Rebalancing Asia: Implications for Inclusive and Green Growth

1. Rebalancing Asia: Implications for Inclusive and Green Growth Masahiro Kawai Dean & CEO Asian Development Bank Institute Overseas Development Institute London 13 March 2013

2. Outline Introduction Impact of GFC on Asia Regional Economic Integration as a Vehicle for Growth Rebalancing Post-crisis Challenge: Rebalancing with Inclusive and Green Growth Conclusions

3. 1. Introduction Asian economies developed rapidly and achieved dramatic reductions in poverty using the export-led growth model, but side effects included: Increasing income inequality Environmental degradation, high energy use Moreover, Asian economies were hit hard by the decline in export demand due to the GFC Prospect of sustained slower growth in advanced economies highlights needs for a new growth model Asia can intensify regional cooperation to achieve greater reliance on domestic and regional demand This demand shift can be supported by greater inclusion and greener growth

4. 2. Impact of GFC on Asia Export collapse due to excessive dependence on the US and European markets for export, particularly in Japan, Asian NIEs, and export dependent middle-income ASEAN countries Some limited financial contagion, particularly in Korea which almost had a currency crisis Loss of business and consumer confidence, GDP contraction or growth slowdown But quick policy response with countercyclical fiscal and monetary policy, plus currency depreciation Beginning of the adjustment of global current account imbalances

5. Crises exposed risks of Asia’sexcessive dependence on US markets Export Growth (y-o-y) Real GDP Growth (y-o-y) Source: CEIC

6. Shrinkage of Current Account Balances after GFC (% of GDP) Source: WEO IMF October 2012

7. 3. Regional Economic Integration a Vehicle for Growth Rebalancing • One of the main engines of growth and development in Asia has been the expansion of trade • Since the late 1980s, the region has experienced the emergence of production networks and supply chains through the “FDI-trade nexus”—a mutually reinforcing process of manufactured trade and FDI • As a result, intraregional trade has expanded considerably • Since the turn of the century, the region has embarked on many initiatives for formal trade integration through Free Trade Agreements (FTAs) • Greater regional integration of trade and investment can help rebalance growth toward domestic and regional demand

8. Emergence of the global factory • Outward-oriented policy, supported by conducive business environment, infrastructure, logistics and educated labour created supply chains – forming factory Asia • These boosted productivity and cut costs; enticing investment and technology transfer. Source: Emerging Asian Regionalism (ADB 2008)

9. East Asia’s intra-regional trade dependence rising over time, 1980-2011 Source: International Monetary Fund, Direction of Trade Statistics

10. Rapid spread of FTAs in Asia (Number of concluded FTAs by country)* Source: ADB’s Asia Regional Integration Center (ARIC) FTA Database (www.aric.adb.org), data as of February 2012. Note: Concluded FTAs include those that are in effect and those that have been signed but are not yet in effect. 10

11. Benefits of Creating a Large Asia-Wide Market Important to form an integrated market for goods, services and finance with active FDI which would create a bigger market for Asia This can enable Asians to produce and consume more and recycle domestic savings for infrastructure and other productive investment in other parts of Asia An Asia-wide FTA (such as RCEP for ASEAN+6 countries) can generate large benefits for Asia and globally

12. However, final demand for Asian exports still mainly from advanced economies Final demand composition of Asia’s export in 2006 Source: ADB, Asian Development Outlook

13. 4. Post-crisis Challenge: Rebalancing with Inclusive and Green Growth Growth rebalancing Asia’s focus on domestic & regional demand, and development of competitive services sectors Inclusive growth for equity & social stability Key for socially sustainable growth in Asia Social sector protection Green growth for environmental sustainability New sources of growth and environmental sustainalibity International support needed for technology transfer, financial assistance, capacity building Regional cooperation to integrate Asian markets and promote these goals

14. A: Current account rebalancingSavings and investment in Japan and China Japan China (% of GDP) (% of GDP) Source: Word Bank, Word Development Indicators; IMF, WEO Database, September 2011

15. Savings and investment in Asian NIEs & ASEAN AEAN 5 Asian NIEs (% of GDP) (% of GDP) Source: Word Bank, Word Development Indicators; IMF, WEO Database, September 2011

16. Sluggish US and EU demand prompting rebalancing towards regional demand Destination of Asia’s Exports by Stage of Production (% of total), 2000 and 2010 Source: ADB Asia Economic Integration Monitor July 2012

