Asia needs visionaries: Bank of Thailand chief

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NATION CONFERENCE : ASIA DRIVING THE WORLD
'Asia needs visionaries'
Yossarin Boonwiwattanakarn
The Nation


Chief executives from 10 Asean countries take part in a group photo with Bank of Thailand Governor Prasarn Trairatvorakul, centre left, and Nation Multimedia Group chairman Suthichai Yoon, centre right, during an international conference

BOT chief says need for long-term strategies to remove bottlenecks

BANGKOK: -- Asian leaders need to address structural bottlenecks, chiefly regarding labour and productivity, in order to achieve sustainable growth, Bank of Thailand Governor Prasarn Trairatvorakul said.

Given that long-term strategies are needed to address these bottlenecks, visionary leadership, consistency and continuity are required, he said yesterday at The Nation's international conference entitled "Asia Driving the World". The seminar was held to mark the 43rd anniversary of Nation Multimedia Group.

In his speech on "Asian and Thai Economies in a Volatile World", the central bank chief said these measures would drive sustainable economic growth with meaningful effect and minimum cost for Asia.

"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," he said.

In Thailand, consistency and continuity are already present in the strategic agenda. However, the problem lies in implementation. In order to address these problems, a combination of legal framework, private-sector participation and quality engagement must be included.

He noted that labour shortage and productivity were the two key things dragging down long-term growth in emerging Asia. To address this shortage, attention should be paid to problems such as the wage structure and mismatch in skills. National strategies are needed to boost productivity, as some macro policies may distort the system, he said. For instance, he said, the agricultural price subsidy measures, while serving their redistribution purposes, might inadvertently move workers away from the productive manufacturing sector to the agricultural sector, thus contributing to lower overall productivity in the economy. Low public spending on research and development, as well as insufficient protection of intellectual property rights might deter innovative entrepreneurship and hinder the moves towards a knowledge-based economy.

"The long-standing weakness of our labour market has emerged as an important bottleneck hampering potential growth. Reorienting the country's growth strategy to focus more on skill development, innovation and productivity involves deliberate planning over a relatively long stretch of time," he admitted.

Pointing out that most policies in emerging markets have been focused on demand-side management, he explained that the real shift of potential growth in the economy must essentially come from supply-side progress.

Prasarn noted that given the economic slowdown, Asian nations have also been given support to deal with the bottlenecks.

Growth forecast revised

The Bank of Thailand yesterday announced a revised economic growth forecast for 2013 with risks tilted to the downside mainly from the fragile global economy and the possibility of further delay in the Bt350-billion water-management plan. From 5.1 per cent, the 2013 forecast was slashed to 4.2 per cent, while the 2014 forecast was maintained at 5 per cent. Inflation forecast was revised down from 2.7 per cent to 2.3 per cent in 2013, and from 2.7 to 2.6 per cent in 2014.

Prasarn noted that despite the global jitters, Thailand's unemployment rate remains low while income remains relatively high. The export sector should also pick up in the latter half, thanks to recovery in Japan and the United States. The low interest rate should also help spur growth. He said the central bank already has the tools to deal with volatility in capital flows. Also, despite some delays, the mega-project investment would contribute to the overall economic outlook, he added.

However, he warned that in the second half, local investors should prepare for fluctuations in global financial markets. He also said that he expects the household debt level, now at 80 per cent of gross domestic product, to affect people's purchasing power. However, he is convinced China's slowdown will only have a short-term effect.

Note: Vision of the "Future of Asia" by Surakiart Sathirathai, chair of the Asian Peace and Reconciliation Council, will be published on Monday. The "Business Visions 2020" gathered from the same event will be published on Tuesday.


-- The Nation 2013-07-20

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Asian and Thai economies in a volatile world
The Nation


Prasarn

BANGKOK: -- Dr Prasarn Trairatvorakul, Governor of the Bank of Thailand, addressed an audience at The Nation's 43rd Anniversary International Conference on July 19. The following are highlights from a transcript of his speech.

We gather here at an important juncture of what seems to be yet another shift in the global economic and financial landscape. The "three-speed" world economy appears to be on a convergence course 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 the market's enthusiastic reactions to the Federal Reserve's signal of so-called "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.

