Prasarn Trairatvorakul: Asian and Thai economies in a volatile world
Speech by Dr Prasarn Trairatvorakul, Governor of the Bank of Thailand, at The Nation's
43rd Anniversary International Conference, Bangkok, 19 July 2013.
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Distinguished CEO and Chairman,
Members of Asia News Network,
Distinguished Guests; Ladies and Gentlemen,
It is a delight to address you on this auspicious occasion of The Nation's 43rd anniversary.
Let me congratulate you warmly, and wish you many flourishing years ahead.
We gather here at an important juncture of what seems to be yet another shift in global
economic and financial landscape. The three-speed world economy appears to be on a
convergence course recently as China and some other emerging markets start to show signs
of slowdown, while the US and Japan are gathering momentum. These changing global
dynamics coinciding with market's enthusiastic reactions to Federal Reserve's signal of
socalled "QE tapering" led to a sell-off of emerging market debt and equities, and reversal of
foreign capital flows that had rushed into the region earlier this year.
Living in a more volatile world
The financial world has indeed become more volatile. Many factors intertwine to render such
great financial market volatility we observe today. These include (1) closer integration of
global economy through stronger trade and financial linkages, (2) increasingly large and
mobile capital flows due to lower costs on cross-border investments, (3) rapid spread of
information made possible by advancement in technology, and (4) more pronounced
reactions on the part of market participants in times of heightened uncertainties ever since
the onset of the global financial crisis. The interplay between market players'
expectations, their self-fulfilling nature and spillover effects paves the way for market
exuberance in response to a trigger event. As a clear case in point, the recent ups and
downs of financial markets upon new information the market perceives from each round of
the Fed's announcements highlight the role of "shifts in beliefs" on market volatility.
What made the post-2008 period particularly vulnerable to such self-fulfilling global turmoil is
the current stage of the world economy characterized by lingering structural weaknesses of
the crisis countries and limited policy space that reduce the potential of macroeconomic
stabilization policy. All of these factors reinforce the role of global shocks and contagion
through real linkages as well as expectation channel in transmitting volatility around the
world.
Notwithstanding the turbulence of the global economy, Asian economies had proven
to be resilient in the face of negative external developments, with favourable
macroeconomic performance and well-maintained stability during the past period, thanks to
the region's flexible policy framework, robust financial system, and improved risk
management as lessons had been learned from the crisis of 1997.
Making headway towards sustainable growth
Ladies and gentlemen,
The success of Asian economies in weathering the global financial crisis is certainly
commendable. But it would be a mistake to be lulled into complacency by this success of
short-term volatility management. In particular, there remain important long-term challenges
to the sustainability of growth in Asia. Indeed, latest economic indicators already pointed to a
less upbeat growth trajectory of the Asian region including China.
The apparent slowdown
in Asia, despite gradual improvement of the advanced economies, lends support to
the idea that Asia also has its own structural bottleneck issues to deal with. The time is
ripe for all parties involved to look beyond short-term fluctuations and give serious
consideration to longer-term structural issues that are holding back Asian potential growth.
This is the second topic of my talk today: what can Asia do to sustain its high pace of growth
in the post-crisis world?
Since the onset of the global financial crisis, most policy responses in emerging markets
have been focused on demand-side management, through monetary or fiscal policy stimulus.
But boosting demand alone could only get us thus far. The real lift of potential growth of the
economy must essentially come from supply-side progress. This refers to either the more
abundance or the better use of capital and labor inputs in the economy. Although Asia's
potential growth remains higher than in other regions, recent studies pointed to a possible
reduction in trend growth since the 2008 financial crisis.1 In my reading of anecdotal
evidence and through policy discussions, two common drags to long-term growth among
emerging Asia are the labor shortage and the decline in productivity growth.
Let me explain the labor market issue using the case of Thailand as an example. The
problem of labor shortage has been deep rooted in Thailand for many years but has not
received much attention until recently. This could be partly due to favorable economic
expansion during the past years that has masked this problem and also because of the
ability on the part of firms to employ immigrant workers. But now with protracted external
demand slowdown coinciding with recent weakening in domestic demand, long-standing
weakness of the labor market has emerged as an important bottleneck hampering potential
growth. Leaving aside the demographic aging problem that has yet to reach its peak,
pervasive skills mismatch has been identified as a main cause of labor shortage. In
particular, workers with vocational training needed by manufacturing industry, is in much
shorter supply relative to university graduates. This has been one of the major holdbacks on
manufacturing capacity. I would like to urge that, in searching for labor market solution,
attention must also be paid to the problems of the wage structure, since at the going wage,
price mechanism and its signaling function do not work efficiently enough to clear the labor
market to eliminate this skill mismatch.
Related issue is that of a long stall in labor productivity as well as overall productivity growth.
Policy distortions and a lack of clear policy directions can discourage firms from
accumulating physical capital and investing in innovation, and prevent workers from moving
to higher value-added sector. For example, agricultural price subsidy measures, while
serving their redistributive purposes, may inadvertently channel workers away from highly
productive manufacturing to agricultural sector, thus contributing to lower overall productivity
of the economy. At the same time, low public spending on R&D and insufficient protection of
intellectual property rights may deter innovative entrepreneurship and hinder a
transformation towards a knowledge-based economy.
