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A Q&A with the International Monetary Fund’s chief of regional studies for Asia Pacific, Rachel van Elkan

GTR: We’ve been disappointed by the general trade and export data in Asia over recent months. What’s your outlook for this, are you expecting things to pick up?

It’s worth thinking about why export growth has slowed. Much of the data we have so far is in value terms. One of the obvious reasons for the slowdown is the declining commodity prices and changes in exchange rates. Even for countries that are not commodity exporters, it’s likely that weaker oil prices, especially crude, have filtered through to product prices. And also where partner countries are using currencies other than the dollar, such as the yen or the euro or other currencies, it’s not surprising to see that in dollar value terms there’s been some weakness given the respective differences in currency value.

That’s far from the whole story though. It’s quite clear that even though in advanced economies growth is picking up a bit, growth is still not where it might be. The US continues to disappoint, the euro area is getting stronger, and we expect Japan to do better this year relative to last, that’s also a factor. But advanced countries remain the main final demanders. That’s also part of the story and is dragging on Asia.

Those are more cyclical or temporary stories, but I think there’s also some evidence of longer-term persistent structural changes. I have in mind the changes within the supply chain, the global value chain in which Asia is very much involved. There’s some evidence that China in particular is becoming less reliant on imported intermediate goods from other Asian countries. That would likely have a more persistent effect on trade.

GTR: You mention structural changes and reform. China is the most obvious Asian country that springs to mind in this regard. How directly can you trace slower growth elsewhere in Asia to the changing situation in China?

That’s undoubtedly a factor in the slower growth in Asia in general. About a year ago we looked at the business cycle correlations among countries. We found that in the case of China, if growth were to slow by one percentage point, other Asian countries would see their growth decline by about 0.3% on average. There are considerable variations across the countries which reflects the fact that some countries export goods that have more domestic content in them – I’m thinking Indonesia and Malaysia with commodities – while others have less domestic content.

I think that’s certainly going to be part of the story and explain why the rest of Asia is also expected to slow down. Asean and Korea in particular are affected. China’s slowing, but it’s also hopefully rebalancing, moving more towards domestic consumption and that could open new opportunities for countries in Asia to meet the final demand, especially for food products and consumer goods.

GTR: Free trade agreements (FTAs) have been high on the agenda in Asia this year. The Trans-Pacific Partnership (TPP) is struggling to get political backing in the US, but most feel that it will probably get over the line at some point this year. There’s also the Regional Comprehensive Economic Partnership (RCEP) – the China-backed FTA, which is also under negotiation among 10 Asean countries. How much of a boon do you expect these agreements to have on the Asian trade economy?

I think these are important initiatives for Asia as a major trading region. The benefits would vary by country but in reality for many countries much of the easy trade liberalisations have already occurred. There have been major developments on tariffs. Sensitive products are still yet to be agreed upon. Perhaps more importantly, behind the border trade barriers. To the extent that economies are open to competition in key sectors and that will improve efficiencies, some of the gains will be sizeable.

It’s hard to put a figure on the benefit when we don’t know the details of the agreements, particularly the TPP, but the challenge is when these aren’t global agreements, there’s always the risk of trade diversion from countries that are not included, as opposed to trade creation, which would be the case when it’s a global trade agreement.

One might think that if one country has liberalised, there’ll be significant pressure on the other countries to follow suit. But it’s hard to know how this will play out.

GTR: Another major story regarding trade and infrastructure finance in Asia is the AIIB. Senior IMF staff have welcomed the AIIB and voiced optimism that there may be room for collaboration. What’s your initial view as to the significance of the AIIB and how could the IMF collaborate with it?

Looking at the macroeconomic side of things, for most countries growth is being impeded by poor infrastructure in the region. Whether it’s the case that economies have outgrown their current infrastructure or through lack of maintenance, infrastructure is often a big bottleneck to growth. The ADB estimated that global infrastructure needs exceed US$10tn, which is a huge and maybe aspirational amount, but the need is huge, especially in parts of Asia.

So the more money that’s put on the table that can facilitate the progression of infrastructure, as long as it’s done efficiently and the risks are well managed, it’s a good outcome. The IMF would be happy to contribute its accumulative knowledge on good practice in infrastructure management.

GTR: After the suggestion and indeed strategic announcement that China was going to change its approach to favour a more consumption-based growth model, rather than huge infrastructure spend, we saw this week that it is planning to invest US$50bn in the Brazilian economy, which came about a week after it made a similar investment in Pakistan. Does the IMF welcome this widespread Chinese investment overseas?

All this foreign investment should be efficient and have a positive social rate of return for the country that’s receiving it. So without knowing the details of what these investments are, I won’t hazard a guess on that. But as long as these investments satisfy these requirements, it’s certainly something to be welcomed.

GTR: Are there any countries you’re looking to with optimism in Asia?

The early numbers for Q1 aren’t all negative. We’ve seen positive surprises in Vietnam, a modest positive surprise in the case of Korea. It’s easy to get lost in the negative, and certainly in the export data in value terms it suggests that things aren’t doing so well. But the GDP numbers don’t convey the same story.

In terms of bright spots, an important change that will happen is that India will outpace China going forward. So although the region as a whole is likely to stay at its current growth rate, the reallocation of growth across the region, with India finally growing at a rapid pace from its low level of development, it shows enormous potential. That’s a very positive thing. It will have implications because the rest of the region is much less integrated with India than it is with China.