Asian policymakers may have to accelerate efforts to reorient growth strategies to mitigate the problems of international spillovers in the global markets, according to Glenn Stevens, the governor of the Reserve Bank of Australia.
Thai central bank governor Prasarn Trairatvorakul (left) presents a painting to Glenn Stevens, his Australian counterpart, yesterday.
"The traditional Asian strategy of export-driven growth assisted by a low exchange rate worked well when Asia was small," he said.
"Asia isn't small any more, and so the rest of the world will not be able to absorb the growth in Asian production in the same way as it once did. More of that production will have to be used at home."
Mr Stevens, in an address on challenges for central banking at the Bank of Thailand's Policy Forum yesterday, said Asian policymakers understand that past export-led growth strategies must change, and that progress has been made.
But more may be needed including cooperation on managing spillovers by central banks through the International Monetary Fund or the Executives' Meeting of East Asia-Pacific Central Banks.
"It is clear that spillovers are with us now. All countries share a collective interest in preserving key elements of the international system even as individual central banks do what it takes to fulfil their current mandates," said Mr Stevens.
"Spillover" refers to how economic policies in one country may affect other countries. For Asian central bankers, a major concern today is the increase and volatility of capital flows and their impact on currencies and capital markets as a result of moves to push interest rates to zero in the US and Europe as a result of the current crisis.
Mr Stevens said the "degree of disquiet in the global policymaking community" regarding spillovers has risen due in part to questions about whether policies such as quantitative easing and expansionary monetary policies in the major economies have been effective.
"The slowness of the recovery in the US, Europe and Japan, I suspect, leaves others wondering whether major countries are relying more on exporting their weaknesses than has been the case in most previous recoveries," he said. "One response to that can be efforts in emerging economies to make their financial systems more resilient to volatile capital flows, such as by developing local currency bond markets and currency hedging markets. ... But that takes time."
Mr Stevens also noted that fiscal and monetary policies have blurred in several countries over the course of the crisis as policymakers have taken unconventional measures to restore growth.
"The problem will be the exit from these policies, and the restoration of the distinction between fiscal and monetary policy," he said. "The problem isn't a technical one ... The real issue is more likely to be that ending a lengthy period of guaranteed cheap funding for governments may prove politically difficult."
Mr Stevens added that enhancing public understanding of the limits of central banks is crucial.
"Central banks can provide liquidity to shore up financial stability and they can buy time for borrowers to adjust," he said. "But they cannot, in the end, put government finances on a sustainable course and they cannot create the real resources that need to be found from somewhere to strengthen bank capital.
"They cannot costlessly correct earlier misallocation of real capital investment. They cannot shield people from the implications of having misassessed their own lifetime budget constraints and as a result having consumed too much. They cannot combat the effects of population ageing or drive the innovation that raises productivity and creates new markets."
Prasarn Trairatvorakul, governor of the Bank of Thailand, said the global crisis has made a clear impact on Asian economies.
"Asia is clearly slowing amid the weak US economic recovery and the euro crisis," he said in his opening remarks to the forum.
"Both Australia and Thailand recently experienced substantial exchange rate swings amid the euro crisis. A flexible exchange rate regime allows flexibility in responding to exchange rate movements. However, in a world where global liquidity is especially fluid due to loose monetary policies in the US and the euro zone, can exchange rates move out of line with fundamentals for a prolonged period of time?"
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