Financial liberalisation, macroeconomic
policy and growth in Asia:
The good times and the bad times
Jayati Ghosh
Jawaharlal Nehru University, New Delhi
IDEAs Conference on
Financial Instability and Inequality in an Economically
Integrated World
Tsinghua Sanya International Mathematics Forum
Sanya, China
22-24 February 2016
Well-known macroeconomic
implications of financial liberalisation
Volatile capital flows create boom and bust trajectories that
generate instability.
Real exchange rate appreciation impact on domestic shift in
incentives from tradeable to non tradeable activities, and
associated macroeconomic imbalances.
Attempts to prevent this associated with reserve accumulation
that implies loss of potential productive investment inside
country.
Fear of capital flight creates deflationary macroeconomic
policy bias and unwillingness to raise taxes.
Other important effects
Increasing reliance on debt-fuelled economic expansion
rather than in multiplier effects of rising wages and
investment.
Reduced link or no link between financial indicators and
productive investment.
Medium term effect on growth because of reduced incentive
for long terms orientation of investors.
Meanwhile booms are associated with deceleration or reversal
of structural change and economic diversification.
This happens during the “good times” – what about the bad
times?
The “good times” are now over
Net capital inflows into major Asian economies ($ bn)
350
300
43
250
55
272
263
42
200
208
202
196
54
150
100
129
130
143
147
41
89
50
0
-20
2005
2006
-18
2007
-31
2008
2009
2010
-50
-100
-109
-150
FDI flows
Portfolio flows
2011
2012
2013
-59
2014
Capital outflows have been large even for
countries other than China
Net capital inflows into major Asian economies excluding China ($ bn)
80
60
24
40
31
38
0
-60
31
13
-15
2005
2006
-20
-40
32
30
20
54
-41
4
2007
2008
2
2009
10
2010
2011
26
-6
2012
0
2013
2014
-29
-34
-66
-80
-100
-112
-120
-140
FDI flows
Portfolio flows
Reserve accumulation decelerated, but turned
into decumulation only from mid 2015
Change in foreign exchange reserves ($ bn)
700
600
500
400
300
200
100
0
2005
2006
2007
2008
2009
China
2010
Others excluding China
2011
2012
2013
2014
Meanwhile Asia is awash in debt
Credit to non-financial sector in some Asian countries
(Per cent of GDP at end-March of year)
350
300
250
200
150
100
50
0
China
Hong Kong
Indonesia
2002
India
2007
2008
Korea
2011
2014
Malaysia
2015
Singapore
Thailand
Household debt increase is significant in this
Total credit to non-financial sector
Credit to households
(% of GDP)
(% of GDP)
265
90
80
245
70
225
60
205
50
185
40
30
165
20
145
10
125
0
China
South Korea
Singapore
China
South Korea
Singapore
Stock market capitalisation as per cent of GDP
350
300
250
200
150
100
50
0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
China
India
Indonesia
Malaysia
South Korea
Thailand
Malaysia Financial sector and investment
(% of GDP)
350.0
50.0
300.0
45.0
250.0
40.0
200.0
35.0
150.0
30.0
100.0
25.0
50.0
20.0
0.0
15.0
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Investment rate (right axis)
Stock market capitalisation
Domestic credit to private sector
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Malaysia: Savings, investment and GDP growth
55.0
15.0
50.0
10.0
45.0
40.0
5.0
35.0
30.0
0.0
25.0
-5.0
20.0
15.0
-10.0
GDP growth (%, right axis)
Investment rate (% of GDP)
Savings rate (% of GDP)
Malaysia Structural change
(% of GDP)
55.0
50.0
45.0
40.0
35.0
30.0
25.0
20.0
15.0
Industry share in Value added
Manufacturing share of value added
Industry share in employment
Indonesia: Savings, investment and GDP growth
40.0
15.0
35.0
10.0
30.0
5.0
25.0
0.0
20.0
-5.0
15.0
-10.0
10.0
-15.0
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
GDP growth
Investment rate
Savings rate
Indonesia Structural change
(% of GDP)
60
50
40
30
20
10
0
Industry share in Value added
Manufacturing share of value added
Industry share in employment
Indonesia: Financial sector and investment
(% of GDP)
70.0
60.0
50.0
40.0
30.0
20.0
10.0
0.0
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Investment rate
Stock market capitalisation
Domestic credit to private sector
Lessons from Southeast Asian “emerging markets”
Financial liberalisation may lead to “financial deepening”, but it
does not have a positive effect on investment and real economic
growth.
Rather it can generate savings “surpluses” that are then exported and
retard productive diversification, and expose economy to domestic
and global boom-bust cycles.
Domestic growth then is sustained by consumer credit that fuels
housing and real estate booms and finance for related investment.
