Christine Lagarde’s Asia prescription: “don’t relax”

Christine Lagarde, managing director of the IMF, says the Asian economic model will continue to perform strongly in 2013, but policies must change to maintain momentum.

Lagarde delivered a fluid address to the Boao Forum for Asia, China’s official annual gathering of politicians and business leaders on Hainan Island.

Perhaps in a sign of the audience’s comfort with Asia’s current direction, most of the questions put to her were about Cyprus. “Do you know the size of Cyprus’s economy within the European Union?” she asked at one point.

The fact that the answer is 0.2% didn’t seem to deter the crowd, but Lagarde’s message about Asia was received politely. She is a magnetic figure, but it’s not clear that her message — “don’t relax”, as she concluded — was fully accepted. Instead the questions about Asia were seeking validation of the region’s greatness, which Lagarde duly provided.

Given the continuing mess in Europe, and the IMF’s mixed reputation in Asia, that’s probably about the best she could expect. Her personal reputation is strong (at another session, George Soros praised her fulsomely) but international institutions perceived as being in the Western camp don’t enjoy a similar appreciation in Asia, especially on the back of pronouncements that the Brics governments want to set up their own development bank. (A dubious project, but that’s another story.)

Lagarde’s critique for Asia is that some 700 million people have been lifted out of poverty over the past generation, most of them in China, but social and economic inequalities have often become dangerously high. Lagarde says South Korea’s example shows that such divergences can be avoided, and that more equal growth will make that progress more durable.

Likening Asia’s economic strategy to farming a field, she noted that constantly planting on the same patch will lead to reduced yields. The farmer resorts to more fertiliser and resources to generate the same result. The economic model has to change if Asia is to realise lasting growth and shared prosperity.

Lagarde cited three factors: investing in education and healthcare, engendering a climate that supports investment and pursuing environmentally sustainable policies.

Governments have been good at investing in physical infrastructure but lag in terms of human capital. That risks the future workforce being unable to compete and find good jobs, particularly in countries with young populations, such as Indonesia and India.

Lagarde was particularly critical of the wasteful subsidies for fuel and food, which often go to lining middleman pockets instead of helping the truly needy, and distort prices. The IMF calculates that Asian governments spend more on such subsidies than on health and education spending.

Those countries with rapidly aging populations, such as Korea and Japan, must do more to attract immigrants and integrate women into the labour force, which requires adjusting many disincentives, including punishing tax regimes for second earners.

Boosting investment growth will be necessary for export-driven countries to avoid the “middle-income trap”. That means providing a better environment for entrepreneurs, opening protected markets, attacking vested interests, improving licensing and contractual regimes, promoting physical infrastructure and liberalising capital markets.

Lagarde brought up energy subsidies again when it comes to promoting sustainable development. The IMF reckons Asian governments spend $1.9 trillion on these subsidies, and they lead to wasteful energy consumption.

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