- Vivek Arora, and Roberto Cardarelli
- Published Date:
- February 2011
Copyright © 2011 International Monetary Fund
Production: IMF Multimedia Services Division
Cover Design: Michelle Martin/Lai Oy Louie
Cover Photo Credits: World of Stock (left); Stephen Jaffe (right)
Arora, Vivek B.
Rebalancing growth in Asia: economic dimensions for China / Vivek Arora and Roberto Cardarelli. - Washington, D.C.: International Monetary Fund, 2010.
- p.; cm.
Includes bibliographical references.
1. Economic development – Asia. 2. Economic development – China.
3. Saving and investment – Asia. 4. Investments – Asia. 5. Exports – China.
6. Employment – China. 7. Consumption (Economics) – China. I. Cardarelli, R. (Roberto) II. International Monetary Fund. III. Title.
Disclaimer: The views expressed in this book belong to the individual authors and should not be attributed to the International Monetary Fund, its Executive Board, or the governments of any of its members.
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- Introduction and Overview
- Vivek Arora and Roberto Cardarelli
- Part I REBALANCING GROWTH IN ASIA: SOME GENERAL THEMES
- 1 Rebalancing Growth in Asia
- Adil Mohommad, Papa N’Diaye, and Olaf Unteroberdoerster
- 2 Corporate Saving and Rebalancing in Asia
- Sonali Jain Chandra, Malhar Nabar, and Nathan Porter
- 3 Investment and Rebalancing in Emerging Asia
- Malhar Nabar and Murtaza Syed
- Part II REBALANCING GROWTH IN CHINA: RELYING LESS ON EXPORTS AND MORE ON CONSUMPTION
- 4 Is China’s Export-Oriented Growth Sustainable?
- Kai Guo and Papa N’Diaye
- 5 Employment Effects of Growth Rebalancing in China
- Kai Guo and Papa N’Diaye
- 6 Determinants of China’s Private Consumption: An International Perspective
- Kai Guo and Papa N’Diaye
- 7 Does Government Spending on Health and Education Raise Consumption?
- Steven Barnett and Ray Brooks
- 8 Access to Finance and Household Saving
- Marcos Chamon and Sonali Jain Chandra
- About the Authors
- Figure 1.1. Illustrative Example of the Effect of Vertical Integration on Trade
- Figure 1.2. Share of Export Value Added in GDP, 2000 and 2005
- Figure 1.3. Export Dependence and Exposure
- Figure 1.4. Average Contribution to Real GDP Growth, 2001–07
- Figure 1.5. Share of Export Value Added in GDP, 2000 and 2008
- Figure 1.6. Share of Medium and High-Tech Goods in Total Exports
- Figure 1.7. Impact on Value Added of Actual Decline in U.S. Private Final Demand, 2008–09
- Figure 1.8. Private Consumption
- Figure 1.9. Consumption Relative to Steady-State, 2004–08
- Figure 1.10. Cumulative Change in Ratio of Private Consumption-to-GDP (2000–07): Estimated Contribution of Disposable Income and Saving Rate
- Figure 1.11. Investment
- Figure 1.12. Capital-to-Output and Investment-to-Output Ratio Relative to Steady-State Level in 2008
- Figure 1.13. Model-Based Determinants of Deviation of Investment-to-GDP Ratio from Sample Mean
- Figure 1.14. Excess Share of Industry in GDP, 2000 and 2008
- Figure 1.15. Model-Based Excess Share of Industry in GDP, 2000 and 2008
- Figure 1.16. Asia: Productivity Levels, 1987–2008
- Figure 1.17. Output (Main Scenario Projections)
- Figure 1.18. Investment-to-GDP Ratio (Main Scenario Projections)
- Figure 1.19. Consumption-to-GDP Ratio (Main Scenario Projections)
- Figure 1.20. Current Account Balance-to-GDP Ratio (Main Scenario Projections)
- Figure 1.21. Exports (Main Scenario Projections)
- Figure 1.22. Imports (Main Scenario Projections)
- Figure 2.1. Change in Saving since 2000
- Figure 2.2. Difference in Mean Corporate Saving, Post-2000 versus Pre-2000
- Figure 2.3. Corporate Saving in Emerging Asia, 1993–2007
- Figure 2.4. Private and Corporate Saving, 1979–2007
