Comments on IMF Regional Economic Outlook: Asia and Pacific

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Outlook: Asia and Pacific

Two-S eed Recover under Tectonic Effect?

Tsan Shu-ki

Hong Kong Baptist Universitywww.sktsan .com

At the launch of the Report in HKSAR on28 April 2011

Hosted by the Hong Kong Monetary Authority

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Two-S eed Recover

• A succinct summar is rovided concernin the two-s eed or

multi-speed) recovery in the global economy in the short term,

highlighting the driving factors, the upside, and moreimportantly, the downside risks.

• The policy recommendations are broadly within IMF norms,

favouring fiscal consolidation, monetary tightening, exchangerate adjustments; plus macro-prudential and curbing measures

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landing in case of continued overheating in some Asian

economies and an em hasis on rebalancin demand and promoting inclusive growth over the medium-term.

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Tectonic effect between/among developed

and developing economies?

• The key question is: What have the financial tsunami and the

subsequent QEs and fiscal loosening unleashed?• A tecton c e ect t at ta es many years to re a ance or ust a

short/medium run glitch? How should one explain the veryuneven, bifurcate “recovery”, as well as the surprising rise in

commodity prices?• Have the “tectonic plates” among economies moved like after

• If yes, econometric and statistical models might turn out to be

misleadin without incor oratin s stemic breaks/chan es.

• It would then be de-coupling or shift in growth centre, which began before the financial tsunami, in a new context.

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Tectonic effect between/among developed

and developing economies?

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What drive recover in Asia: investment?

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What drive recover in Asia: credit?

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What drive recovery in Asia: BOP surplus?

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Asia’s challen es• To a more robust Asian economy, the present may represent the

o ortunit of a decade to reinforce de-cou lin and shift ingrowth centre. This applies to BRICS as an extra-Asian entity.

• A temptation is to use the “tectonic” effect and further boost long- share of investment in GDP). Rebalancing, consumption

promotion, and the concern about sustainability are important, but.

• These latter problems would assume priority when an economyreaches a certain development level, and when the globaleconom c an nanc a system st om nate y t e anEurope moves to a “sustainable” trajectory after meaningful

reforms.• Rebalancing requires efforts from both sides. If the advanced

economies do not clean their own houses, emerging economiescould not do it alone.

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’• Nevertheless tem tation is tem tation. Asian economies

should note that the recent rebound has also been due to

strong external demand. Two-thirds of the final demand for ,initiatives to promote an intra-regional trade bloc.

• Capital inflows can at the same time be rather volatile,

a oug ere s a e a e w e er ne or gross ow s morerelevant.

• In an case as far as inflation d namic is concerned moreattention should be paid to the transmission from assetinflation to retail inflation. When property prices and rentals

,accommodative policies, the costs of business operationwill rise, adding to the pressure of higher food and oil

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Asia’s challen es

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Asia’s challenges

• Economic shifts are unlike natural disasters, at least not tosuc an a rupt egree. ven ro ust s an econom es, not tomention less robust ones, need to pay attention to cyclicalissues of overheatin . Macroeconomic olicies cannot betoo “accommodative” for the sake of growth.

• The long run has to be distinguished from the short run.

• As Keynes said, “In the long run, we are all dead.” But if one dies in the short run, there will not even be a long run

• The warning about the possibility of a hard landing by theIMF, if things are allowed to go to the limit, should be well

taken.

• What are the optimal short-term policies to deal withoverheating?

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’• In the monetary-fiscal mix, I suppose greater emphasis

nee s to e p ace on t e sca var a e n t e equat onagainst asset inflation, including transaction taxes, as wellas uantitative curbs on s eculation.

• Monetary policies are in a dilemma, as higher interest ratesand exchange rate appreciation would tend to attract morecap a n ows an ence aggrava e asse n a on n eshort run.

• .economies practice managed float, a gradual process of

appreciation would induce systematic expectations of , - .Only a drastic appreciation can kill off the systematicexpectations; but then can the economy stand the adverse

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• Hence, fiscal and quantitative measures have to beimplemented in an appropriate mix with monetary tightening.

• The developments in 2010-2011Q1 have aggravated asset and retail inflation as well as income/wealth inequality in, for example, China and HKSAR. Capital inflows and assetinflation have la ed a notable role.

• The suggestion of “inclusive growth” by the IMF is laudable.How to im lement “social rotection olicies” could however

be a headache, politically and economically. Theimplementation of minimum wage in HKSAR has been a

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• In the longer run, we will be back to the issue of de-coupling

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Comments on IMF Regional Economic Outlook: Asia and Pacific

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