Good news is, the risk of a sustained growth slowdown could be reduced or even avoided,
as success of some mature economies in Asia have shown in the past. This will depend
crucially on the quality and the timeliness of public policies across a wide spectrum in
tackling these long-term issues. To be sure the task is not going to be easy. Reorienting
the country's growth strategy to focus more on skills development, innovation, and
productivity involves deliberate planning over relatively long stretch of time. Three principles
are of the essence: visionary leadership, consistency, and continuity.
Due to the long-term nature of structural readjustments, of policy implementation
continuity
is required for the policy measures to take meaningful effect on the economy. Consistency
both over time and across the broad spectrum of macroeconomic policies, guided by the
overriding economic reform agenda, is needed to reach an optimal outcome at minimum
cost. And precisely because of all the challenge and difficulty in searching for the right
direction for the economy and making it happen, a visionary leadership is vital for
successful structural transformation. Clear and far-sighted vision for the economy, the ability
to maintain coherency between strategic ideas and short-term actions, and the ability to
bridge differences and cultivate shared beliefs are but some of the important characteristics
needed for policymakers to deliver changes.
These three principles - visionary leadership, consistency, and continuity - should be at the
root of the national economic policy formulation and implementation to ensure quality public
policy that can enhance the country's competitiveness and sustain long-term growth.
Realizing potentials of regional integration
Ladies and gentlemen,
Implementing reform through domestic policy alone is likely to be a daunting task, but
fortunately Asian economies can leverage on the vast opportunities offered by the regional
economic network.
This brings me to the final topic of my talk, that of regional
economic and financial integration in Asia. Under ASEAN economic community (AEC),
the region's prospects will be much enhanced by further integration efforts to foster freer
international trade and more mobile movements of factors of production. Four broad facets of
regional connectivity are expected to contribute to ASEAN economic growth and stability.
First, with barriers to trade in goods and services brought down, there will likely be a
substantial expansion in intra-regional demand. This increasing role of intra-regional trade in
final consumption goods should provide the region with a potential source of resiliency
against global demand shocks. Second, higher mobility of factors of production and
crossborder infrastructure development can help unlock the tremendous potential of the region by
removing supply-side constraints and bottlenecks to growth faced by individual countries,
while also making best use of resources and comparative advantages through regional and
global supply-chain networks.
Third, through closer ties of financial and capital markets, ASEAN countries stand to benefit
from tapping the vast pool of Asian savings, to finance intra-regional investment activities.
This will prove particularly valuable given that many ASEAN countries are currently in much
need of investment to lift their potential rates of growth after a prolonged period without
largescale upgrading. And the strengthening of regional financial safety net through
lastly,
institutional mechanism and arrangement such as the development of the Chiang Mai
Initiative Multilateralization (CMIM) will increase the region's ability to respond to a crisis,
build confidence and hence lessen possible market turbulence during times of financial
stress.
As I have outlined here, numerous advantages for member countries and for the region as a
whole can be expected from the launch of the AEC in just a few years from now. However,
capitalizing on these opportunities will not be automatic. ASEAN leaders will need to step
up their efforts in their preparatory works to achieve a credible and meaningful start.
For one thing, boosting each member country's competitiveness and addressing key
structural problems should be priorities that lie primarily with respective nations. Furthermore,
to ensure sustainable success of regional economic integration, growth must be inclusive
both within and between member countries. To this end, the equitable economic
development pillar of the AEC blueprint calls on member states to narrow the development
gap within ASEAN through mutual assistance and cooperation. Under this pillar, subregional
programs such as the Greater Mekong Subregion (GMS) Economic Cooperation have been
underway to accelerate economic integration of the newer members through various capacity
building and infrastructure projects. This would help spread the benefits of growth more
widely and evenly while enabling the AEC to take advantage of the potential source of
synergies by bringing the capital and know-how of the more mature economies together with
the competitive costs and abundant resources of the new frontier member countries.
Another key element for sustainability of this ambitious effort towards a pan-Asian economic
integration is to bring on board private sector involvement to draw in private expertise as
well as private capital in funding and operation of intra-regional investment projects. In this
regard, greater efforts should be made to raise awareness of AEC among the business
community in sustaining high levels of collaborative economic dynamism within the region.
Last but not least, since regional integration relies much on harmonization and coordination
of cross-national policies with strong commitment by national leaders in implementing the
agreed arrangements, political stability and peaceful relationship among member states will
prove imperative to the success. This calls for the promotion of peace and stability within
the region with fair mechanism to arbitrate disputes to ensure that progress on economic
integration will not be delayed or discontinued due to conflicts among member nations.
Concluding remark
Ladies and gentlemen,
I have spoken at length, from a subject of a volatile world, onto more structural issues facing
Asian economies, and the regional cooperative forces that provide promising ways forward
for Asia. Let me now wrap up by leaving you with a final remark on these issues.
In these uncertain times and with all the increased interconnectedness of the world economy,
volatility and short-term fickleness of marketplace are unavoidable. The wise thing to do is to
understand the nature of this global interconnectedness, enhance risk management at both
the macro and micro levels to mitigate negative impact that it may bring upon, all the while
maximizing opportunities that it can immensely provide. It is conceivable that, in this highly
integrated world, information and confidence are very important in influencing actions. Just
as how "shifts in beliefs" can go a long way to create extreme market reactions and volatility,
on a positive side I trust that a successful "anchoring of confidence" in our "shared beliefs" of
ASEAN's strength and future will encourage actions and commitments that will bring
sustained prosperity for all.
Thank you. And happy birthday to The Nation.