- Figure 2.5. Household and Corporate Saving, 1979–2007
- Figure 2.6. Corporate Saving Offset by Households, 1979–2007
- Figure 2.7. Households: Consumption and Disposable Property Income, 1979–2007
- Figure 2.8. Marginal Propensities to Consume, 1979–2007
- Figure 2.9. Corporate Governance Quality, 2008
- Figure 2.10. The Effect of Corporate Governance Reform on Corporate Saving
- Figure 2.11. Financial Reform, 2005
- Figure 2.12. The Effect of Financial Liberalization on Corporate Saving Post-2000
- Figure 2.13. Financial Reform Since the Asian Crisis
- Figure 2.14. Measure of Investor Protection in Asia, 2005–09
- Figure 3.1. Asia: Gross Fixed Capital Formation (GFCF) and Gross Saving, 1993–2009
- Figure 3.2. Export-Oriented Asia: Contribution to Change in Average Share of GFCF in GDP
- Figure 3.3. Selected Asia: Change in Investment by Type
- Figure 3.4. Phone Connections, 1995, 2005, Latest
- Figure 3.5. Electricity Generation, 1995, 2005, Latest
- Figure 3.6. Firm-Level Investment Rate, 2000–07
- Figure 3.7. Composition of Investment by Sector, 1990, 2000, and 2007
- Figure 3.8. NIEs: Firm-Level Investment Rate, by Size and by Sector, 2000 and 2008
- Figure 3.9. Export-Oriented Asia: GFCF—Change in Share versus Change in Relative Price
- Figure 3.10. Corporate Sector Leverage, 2000–08
- Figure 3.11. Uncertainty: Stock Price Deviation, 2000–08
- Figure 3.12. Effective Corporate Tax Rates in OECD
- Figure 3.13. Size of the Corporate Bond Market: Selected Asian Economies, 2009
- Figure 3.14. Venture Capital Investment: Selected Advanced Economies, 2006
- Figure 4.1. China: Contribution to Growth, 1990–2008
- Figure 4.2. Estimated Contribution of Exports to GDP Growth
- Figure 4.3. Investment-to-GDP Ratio, 2004–08
- Figure 4.4. Pattern of Exports of Goods in Selected Countries Since Their Growth Take-Off
- Figure 4.5. Market Share in Selected Economies Since Their Growth Take-Off
- Figure 4.6. Changing Composition of Exports, China, Japan, and Korea
- Figure 4.7. Convergence Process of Per-Capita GDP, China, Japan, and Korea
- Figure 4.8. China: Real GDP Growth (1980–2010) and Forecast Growth
- Figure 4.9. China: Average Saving, Rate by Age of Head of Household, 1990 and 2005
- Figure 4.10. China: Growth of Real Exports of Goods and Services, 1980–2010 and Forecast
- Figure 4.11. China: Growth of Real Imports of Goods and Services, 1980–2010 and Forecast
- Figure 4.12. China: Market Share in World Trade, 1980–2010 and Forecast
- Figure 4.13. China’s Share in World Production, 1980–2007
- Figure 5.1. China: Employment Share of Tradable and Nontradable, 1996–2007
- Figure 5.2. China: Employment Creation Before and After End-SOE Restructuring
- Figure 5.3. China: Employment by Industry, 2007
- Figure 5.4. China: Services Share of Employment, Model’s Prediction vs. Actual
- Figure 5.5. Employment Intensity of Growth, Selected Economies
- Figure 5.6. China: Agriculture Share of Employment, Model’s Prediction vs. Actual
- Figure 5.7. China: Manufacturing Share of Employment, Model’s Prediction vs. Actual
- Figure 5.8. Services Share of Employment, Model’s Prediction vs. Actual for Selected Countries
- Figure 5.9. Share of Employment in Primary Industry, China, Japan, and Korea
- Figure 5.10. China: Illustrative Employment Effects From Shift Toward Nontradable Sector
- Figure 5.11. China: Illustrative Employment Effects From Shift Toward Nontradable Sector and Lower Saving Rate
- Figure 6.1. China: Private Consumption, Predicted vs. Actual, 1992–2007
- Figure 6.2. Cumulative Change in Private Consumption to GDP Ratio 2000–07: Estimated Contribution of Disposable Income and Saving Rate
- Figure 6.3. Employment Intensity of Growth
