Transcript
CHAIR
I now call on Anne Krueger to speak to us on the role of trade openness in structural change and the rise of Asia. Anne?
PROFESSOR ANNE KRUEGER
Thank you very much, it's a great pleasure to be here and I thank the organisers for inviting me. I do not have a PowerPoint presentation for reasons that are too complicated to explain, given my time limit, but there we are. Being the first panellist in a programme like this has a huge advantage because whoever comes first can say what they want to say, whoever comes later has to adjust to some extent to what's been said earlier. Fortunately in this case, while I have to adjust and will do so, for the most part I'm in agreement with what such speakers in the first session said, so I don't have to go and get into a big argument before I get going, which is very nice.
As was said, I'm focusing on the trade aspects of adjustment, not the employment, which Gordon already covered, and obviously, with what Asia has been doing, the pressures for structural adjustment both in Asia and in the rest of the world, have come in significant part through trade, because trade has been such an important instrument for accelerating growth in many of these countries. While the Asian economies and Asian trade were growing rapidly until the year 2000, the base, except for Japan, was small enough so that the rapid growth did not really represent the structural change for the global economy, again, except for Japan. Japan's emergence as a moderate industrial trading nation was a major feature of the 1970s and 1980s and, indeed, some of the rhetoric now concerning the emergence of China, bears a striking similarity to the rhetoric 30 years ago about the emergence of Japan, but the slowing down in Japan's growth since 1990 has meant that there was little more focus on Japan after that time and in the 1990s there was not much concern about structural change, but by 2000, China's export led growth had been proceeding for almost two decades through a very small base.
China's entry into the world trade organisation appears to have resulted even in acceleration of that already rapid growth and by 2010 China was exporting US$1.568 trillion up from US$249 billion in 2000. The country's share of world exports had increased from 3.9% at the beginning of the decade to 10.3% ten years later. That is structural change, and of course it was structural change on both sides of the equation. China's size and her virtually unprecedented rate of growth focussed world attention on China and so too did the Chinese need for raw materials and the large trade in current account surplus with the United States. But other Asian economies were also increasing their role in the world economy. India's exports rose starting in about 1993 from 42 billion in 2000 to 220 billion a decade later. Malaysia's rose from 98 billion to 199 billion in that same decade; Thailand's from 69 to 195 billion, so all of these countries had very rapid rates of growth. Even Vietnam's exports rose from 14 billion to 71 billion over the decade, and so in effect we had all of Asia growing very rapidly and doubling your exports in a decade is growing at 7% a year, which of course is well in excess of the rate of growth of real GDP in the industrial countries.
China's share has tended to focus on that country and not only is overall Chinese and Asian trade of increased and increasing importance, but issues are arising with respect to a number of goods. Some producers of unskilled labour intensive manufactured goods in advanced countries have sought to redress through the WTO processes, including of course, even this week when the US filed a complaint with the WTO about Chinese subsidisation of auto parts. China's demand for raw materials has been large enough and as everybody in this room knows, grown sufficiently rapidly to alleviate concerns about future supply and demand, and therefore prices of some primary commodities.
It's likely, however, that Chinese export growth will not be so rapid in the future as it has been. Chinese producers are beginning to offshore production of some labour intensive commodities as has already been mentioned, but even more significant, the share of consumption and GDP is again, as noted earlier, well below levels that appear warranted and the authorities are gradually adopting measures to encourage larger reliance on the domestic market for future growth and that's of course something that will be in China's self-interest as well as everybody else's. As Chinese real wage rates rise and the supply of unskilled labour from rural areas does not grow as rapidly as it did, there will still be a supply, but the rate of growth of supply will not be so rapid, these trends are likely to continue, and that's likely to make a difference. But other low waging economies have hardly started yet, and we sometimes forget that. I think Pakistan, Indonesia, Philippines and Myanmar, almost half the size of China in terms of population right there, and not to mention that India has by no means as yet, achieved as much as she should and there's a very great likelihood that India's share in trade will increase in the future.
With all of that, though, there are some reasons not to think that those very large orders of magnitude and growth rates will be quite as dramatic in effects as the numbers might suggest and there are really four aspects to asking where things will go in the future. The first question of course, is what will happen with the growth rates themselves of the Asian economies if their policy makers satisfactorily confront the economic challenges with which they're faced. Second then is the question of whether they will indeed address these challenges satisfactorily or whether indeed they'll run into trouble on that account. But the evolution of the Asian economies will also depend on the international economy and here the issues can be raised both about prospective growth rates in advanced countries, which is important, and also, of course, of the non-Asian developing countries, assuming that country's policies concerning the international economy continue on their present path, and finally there are important questions to which I will come back concerning the future of the open multilateral trading system which is vital for everybody.
