Tuesday, May 10, 2016

Revive the Regional Growth Momentum

Darson Chiu
In December, 2015, the Economist Intelligence Unit revised its forecast for the world economic growth in 2016 from 2.7% to 2.6%. In January, 2016, three other signature institutes, the International Monetary Fund, Global Insight, and World Bank adjusted their forecasts of global GDP growth rate from 3.6%, 2.9%, 3.3% to 3.4%, 2.8%, and 2.9% respectively. All of these recent adjustments conducted by major institutes have one thing in common; every one of them is downward. In short, pessimism betides, and optimism subsides.
Economists have been stressing the coming of new normal or new mediocre. The tumbling crude oil prices did not pick up consumption as expected since June, 2014. Quite the contrary, falling energy prices have caused distortions on base effects and dragged down aggregate output growth on year-on-year basis. Strong growths occurring before the most recent global financial crisis seem hardly likely for the time being or even in the near future. “A little happiness”, a phrase that has been so popular at bad times will probably be cited even more frequently from now on.

Asia Pacific great powers are all coping with either tepid growth or slowing down. The US Federal Reserve had its first rate hike in December 2015 since December 2008, however forced to conduct a negative interest rate pressure test in February, 2016 due to contracting businesses. China has been trying all it can to avoid a potential hard landing and bid goodbye to 7% growth rate for good. Japan’s central bank cut its interest rate further to negative level and announced that its monetary operations could go even looser.
In addition to that the geopolitical factors are furthering uncertainties to the deteriorating economic conditions; large countries are not performing adequate leadership in pulling the world economy along but desperately coping with their own difficulties. With respect to heavy fiscal constraints and debt pressures, extreme monetary operations in the means of quantitative easing have become one of the very few workable options. Overcapacity due to over investment at bad times has been an issue causing inexhaustible structure reforms, whereas continuous reforms have also slowed down the growth momentum and limited the growth potential. When big players are dealing with either tepid growth or periodically headwinds, soggy demands hold back others that are closely associated with global or regional supply value chains.
As every economy is specialized in specific parts and components at its relevant statuses of supply value chains with respect to particular comparative advantages, almost none can be immune from the shrinking world demands. Therefore, to pick one’s growth potential is no longer simply to seek the betterment of oneself but the wellbeing of all.
Consumption, investment, and trade are main engines that used to drive economic growth yet seemed to lose steams in recent times. Decision makers are indeed responsible for building hale and hearty environments that are able to encourage activities of consumption, investment, and trade.
Private or household consumption is the most important component of GDP. The private consumption accounts for 58% of the world aggregate GDP, 61.9% of OECD and 51.5% of non-OECD countries estimated as of the year of 2015. Despite the consumption preferences and decisions are dissimilar across countries; it is the rule of thumb that the demand for consumption goods is strong at good times, whereas consumers tend to retrench at bad times. Since the marginal propensity to consume theory indicates that an increase in consumer spending occurs with an increase in disposable income, avoiding income traps is essential for supporting consumption. Income traps have been present in different forms: emerging economies are suffering from middle income traps, and advanced economies are stressing high income traps.
In addition to escape from income traps, building sound social safety nets is also a necessary task to promote private consumption. Saving is critical especially for developing economies when lacking sufficient social safety nets. However, high saving rate on the other hand restricts other economic activities such as consumption. With well functioning safety nets, consumers will be more willing to spend their money.
As for investment, it is the key for growth from here on out. Besides the fact that investment is a crucial component of domestic demand, it also paves the way for supplying external demand in the future. Not only emerging but also advanced economies have strived to attract foreign investments. For emerging economies, foreign investments come with technology, a chance to upgrade their economic capacity. For advanced economies, foreign investments bring in capital and job opportunities. Complicated and excess regulations, poor infrastructures, and unstable political systems are some of many reasons that could impede potential foreign investments. Hence, capacity building to create healthy environments through information and knowledge sharing among economic partners to eliminate or mitigate those unattractive factors would be much needed.
Furthermore, foreign investment can come in two forms: foreign direct investment (FDI) and foreign portfolio investment (FPI), the former is also known as cold money, and the latter is recognized as hot money. It seems that cold money is more popular and welcomed by governments, because it provides solid contributions to GDP. By comparison, hot money is resented by governments especially by central banks due to that it influences or even twists currency exchange rates and sometimes forms financial bubbles. Creating sound peripheries that can help direct hot money into cold money would be another signature joint mission for economists, decision makers, and businesses.
Trade is the last but not least engine for GDP growth; otherwise, negotiations for most free trade agreements wouldn’t be so difficult to conclude. Recently, the conclusion of Trans-Pacific Partnership (TPP) has been on the spotlight, as regional supply chains will be reshuffled when the treaty comes about. TPP also sets a high quality benchmarks for others including the Regional Comprehensive Economic Partnership (RCEP) and Transatlantic Trade and Investment Partnership (TTIP).
Free trade is in theory good for all participants. If the agreement covers the region, then it is beneficial for the entire region. When a free trade deal is implemented, tariff and non-tariff barriers are eliminated. As a result, suppliers’ and consumers’ surpluses are maximized; overall welfares increase, and resources are optimally allocated.
However, free trade poses serious threat for outsiders. For example: rules of origin require a high percentage of intermediate components of a final product to enjoy free duty treatment. Said requirement simply edge out outsiders’ chances to compete with signed members in that trading bloc. As more members will certainly create more benefits; making sure every economy is included would be to seek wellbeing of all in our region.
(Dr. Darson Chiu is the Director General of CTPECC.)


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