- Figure 6.4. Service Sector Share of Employment, China, Japan, Korea, and the United States
- Figure 6.5. Agriculture Sector Share of Employment, China vs. Model Prediction
- Figure 6.6. China: Share of Investment Income in GDP, 1992–2007
- Figure 6.7. China: Share of Net Property Income in Disposable Income
- Figure 6.8. Share of Current Transfer in Disposable Income
- Figure 6.9. Share of Private Consumption and Disposable Income
- Figure 6.10. Share of Private Consumption and Per Capita GDP
- Figure 6.11. Old-Age Dependency Ratios
- Figure 6.12. Pension System Replacement Ratios
- Figure 6.13. Pension System Coverage
- Figure 7.1. Consumption in China and Selected Countries
- Figure 7.2. China: Urban and Rural Saving Rates, 1991–2009
- Figure 7.3. China: Urban and Rural Income, 1991–2009
- Figure 7.4. China: Indicators of Urban and Rural Consumption and Income, 1991–2009
- Figure 7.5. China: Health and Education Spending, 2000–09
- Figure 8.1. Private Consumption Expenditure at Constant Prices
- Figure 8.2. Financial Reform Index, 2005
- Figure 8.3. Household Consumption, Credit, and Financial Reform in Comparator Countries
- Figure 8.4. Brazil: Volume of Credit to Individuals and Housing, 2004–09
- Figure 8.5. China and Selected Asia: Size of Mortgage Markets—Average 2003–08
- Figure 8.6. Mortgage Loans by Maturity, 2004–08
- Figure 8.7. Korea: Mortgages and Consumption, 2004–08
- Table 2A.1. Private and Corporate Saving
- Table 2A.2. Impact of Corporate Saving on Private Saving by Region
- Table 2A.3. Private Consumption and Household Property and Nonproperty Income
- Table 2A.4. Difference in Mean Corporate Saving, Post-2000 versus Pre-2000
- Table 2A.5. Determinants of Corporate Saving-to-GDP
- Table 2A.6. Corporate Saving and Corporate Governance
- Table 2A.7. Results from Firm-Level Regression
- Table 3.1. Determinants of Private Investment Spending
- Table 3.2. Effect of Infrastructure on Private Investment Spending
- Table 3.3. How Would an Improvement in Fundamentals Affect Investment in Asia?
- Table 3.4. NIEs and Japan: Changes in Fundamentals, 1990–97 versus 2000–07 by Firm and Type
- Table 3A.1. Selected Financial Indicators for Firms, 1990–97 and 2000–07
- Table 3A.2. Investment Equations, Full Sample (1991–2008)
- Table 3A.3. Asia: Investment Equations, Sub-Sample Analysis
- Table 4.1. Baseline Elasticity Assumptions
- Table 4.2. Illustrative Conditions to Sustain China’s Growth Strategy
- Table 4.3. Illustrative Conditions to Sustain China’s Growth Strategy
- Table 4.4. Higher Consumption and Zero Net Exports Contribution to Growth
- Table 5.1. China: Sectoral Education Attainment, 2006
- Table 5.2. China: Determinants of the Share of Employment in the Service Sector
- Table 5.3. China: Determinants of the Share of Employment in the Agriculture Sector
- Table 6.1. Determinants of Private Consumption for 39-Country Panel
- Table 6.2. International Pension Comparison
- Table 7.1. Urban Households in China: Saving and Government Spending
- Table 7.2. Rural Households in China: Saving and Government Spending
- Table 8.1. Cross-Country Determinants of Household Final Consumption Expenditure/GDP
Asia’s economic performance in recent decades has been remarkable. A region that was once among the poorest in the world is today a force that is leading the global economy as the world recovers from its most devastating economic crisis in over half a century. Asia’s success is, of course, no accident. It is based on years of sustained effort to implement reforms and strengthen institutions that laid the basis for raising economic growth, improving resilience to crises, and harnessing the benefits of globalization.
