Jayati Ghosh Jawaharlal Nehru University, New Delhi IDEAs Conference on

1. Financial liberalisation, macroeconomic policy and growth in Asia: The good times and the bad times JayatiGhosh Jawaharlal Nehru University, New Delhi IDEAs Conference on Financial Instability and Inequality in an Economically Integrated World Tsinghua Sanya International Mathematics Forum Sanya, China 22-24 February 2016

2. Well-known macroeconomic implications of financial liberalisation • Volatile capital flows create boom and bust trajectories that generate instability. • Real exchange rate appreciation impact on domestic shift in incentives from tradeable to non tradeable activities, and associated macroeconomic imbalances. • Attempts to prevent this associated with reserve accumulation that implies loss of potential productive investment inside country. • Fear of capital flight creates deflationary macroeconomic policy bias and unwillingness to raise taxes.

3. Other important effects • Increasing reliance on debt-fuelled economic expansion rather than in multiplier effects of rising wages and investment. • Reduced link or no link between financial indicators and productive investment. • Medium term effect on growth because of reduced incentive for long terms orientation of investors. • Meanwhile booms are associated with deceleration or reversal of structural change and economic diversification. • This happens during the “good times” – what about the bad times?

4. The “good times” are now over

5. Capital outflows have been large even for countries other than China

6. Reserve accumulation decelerated, but turned into decumulation only from mid 2015

7. Meanwhile Asia is awash in debt

8. Household debt increase is significant in this

16. Lessons from Southeast Asian “emerging markets” Financial liberalisation may lead to “financial deepening”, but it does not have a positive effect on investment and real economic growth. Rather it can generate savings “surpluses” that are then exported and retard productive diversification, and expose economy to domestic and global boom-bust cycles. Domestic growth then is sustained by consumer credit that fuels housing and real estate booms and finance for related investment. These usually end in tears - downturn began a couple of years ago –unravelling of household debt has knock-on adverse effects on bank viability and on investment. Recent global slowdown – and especially in China – only adds to existing pressures on real economies.

25. India: Inadequate diversification

31. So what’s next? • Bad times mean falling export prices, capital flows reversal decelerating GDP growth and likely looses of employment eventually. • If neoliberal economic strategies continue to be pursued, that will only make things worse. • But they can also provide an opportunity for course correction – as is currently being attempted to a limited extent in Indonesia. • Alternative strategies cannot be successful with deregulated financial markets and significant foreign ownership of financial institutions – so that has to be corrected as well.

32. Thanks for your attention!