ADB’s chief economist: Recovery depends on Asian manufacturing demand

ADB's chief economist: Recovery depends on Asian manufacturing demand

HONG KONG — With China’s slowing economy adding to downward pressure on world commodity prices, recovery will depend on an expansion in manufacturing demand in countries such as India and Indonesia, according to Shang-Jin Wei, chief economist of the Asian Development Bank.

   Wei spoke to the Nikkei Asian Review a day after the Manila-based bank cut its 2015 growth forecast for developing Asia to 5.8% from a 6.3% estimate in March, which would be the weakest expansion in 14 years. The economist was guarded on the possible impact on growth in the region from the ASEAN Economic Community, which is set to launch by year end, and the Trans-Pacific Partnership trade pact, which negotiators from 12 countries will meet to try to finalize on Sept. 30.

   Kazakhstan, which received a $1 billion loan from the ADB on Aug. 21 a day after floating and effectively devaluing its currency by more than 20%, is not in crisis, Wei said. An edited transcript follows:

Q: How do you see the commodity price story evolving next year?

A: For most commodities, demand factors are perhaps more important than supply factors. How much commodity prices can recover depends very much on how fast other countries like India and Indonesia as well as countries in other regions… can develop their manufacturing sectors, including export-oriented manufacturing, to pick up the demand for commodities that used to be [taken] by China.

   For the world as a whole, the demand for electronics and industrial products shouldn’t be lower. The world as a whole is getting richer and richer. It’s really a question about if China is not doing [this production], shouldn’t somebody else be doing it?

   Many countries’ [leaders] have the ambition — [such as] Prime Minister Modi of India and President Joko Widodo of Indonesia — to substantially increase their manufacturing capacity, including that for the world market. So in principle, when growth rates in those countries pick up further, when export capacity in those countries improves, we shall see a recovery of potentially strong demand for commodities.

   So it’s not really about China and supply. It’s about demand for commodities from the world as a whole and China should be just a part of it. Given that structural transformation and change of growth model, China could be a progressively smaller part of global demand.

   The pace of further growth and increase in export capacity in other countries depends very much on the pace of structural reforms, the pace of infrastructure investment. It will take some time.

   The Indian government has this ‘Make in India’ campaign. It is meant to transform the country into a manufacturing center. In principle, given their substantially lower labor costs and [that] there are a lot of very smart people in the country…if you had the right policy package – land reform, labor market reform — together with better infrastructure, there is no reason why India couldn’t be as successful as China used to be.

Q: Has Asia been a net beneficiary of low commodity prices?

A: Given that most countries are commodity importers, it clearly benefits them. China and India would not be able to grow as much as they do if commodity prices were substantially higher.

   [But] there are also countries that are resource exporters. Kazakhstan and Mongolia very clearly are hurt a lot.

   Substantially lower global oil prices presents a challenge in terms of a negative terms-of-trade shock hit for the country [Kazakhstan], and the quantity of oil exports is declining. This combination means the country has much less export revenue and the government has much less fiscal revenue. Because the country set up a sovereign wealth fund at a time the oil price was higher, there’s no imminent fiscal crisis. Nonetheless, structural adjustment, expenditure adjustment, revenue adjustment [and] efforts to diversify the production structure and export structure are all necessary to make sure the country is even more resilient.

   The ADB’s budget support is also in the context of strengthening market confidence and minimizing the chance of speculative attack on the country. The government recognizes the recent devaluation has the potential to help non-resource manufacturing sectors to have a better chance to develop.  Hopefully the country will develop alternative export revenues outside the oil and gas sector.

Q: Vietnam and Bangladesh are among the very few countries whose projected growth rates have been upgraded by the ADB. Will the two garment exporters be affected by a weaker yuan?

A: China is exiting certain sectors such as low-end garments. Countries like Bangladesh and Vietnam can gain by picking up some of that market share. Any reduction in the value of [the] RMB would strengthen [China’s relative] competitiveness. But the reduction in the renminbi has been very small… and takes place in the context of sustained appreciation in the last few years. We are talking about 50% appreciation [versus] 4% depreciation.

   Much of the exchange-rate adjustment of China perhaps is a correction of the previous overvaluation. Bangladesh’s wage rate is essentially a quarter or less of China’s, so given that wage gap, a 4% change in exchange rate is not going to make a tremendous difference.

Q: Since the ADB is citing capital outflows as a rising concern for Asian economies, do you expect more governments to consider some form of capital controls?

A: During calm times, you want to always work on one’s capacity to implement prudential regulations. The more domestic prudential regulations you have that can serve the purpose of controlling risks, the less need you will have to rely on capital flow controls. But when domestic capacities are not fully there, there is some room of capital flow management.

    In crisis time, when you previously didn’t have capital flow management, what can you do? Introducing capital flow management during a time of crisis per se could expedite capital outflow. That’s not what you want to see.

Q: Do you expect the launch of the ASEAN Economic Community or a possible agreement in the Trans-Pacific Partnership talks to have a significant impact on regional growth?

A: Overall growth [in Southeast Asian countries] still will be driven by domestic themes. Not because free trade is not important, but because the large countries in ASEAN already have close to free trade among themselves.

   The significance of TPP is the potential to be a stepping stone for further liberalization and maintaining an open environment and encouraging countries to look for additional reforms. The risk that one needs to manage is to make sure TPP will not be the end point. Particularly, you don’t want to have one trading bloc that excludes China and another bloc that excludes the U.S. and the two blocs not talking to each other.

    China and the U.S. both are important parts of the same global value chain. Excluding either of them in trade agreements has the potential to raise costs for consumers and producers.

Interview by Nikkei staff writers Jennifer Lo and Yasuo Awai and NAR deputy editor Zach Coleman

ADB's chief economist: Recovery depends on Asian manufacturing demand