It is well recognized across the region, however, that rapid growth cannot be taken for granted. Asia will need to build on its robust policy foundation with further reforms to address the challenges that the region still faces in both the near and the medium term. In the near term, the main challenge is consolidation of the recovery while maintaining macroeconomic stability amid a volatile global environment. Over the medium term, a key policy challenge for many Asian countries is how to sustain rapid growth in an environment where exports—a key engine of growth—may be weakened as a result of diminished demand from the industrial countries that have been particularly hard hit by the crisis. Indeed, compared with other regions, Asia has come to rely heavily on external demand for its growth.
A second, domestic engine of growth is surely the answer to this challenge, and the recent policy debate in Asia has turned to the question of how to strengthen private domestic demand. The IMF has been closely engaged in discussing this issue with Asian authorities in recent years, and in emphasizing it in our research efforts in order to try and draw some policy conclusions.
Against this background, this book brings together material and analysis prepared in 2009 and 2010 by IMF staff working on Asia. The author team, led by Vivek Arora and Roberto Cardarelli, included Steven Barnett, Ray Brooks, Marcos Chamon, Kai Guo, Sonali Jain Chandra, Adil Mohommad, Malhar Nabar, Papa N’Diaye, Nathan Porter, Murtaza Syed, and Olaf Unteroberdoerster.
Director, Asia & Pacific Department
International Monetary Fund
The authors would like to acknowledge the valuable comments and input of several IMF colleagues who have worked on Asian economic issues, particularly Nigel Chalk, Joshua Felman, Tarhan Feyzioğlu, Subir Lall, and Mahmood Pradhan, and the overall guidance of Anoop Singh.
The authors’ work on Asia has benefited greatly from interactions over the years with many officials and analysts in the region who are too numerous to name individually. Their views and insights have been critical for thinking through the issues dealt with in this book.
We are grateful to Kessia De Leo, Lesa Yee, and Imel Yu for assistance with preparing successive drafts of the volume, and to Sean Culhane for editing the volume and managing its production.
The opinions expressed in this book, as well as any errors, are the sole responsibility of the authors and do not necessarily reflect the views of other members of the IMF staff, of Asian authorities, or the Executive Directors and Management of the IMF.
Introduction and Overview
Vivek Arora and Roberto Cardarelli
A key feature of the world economy in recent decades has been Asia’s emergence as an economic powerhouse. This emergence is by now well documented and its many dimensions have been extensively studied, but a reminder of even the most basic facts is still striking. Over the last 30 years, the economy of emerging Asia and the newly industrialized economies—a group that encompasses all of Asia except Australia, Japan, and New Zealand—has grown by over 7 percent annually on average, with the implication that it has doubled in size every decade.1 The resulting eight-fold increase in output in just a single generation is virtually unprecedented in history, and it has had significant implications for people in the region. Many hundreds of millions of people have risen out of poverty, and living conditions have improved substantially in almost every country. Asia has come to account for over one-fourth of the world economy in terms of GDP at market exchange rates, a share that exceeds that of the United States and of the Euro area.
Asia’s successful emergence has been based in large part on a strategy of outward-oriented growth. China’s “reform and opening up” policy, launched in 1978, is perhaps the most prominent example, but the move toward giving market forces greater play in the economy and, in particular, encouraging the production of tradable goods has been a common theme across most of the region. The move over time from relatively inward-looking toward more outward-oriented policies has allowed countries to better exploit their comparative advantages, benefit from the economies of scale afforded by global markets, become more competitive, strengthen their technological base, and increase both income and jobs. Asia’s share in world exports has trebled over the last three decades, and it currently accounts for nearly one-fourth of all the world’s exports.
