantial capital increase; "our capital base is now tripled from $55 to $165 billion, which shows how much shareholders think it useful to increase ADB's technical as well as financial assistance to developing countries in Asia."

--Katherine Hyde
Topics:  Business, Policy

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