Near-Term Policy Challenges

for Low-Income Asia

Somchai Jitsuchon

Research DirectorThailand Development Research Institute

Four Challenges

1. Dealing with Public Debts

2. Managing Capital Flows

3. Increasing Regional/Domestic Trades and

Investment

4. Continue Tackling Poverty and Inequality

Source: The Economist Online, March 4th, 2010

Many governments’ sovereign rate were downgraded because of the crisis

Dealing with Public Debts

Dealing with Public Debts

High public debt leads to lower long-term Growth◦ Rising cost of fund◦ Suppress public-led investments (e.g. in infrastructures)

Needs well planned ‘conditional Exit Strategy’◦ Spell out clearly series of conditions that trigger each steps of exit

strategy.◦ Should help lowering market pressure on long-term interest rates.

If need further stimulus, fiscal deficit must be as much redistributive as possible◦ To avoid ‘Ricardian Equivalence’ trap, thus maximizing the stimulating

effects◦ Require better targeting (economic sector, recipients) ◦ Can achieve by investing in vulnerable database and outreach capability

Example of Poor Targeting: Thailand’s stimulus checks

Eligibility to Stimulus Checks by Household Income Class

Source: Jitsuchon (2009)

% those receiving checks ended up with extra spending

Source: Jitsuchon (2009)

Resulting in poor stimulating effects

Dealing with Public DebtsBeware of long-term commitment of stimulus package

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

0

5

10

15

20

25

Social Spending Non-Social Spending

Projection of Thailand’s Public Spending (%GDP)

Managing Capital Flows: Why

The crisis, and its corrections, adds extra fluctuation to capital flows to/from Asia.

They are pro-cyclical.

They might be here to stay.

Managing capital flows requires a broad package, both macroeconomic and specific measures (such as various forms of capital controls).

Must weigh cost (volatility) with benefits.

Managing Capital Flows: How

Information disclosure, to facilitate better risk pricing

Develop new, and promote the use, of risk management tools

More stringent prudential measures on FIs, increase competition

More legal safeguard under various trade agreements

Deepening financial markets

Source: Calculated

Global trade pattern showed a weak sign of

correction to global imbalance, further

correction can be expected Differences between Export and Import

Growth(sorted by current account position in 2007, from most surplus to most deficit)

China

Japa

n

Singa

pore

Mal

aysia

Hongk

ong

Thaila

nd

Indo

nesia

Philip

pine

s

South

Kor

ea

Vietn

amIn

dia

Austra

lia

Unite

d Sta

tes

-60

-40

-20

0

20

40

60

-800

-600

-400

-200

0

200

400

600

Q3/2008 Q4/2008 Q1/2009 Q2/2009 Current Account 2007

Gro

wth

Dif

fere

nce

(%

)

Cu

rren

t A

cco

un

t (B

illi

on

U.S

. D

oll

ars)

Increasing Regional Trade and Investment

Challenge: How to reap full benefits from various trade deals?◦AFTA◦ASEAN Economic Community (AEC) ◦ASEAN+3

Should focus more on trade facilitation measures (e.g. custom process, trade-related logistics)

Increase ‘utilization rate’ of FTAs etc.

Continue Tackling Poverty and Inequality

The crisis added 60 millions to global poverty trend (ADB, June2009)

Challenge: How to prevent poverty from climbing up?◦From crisis-related factors◦From other structural problems

Resumed food price boom? Bioenergy crops expansion Climate change?

LICs need to invest more in formal safety net

Poverty situation might showed a returning to pre-crisis level.

9.5 8.5 8.9

13.612.2

16.017.8

16.214.2

7.8

0

5

10

15

20

Jan Feb Mar Apr May Jun Jul

2006 2007 2008 2009

Head-Count Ratio

Thailand’s Poverty Incidences, 2006-July 2009

Average Thai Household Consumption and Poverty Lines (Baht)

However, improvement was due mainly to falling poverty lines, not increased HH income. Future remain uncertain.

1,5411,548

1,573

1,611

1,5851,592 1,594

5,600

7,600

9,600

11,600

13,600

15,600

17,600

Jan Feb Mar Apr May Jun Jul

Average Consumption Poverty Line (RHS)

Help mitigating adverse impacts from the current global

crises (or any crises), allowing the country to continue

open up (and gain efficiency)

Should improve safety net in (a) coverage (b) equality

(c) sufficiency

Achieve this by:

Investing in information system about vulnerable HH and

individuals

Strengthening outreach capacity (reaching to the poor)

using public, NGOs, and local government resources.

Investing in Social Safety Net