Over time, however, a growing recognition has developed, in Asia and elsewhere, that in order for Asia to sustain strong economic growth, the impetus provided by exports needs to be balanced with a second engine of growth.2 The global financial crisis hastened the urgency of this transformation as global demand was dramatically lowered. But even before the crisis, policymakers recognized that Asia may have become unduly reliant on external demand in comparison with other regions, that market shares for Asian exports in key products were approaching high levels by historical standards and could run into natural limits, and that the heavy orientation toward the tradable goods that fuel production and exports may often come at the cost of a relative neglect of nontradable sectors, particularly services. This internal imbalance leaves an economy both more vulnerable to swings in external demand than it would otherwise be and unable to draw fully on the potential of nontradable sectors.
The heavy reliance on exports in Asia has been reflected in a rise in the external current account imbalance in recent years. For emerging Asia as a whole, the current account was close to balance during the 1980s and 1990s, recording a deficit of around ½ percent of GDP during the 1980s and a surplus of roughly the same magnitude during the 1990s. The picture changed during the 2000s, when the surplus rose sharply to average nearly 4½ percent of GDP for the decade. Similarly, Asia accounted for around 11 percent of global saving on average during 1980–2000, but this share nearly doubled in the 2000s. These patterns have reversed somewhat since the onset of the financial crisis, with current account surpluses falling since 2008 as external demand collapsed. However, it is still too soon to say whether the reduction in surpluses will endure or whether it represents largely a cyclical change.
The second engine of growth that would help to address these imbalances and reduce the undue reliance on external demand is, of course, domestic demand, and in particular private domestic demand. Private demand comprises both consumption and investment, and here the story across Asia is somewhat heterogeneous. In some countries, such as China, consumption is relatively low, while in others, such as the larger ASEAN countries, it is investment that has been relatively low ever since the 1997–98 Asian financial crisis. The implication of this heterogeneity is that any discussion of rebalancing growth in Asia toward domestic demand has to pay attention to the various components of private domestic demand. Meanwhile, the counterpart on the supply side is that production needs to be reoriented from export sectors toward sectors that serve domestic markets. Such a reorientation does not in any way call for a reduction in countries’ openness to trade. It does, however, require the development of hitherto neglected domestically oriented sectors that likely would entail faster growth in nontradable production and in imports.
How, then, to develop this second engine of growth? Many of the policy changes that could contribute have been widely noted in international policy discussion (Strauss-Kahn, 2010). They include measures such as strengthening social safety nets, which should help to reduce the need for precautionary saving and thus boost consumption; improving infrastructure, which can encourage more private investment; financial sector deepening, which can support private consumption as well as investment both by smaller firms and by larger firms that seek financing for large projects; and, where needed, more exchange rate flexibility. Reflecting in part the varied pattern of domestic demand across Asia, however, the general policy themes involved in rebalancing growth apply differently to different countries.
As the foregoing discussion makes clear, rebalancing growth is a complex challenge that involves multiple policy and analytical aspects. The IMF staff’s work on Asia in recent years has discussed many of these aspects, and this book focuses on a few of the issues that this work has covered.3 Much of the work has focused on the rebalancing challenge in China, which is of interest in its own right as Asia’s largest economy.