Let me turn to each of these in turn, but first emphasise three, I think, important propositions. First, any country's growth prospects are better if its own economic policies are sound and most of the adjustments that have to take place are, in most countries, domestic and not international. If growth is to continue, it's mostly a matter of getting your own economy functioning more satisfactorily and of course the openness helps and the trade helps, but it can't do the job alone. Secondly, policy stances that permit growth at early stages of development may not be appropriate to sustain growth beyond middle income status and many countries have done reasonably satisfactory growth over a period of ten or maybe even 20 years, but then ended up sort of stuck in what's called a middle income trap where they've been unable to make the further adjustments that are required to go to the next stage of growth and that's an issue coming, too. Third, all countries' growth prospect are improved, as I've already said, with the open multilateral trading system and the financial system both being healthy and their prospects could be greatly impaired if protectionist forces are strengthened, which is certainly unfortunately not out of the question.
Well, let me first turn to growth prospects for Asia. To date, the countries that have experienced rapid economic growth have found that after they digested the benefits of trade opening
and of rural urban migration which is associated with it, the growth rate inevitably slows down. This happened in Japan in the 1970s when the rural labour force, the surplus, so to speak, had been employed in the urban areas, and in Hong Kong, Korea, Singapore and Taiwan in the 1980s, 1990s. How much scope there is for further rapid catch-up or convergence in Asian countries is a matter of judgement and it varies from country to country, it is certainly not the same for them all.
For the advanced countries in Asia, slow down from the pace of earlier decades has already occurred, but it is likely to be further experienced because of demographic factors. As is well known and was talked a bit about earlier, the industrial countries of East Asia have very low rates of population growth, indeed for Japan, the labour force, not just the population, is already falling in numbers. It's projected that Japan's total population will decline from 127 million in 2010 to 109 million in 2050, while the drop in the labour force will be proportionately considerably greater. The other advanced Asian economies are not far behind; South Korea's working age population is projected to peak in 2018 and the total population, 2029. Slowing labour force growth has two negative impacts on the overall rate of growth of GDP, first the very fact that labour becomes scarcer means that more capital investment is needed, assuming no change in the rate of innovation, as additional capital substitutes for labour rather than simply bringing more people from an unproductive pursuit in the rural areas to a more productive pursuit in the urban areas.
Secondly, as life expectancy increases, the fraction of the population that must be supported, ie the elderly, by the labour force rises. The estimate for Singapore is that right now there are about six workers per old person, and by 2050 there will be two. It's a huge change demographically but it has huge fiscal and growth implications. The fiscal challenges of supporting an older population may drain private savings and result in deteriorating fiscal situations and thus hinder growth unless they are addressed, and even then it's hard to see how they can't make a dent. If old age is supported privately, the savings rate will fall as the elderly consume all their earlier savings. There can be certain offsets, of course. Policies that increase the labour force participation rate, including child care, higher retirement ages, immigration etc, can reduce the negative effects of these factors. Likewise, incentives for innovation which enhance the productivity of labour and capital can provide an offset to some degree providing the incentives make sense and they're relatively on a level playing field.
But the world as a whole is facing demographic challenges of a type not heretofore encountered in the industrial age, and it will take enlightened policy responses in those countries undergoing demographic transition to offset negative effects of population ageing and there's a lot of uncertainty about it. Maybe birth rates will go up again, but even if they started rising immediately, labour force projections for the next 20 years are very firmly grounded and cannot be changed and the ageing part of the population for the next 40 years is pretty well set, so there are parts of it that cannot be changed in the very short run by those means.
In Asia, not only are the advanced countries experiencing or about to experience demographic problems, but some of the emerging markets are facing challenges before they reach industrial strengths and of course China has the most visible of those; China's demographic prospects are much the same as those of the advanced economies despite her still low level of per capita income. China's working age population is projected to peak in 2018 and the labour force in 2029, not much different from South Korea. The implications for the growth of trade are significant because of course, comparative advantage can shift shifts as your wage rate goes, your wage rate goes with this relative supply of labour and capital and skills and so those are problems going ahead.
India's demographic profile is different, as population and labour force are projected still to be growing, going on for the next 30 or 40 years. And there are some young “Asian economies" including Pakistan and Afghanistan, but overall the Asian economies will experience much lower growth of the labour force than they have over the last half century and a much more rapidly growing elderly age group. In itself, slower population and labour force growth will result in a retardation of GDP growth, in addition, for the countries that have been growing extremely rapidly, the benefits of the rural to urban migration will slow as the supply of would-be migrants decreases as a percentage of the total labour force and population. The gains to be had by catch-up will therefore also slow and how soon this will occur, how much of a slow down there will be and whether it will be relatively sudden as it was in the cases of East Asia or more gradual, will depend in significant part to the policy responses of the Asian countries to their domestic challenges.
I mentioned the middle income trap already and it's a real possibility; certainly addressing labour force issues and getting productive and flexible labour forces is going to be more important in the future than it has been in the past. I'm skipping a bit here because of lack of time. Even with a significant slowdown in growth, however, Asia's role in the global economy is likely to increase for some time to come. First off it may not be the same outcome as some countries are more forward looking in their policy adjustments than others. It's likely that the countries with lower per capita incomes can maintain above average growth rates for several more decades if they sustain appropriate economic policies and for some, growth of exports and of trade is likely to result in increasing shares of exports and imports in the GDPs for a considerable period of time. India, for example, still retains an average tariff on manufacture of over 10% and neither agricultural trade nor trade in services has as yet been significantly opened up.