These usually end in tears - downturn began a couple of years ago –
unravelling of household debt has knock-on adverse effects on bank
viability and on investment.
Recent global slowdown – and especially in China – only adds to
existing pressures on real economies.
China: Investment and financial indicators
200.0
50
180.0
48
160.0
46
140.0
44
120.0
42
100.0
40
80.0
38
60.0
36
40.0
34
20.0
32
0.0
30
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Investment rate (right axis)
Stock market capitalisation
Domestic credit through formal banking
China: Investment savings and GDP growth
55
16
50
14
45
12
40
10
35
8
30
6
25
4
20
2
GDP growth (right axis)
Investment rate (% of GDP)
Savings rate (% of GDP)
China Structural change
80.0
70.0
60.0
50.0
40.0
30.0
20.0
10.0
0.0
Agriculture share of value added
Agriculture share of employment
Industry share of Value added
Industry share of employment
Debt ratios in China
(% of GDP)
300
282
250
200
158
2007
150
2014
125
100
72
65
55
50
42
38
20
24
0
Government
Corporations
Households
Financial Institutions
Total
Estimates of Shadow Banking in China
(RMB billion)
30000
25000
20000
15000
10000
5000
0
2002
2003
Entrusted loans
2004
Trust loans
2005
2006
Bankers' acceptances
2007
2008
2009
Interbank entrusted loan payments
2010
Financial leasing
2011
2012
Small loan companies
2013
Lending to real estate in China
(RMB trillion)
30
26
25
25
24
23
20
22
21
15
20
19
10
18
5
17
40268 40359 40451 40543 40633 40724 40816 40908 40999 41090 41182 41274 41364 41455 41547 41639 41729 41820 41912 42004
Bank loans: Developers
Bank loans: Mortgages
Trusts: Real estate
Trusts: Infrastructure
Entrusted loans to developers
Onshore bonds for real estate and construction
Percent of bank loans (right axis)
Index of house prices in Beijing and Shanghai
125
120
115
110
Beijing
Shanghai
105
100
95
90
4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3
2012
2013
2014
2015
42009
42013
42019
42025
42031
42037
42041
42047
42060
42066
42072
42076
42082
42088
42094
42101
42107
42111
42117
42123
42130
42136
42142
42146
42152
42158
42164
42170
42174
42181
42187
42193
42199
42205
42209
42215
42221
42227
Movements in the Shanghai Stock Exchange
5500
2000000
1800000
5000
1600000
4500
1400000
4000
1200000
1000000
3500
800000
3000
600000
2500
400000
Turnover value RMB mn (right axis)
Shanghai Composite Index
India: Inadequate diversification
Structural Change in India
80.00
3000
Primary share of GDP
70.00
2500
60.00
Primary share of
employment
2000
50.00
40.00
1500
Manufacturing share of
GDP
30.00
1000
Manufacturing share of
employment
20.00
500
10.00
0.00
GDP per capita (1990 $)
0
India: Financial sector and investment
(% of GDP)
160.0
140.0
120.0
100.0
80.0
60.0
40.0
20.0
0.0
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Investment rate
Stock market capitalisation (% of GDP)
Domestic credit to private sector
India: Savings investment and GDP growth
45.0
12.0
10.0
40.0
8.0
35.0
6.0
4.0
30.0
2.0
25.0
0.0
-2.0
20.0
-4.0
15.0
-6.0
-8.0
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
10.0
GDP growth (right axis)
Investment rate (% of GDP)
Savings rate (% of GDP)
India: Continued lack of structural change
35.0
30.0
25.0
20.0
15.0
10.0
5.0
0.0
Industry share of value added
Manufacturing share of value added
Korea: Financial Indicators and Investment rate
180.0
160.0
140.0
120.0
100.0
80.0
60.0
40.0
20.0
0.0
19891990199119921993199419951996199719981999200020012002200320042005200620072008200920102011201220132014
Investment rate
Stock market capitalisation (% of GDP)
Domestic credit from financial sector
South Korea: Investment, savings and GDP growth
40.0
20.0
35.0
15.0
30.0
10.0
25.0
20.0
5.0
15.0
0.0
10.0
-5.0
5.0
-10.0
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
0.0
GDP growth (%, right axis)
Investment rate (% of GDP)
Savings rate (% of GDP)
So what’s next?
Bad times mean falling export prices, capital flows reversal
decelerating GDP growth and likely looses of employment
eventually.
If neoliberal economic strategies continue to be pursued,
that will only make things worse.
But they can also provide an opportunity for course
correction – as is currently being attempted to a limited
extent in Indonesia.
Alternative strategies cannot be successful with deregulated
financial markets and significant foreign ownership of
financial institutions – so that has to be corrected as well.
Thanks for your attention!