Accordingly, the book first discusses some general themes in Asia’s rebalancing, and then the bulk of the book focuses on China. Part I outlines Asia’s relatively heavy reliance on external demand for growth and discusses the determinants of low investment and high corporate saving in much of the region. (Corporate saving is a particular point of interest because it has played an important role in the rise in national saving in Asia over the past decade, but it seems to have been less extensively studied in the literature than household saving.) Part II focuses on some of the challenges that China faces in seeking to rebalance its growth, both the overarching challenge of reorienting the growth model away from exports and the specific question of how to raise private consumption. In particular, the three chapters in Part I, “Rebalancing Growth in Asia: Some General Themes,” focus on the following themes:
- Asia’s overall export dependence. Chapter 1 documents the fact that Asia’s dependence on external demand is higher than that of other regions in the world and also higher than a simple examination of net exports would suggest. The counterpart is domestic demand that is often too low, reflecting consumption in some cases and investment in others. The chapter analyzes quantitatively the potential implications for Asia of a package of measures aimed at rebalancing growth. The benefits of implementing these measures across the region as a whole are shown to be substantially larger than implementing them on a stand-alone basis.
- Corporate saving. High saving in many Asian countries reflects not only household saving but also corporate saving. Chapter 2 documents the rise in corporate saving across Asia over the past decade or so. The rise stands in sharp contrast to the relatively anemic trends in investment and has thus contributed to the growing external imbalance. The analysis in the chapter ascribes the high and rising trend in corporate saving to a need for financial market development and further improvements in corporate governance that would allow firms to meet more of their financing needs from capital markets and less from retained earnings.
- Investment. Two aspects of Asia’s investment that stand out are, first, its relatively low level in much of the region (although not in China) and, second, a general orientation of investment toward tradable sectors and away from nontradable sectors. Chapter 3 presents an empirical analysis to determine the basis on which investment can be said to be too low in much of the region. It finds that the relatively low investment owes largely to fundamental factors such as low returns, uncertainty, the business climate, insufficient access to market finance, and shortfalls in infrastructure.
The five chapters in Part II, “Rebalancing Growth in China: Relying Less on Exports and More on Consumption,” focus on two additional issues:
- China’s export-oriented growth: sustainability and employment consequences of rebalancing. Chapter 4 assesses the sustainability of China’s export-oriented growth strategy and concludes that it would require very large increases in market share in key industries as well as steep reductions in profit margins. Turning away from export-oriented growth, however, is often dismissed as implausible given the employment implications. But these implications have seldom been quantified. Chapter 5 uses the IMF’s global integrated monetary and fiscal (GIMF) model to run scenarios of rebalancing and concludes that while in the short term there could be employment losses, in the longer term employment would actually rise as the growth of the nontradable sectors generated additional jobs.
- Household consumption. Chapters 6–8 address various challenges associated with raising private consumption, which is usefully done by examining the situation of China. To set the stage, Chapter 6 assesses the determinants of private consumption. It finds that China’s low share of private consumption in GDP can be mainly explained by the low share of household income and by economic factors that keep the saving rate high. An important point is that high household saving in China is not somehow preordained by cultural forces but may owe to a small set of relatively well understood economic variables that may in turn be responsive to policies. Chapter 7 examines the particular role of government spending on health and education in determining precautionary saving (and thus consumption) in China, and finds that government health spending can have a particularly significant effect on urban consumption. Chapter 8 looks at the potential for greater consumer finance to boost consumption in China drawing on empirical analysis as well as case studies from some other countries (Brazil, Korea) and concludes that innovations in consumer finance may help to increase household consumption.
Overall, we hope that these chapters add to the rich discussion underway in policy and academic circles on rebalancing growth in Asia.
International Monetary Fund2010Regional Economic Outlook: Asia and Pacific—Leading the Global Recovery and Rebalancing for the Medium Term (Washington) April.
ParkY.2009“The Global Economic Crisis and Rebalancing Growth in East Asia” Research Policy Brief No. 15 (Tokyo: Asian Development Bank Institute).
PrasadE.2009“Rebalancing Growth in Asia,”NBER Working Paper No. 15169 (Cambridge, Massachusetts: National Bureau of Economic Research).
SinghA.2010“Asia: Leading the Way Forward,”Finance and DevelopmentApril pp. 5–7.
Strauss-KahnD.2010“Asia and the Global Economy: Leading the Way Forward in the 21st Century” Opening remarks at the Asia 21 ConferenceDaejeon, KoreaJuly12.