17. B: Inclusive growth Inclusive growth promotes access to opportunities for all and spreads the benefits of growth more equitably among all segments of people and businesses It addresses poverty reduction (i.e., for the poor to get out of abject poverty) It supports low-income people aspiring to join the middle class as well as the middle class people aspiring to further improve their quality of life It attempts to address inequity (unfavorable initial conditions) and income insecurity, through Greater access to opportunities (education, jobs, markets, finance, and unbiased laws and regulations) Provision of cushion against economic volatilitiesandunexpected contingencies (social safety nets) Social security system (old-age pension, health, etc)

18. Inclusive growth for a changing society • Success of poverty reduction, and a rapid decline in the number of poor • A shift of population from poor to low-income (with $1,000-$5,000 per year) households, and to the middle class (with $5,000-$35,000) • The resulting demand for diverse needs of society, not simply poverty reduction • Expansion of policymakers’ attention from “poverty reduction” policies to more comprehensive policies supporting the diverse needs of low-income and middle-class households • Inclusive growth policy supports healthy developments of the middle class & consumer society

19. A rise of low-income and middle class households in East Asia (% of population) Source: Author’s computation from Euromonitor International, World Consumer Lifestyles Databook, 2009.

20. C: Environmental sustainability and green growth Asia needs to focus on protecting the environment and improving energy efficiency to achieve a lower-carbon society while pursuing its socioeconomic objectives A holistic approach is needed: Mainstream environmental protection, resource use efficiency, and emission reduction in the development strategy, based on the co-benefits approach Invest in energy efficiency and renewable energy development, and apply new technologies Adopt market friendly policies (reducing fuel subsidies and raising energy prices) while paying adequate attention to social protection This requires greater prioritization on environmental improvement over “brown” economic activity Advanced economies such as Japan, Korea and Singapore are vital in green technology cooperation

21. Growth vs Environment (Ecological footprint) Positive relation between income and ecological footprint (pressure). Log_eco_footprint = -4.16 + 0.55 Log_GDP_PC; R2 = 0.854 21

22. OECD Asia Oceania 2009 CO2 Emissions (of 28,999 Mt) Other regions including US, Europe, etc. PRC PRC PRC India India India Non-OECDAsia 2035 CO2 Emissions (of 35,442 Mt) Other regions including US, Europe, etc. India India PRC Other regions including US, Europe, etc. 100 25 75 0 50 Other regions including US, Europe, etc. Developing Asia’s emissions in comparison with other regions Source: IEA (2010)

23. Low-carbon green growth can benefit developing Asia in multiple ways • Many low-carbon policy interventions have important co-benefits for Asia at different levels • Enhanced energy security associated with energy efficiency and renewable energy projects • Human health benefits from improved environmental conditions, including lesser air pollutants • Socio-environmental benefits that can be achieved through forestry and agricultural management, waste reduction programs, smart city • The new green sectors can create knowledge-intensive employment and international competitive advantage • Because emerging countries of Asia are likely to suffer disproportionately from the negative impacts of climate change, Asia has strong interests in becoming a leading participant in the global efforts towards mitigation and adaptation

24. Regional cooperation to accelerate environmentally sustainable growth • Global Framework: • Industrialized Economies: Deep cut and commitment to transfer • of technology and financial resources. • Developing Economies: Commitment to Nationally Appropriate • Mitigation Actions (NAMA) • Domestic Polices • Eco/carbon tax • Cap & trade with targets and standards • Liberalization of trade in environmental goods and services (EGS) • Direct and indirect support for Research, Development and Deployments (RDD) • Regional Cooperation Programmes • Financial Mechanisms on emission reduction • Green technology transfer through market based mechanisms such as CDM • Public technology pool using publicly owned or funded green technology

25. 5. Conclusions Asia has been successful in achieving sustained economic growth, development, and poverty reduction Nonetheless, Asia faces enormous challenges of transforming its development paradigm to: balanced growth towards regional demand inclusive growth (equitable & socially resilient growth) environmentally sustainable growth This transformation requires institutional and governance reform at the national level Regional cooperation for integration is essential, while working with the global community

26. Thank youFor more information: Dr. Masahiro Kawai Dean& CEO Asian Development Bank Institute mkawai@adbi.org +81 3 3593 5527 www.adbi.org