The financial world has indeed become more volatile. Many factors intertwine to render the great financial market volatility we observe today. These include closer integration of the global economy through stronger trade and financial linkages, increasingly large and mobile capital flows due to lower costs on cross-border investments, the rapid spread of information made possible by advancement in technology, and more pronounced reactions on the part of market participants in times of heightened uncertainties 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.

Notwithstanding the turbulence of the global economy, Asian economies had proven to be resilient in the face of negative external developments, with favourable macro-economic performance and well-maintained stability, 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.

The success of Asian economies in weathering the global financial crisis is commendable. But it would be a mistake to be lulled into complacency by this success in 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 for the Asian region, including China. This is the second topic: 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 can 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 abundant or the better use of capital and labour inputs in the economy. Although Asia's potential growth remains higher than in other regions, recent studies point to a possible reduction in trend growth since the 2008 financial crisis. For example, the IMF's Regional Economic Outlook for Asia and Pacific region, April 2013, highlighted that a number of emerging Asian economies could run the risk of a sustained growth slowdown of the so-called the"middle-income trap" phenomenon.

Two common drags to long-term growth in emerging Asia are the labour shortage and the decline in productivity growth.

The problem of labour shortage has been deep-rooted in Thailand for many years, but has not received much attention until recently. This could be partly due to favourable economic expansion that has masked this problem, and also because of the ability on the part of firms to employ migrant workers. But now, with protracted external demand slowdown coinciding with a recent weakening in domestic demand, the long-standing weakness of the labour market has emerged as an important bottleneck hampering potential growth.

Leaving aside the demographic ageing problem that has yet to reach its peak, pervasive skills mismatch has been identified as a main cause of labour shortage. In particular, workers with vocational training needed by the manufacturing industries, are in much shorter supply relative to university graduates. This has been one of the major holdbacks on manufacturing capacity.

A related issue is that of a long stall in labour 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 the 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 the agricultural sector, thus contributing to lower overall productivity in the economy. At the same time, low public spending on research and development, and insufficient protection of intellectual property rights, may deter innovative entrepreneurship and hinder a transformation towards a knowledge-based economy.

The good news is, the risk of a sustained growth slowdown could be reduced or even avoided, as the successes 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. Reorienting the country's growth strategy to focus more on skills development, innovation and productivity involves deliberate planning over a long stretch of time. Three principles are of the essence: visionary leadership, consistency and continuity.

These three principles 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.

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 and regional economic and financial integration in Asia. Under the ASEAN economic community (AEC), the region's prospects will be much enhanced by further integration efforts to foster freer international trade and more mobile 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 resilience against shocks.

Second, higher mobility of factors of production and cross-border 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 large-scale upgrading.

And last, the strengthening of a regional financial safety net through institutional mechanisms and arrangements such as the development of the Chiang Mai Initiative Multilateralisation will increase the region's ability to respond to a crisis, build confidence and hence lessen possible market turbulence during times of financial stress.

Numerous advantages for member countries and for the region can be expected from the launch of the AEC in just a few years. However, capitalising on these opportunities will not be automatic. ASEAN leaders will need to step up 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 the 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 programmes such as the Greater mekong Subregion Economic Cooperation have been underway to accelerate economic integration of the newer members through various capacity building and infrastructure projects. This will 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 the sustainability of this ambitious effort towards pan-Asian economic integration is to bring on board private-sector involvement. In this regard, greater efforts should be made to raise awareness of the AEC among the business community.

Last but not least, since regional integration relies much on harmonisation and coordination of cross-national policies, with strong commitment by national leaders in implementing the agreed arrangements, political stability and peaceful relationships among member states will prove imperative to success. This calls for the promotion of peace and stability within the region, with fair mechanisms to arbitrate disputes, to ensure that progress on economic integration will not be delayed or discontinued due to conflicts among member nations.

In uncertain times, and with all the interconnectedness of the world economy, the volatility and short-term fickleness of marketplaces are unavoidable. The wise thing to do is to understand the nature of this interconnectedness, enhance risk management at the macro and micro levels, to mitigate negative impacts while maximising opportunities. 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 creating extreme market reactions and volatility, on the 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.


-- The Nation 2013-07-20