But even if the share of exports in Chinese GDP does not increase further, the Chinese increase share of world trade would almost certainly continue to rise as long as China's GDP growth remains above that of the rest of the world and it's certainly likely to do so, and a major source of challenge for China is to shift sources of demand somewhat more, but it has to do that for two reasons. One I mentioned already and the other is the risk of the re‑emergence of global imbalances; if that were to happen, we would then face other, more immediate problems in terms of world economic growth. The Asian Development Bank's projections have already been mentioned, which would have Asia by 2050, with good policies, having about half of world GDP. That certainly may not be exactly right, but that's up from something on the order of, let me get the number, on the order of 27% now, so a doubling of share of Asia, a doubling of its weight over the next four decades is certainly in the realm of possibility.
It has to be remembered, or course, that as Asia's share increases, so too will the share of Asia as a market, and some of the increase in exports of countries at earlier stages of development would replace exports of unskilled labour intensive goods from China. The Japanese long ago suggested that there was what they called a flying geese pattern, where there's a goose at the head and then the ones that come behind, and what they meant was that as Japan moved out of some of the unskilled labour intensive industries, other countries, and at that time the Japanese had in mind South Korea, Taiwan and so on, would come and replace them in terms of the unskilled labour and they'd then begin becoming flying geese two back in the pattern and so it would go and of course now we have South Korea, Taiwan, Singapore and so on as advance
d countries and so the flying goose pattern is now presumably being reflected in China and so on; as the Chinese move their unskilled labour in that intensive manufacturing and so on into Vietnam and other areas, that the same thing can happen all over again. So we have that, and that will be a partial offset to the increased share, both because the countries that grow rapidly are themselves markets and because they're releasing some of their activities to other countries.
I don't have much time and I wanted to spend more time than I now have on the global implications of all this, but let me very quickly go through them. The first and the most important, in my judgement, although it depends on other things too, is some attention to the open multilateral trading system which has served all of us very, very well despite the fact, as Professor Hanson said, some people benefit more than others; for our economies as a whole; the growth rate we've had in the international economy has been vital, not only for the most rapidly growing but also for the others. The trade frictions are greater when growth rates are low, which already says one reason why it's desirable to have more growth, and the financial crisis is by no means over. A lot of challenges are country specific, but, if the growth rates that I mentioned that were suggested by the Asian Development Bank are likely to happen, the international financial and trading system has to be addressed and make sure it's functioning.
We are seeing increased protectionism at the present time, there's a global trade alert which tries to track what are the increases in protectionism over the past several years since the financial crisis began, and at the moment, the biggest sinners in order of number of items covered, which is not the same necessarily as the impact of them, are, in order, Russia, Argentina, several European countries, mostly in eastern and southern Europe, India and China. Argentina last week increased some tariffs, and Brazil has just put another 100 commodities to have a higher tariff than they had before. We are seeing some of this already with slower growth and it needs to be addressed. Basically what they need to do, there's an urgent need to have a strengthened system, not a weaker one, and at the same time the Doha Round of trade negotiations, which is what should have strengthened it, is languishing, and protectionist pressures are, as I said, on the rise. Failure to complete the Doha Round has greatly increased the difficulty of addressing the new issues that have arisen, some of which are important, and prevented the realisation even of the gains that would have occurred had the Doha Round been included on the basis of what had already been agreed by 2008. For the world economy as a whole it is vital that we get back to that.
Issues on the financial side are equally in need of urgent resolution, in part because they spill over to trade; the financial crisis indicated the need for increased incentives for financial institutions to improve their evaluation of risk/reward tradeoffs, and some of those have to be international because otherwise the countries that are not adhering to those standards are the ones whose financial systems gain. Moreover, there is a risk, as I mentioned, that global imbalances might once again lead to overly aggressive risk taking with lower negative real returns, and the IMF has no more authority now than it did a decade ago, to do more than comment on risks unless a country seeks its financial support. The IMF tried persuasion and it did not work, in 2006, 2007, and the mutual assessment plan now on the table seems so far to have had everybody present plans that looked as if there was no problem.
So, as this suggests, there are major issues that need to be addressed. But, having those issues addressed also means that Asia has to have its say, and the issues of governance are serious because most countries are outside the advanced G7, or the OECD countries have so far perceived themselves as being, if you like, free riders or observers or beneficiaries, depending on what they've perceived, of the international system as determined, as they perceived it, by the advanced countries. That can no longer go on; Asia has already become too important for that, and there needs to be strengthened international participation, and I choose my words carefully because I do not mean simply the number of votes in the IMF or the World Bank, the WTO is already one country, one vote, that might be changed to the other way in any event, but be that as it may, there are issues of course of voting share but there is also an issue of taking responsibility for the system as a whole instead of looking only for the interests of individual commodities in each individual country.
I would argue that it behoves Asian countries to become more forthcoming in discussions in global forums such as this one and others on the issues that are confronting the international community rather than leaving it to the leadership of the past which of course can no longer carry the burden alone, for obvious reasons. Thank you very much.