The Federal Reserve Bank of San Francisco’s Country Analysis Unit (CAU) hosted a Quora session on Financial and Economic Development in late 2018. Quora users posed a variety of questions to the CAU team and then voted for those they most wanted to see answered. We have summarized and linked to a number of the most popular questions and answers below. To see answers in their entirety, please click through to Quora.
A: Japan’ recent economic performance is probably better than you think. For a country that has seen its population shrink in the 21st century, the economy has actually done pretty well. Since 2000, its per capita GDP growth is roughly on par with other G7 economies, and in the wake of the global financial crisis, its average growth was second only to Germany’s. Today, the economy is at near record low unemployment and business and consumer confidence are up.
Within that context, here are a few lessons the rest of the world might take from Japan’s modern experiences: the importance of reacting decisively in the face of financial crisis, the challenge a shrinking population poses on economic growth and financial stability, and the mixed blessing of being a global safe haven. (By Sean Creehan)
A: China faces plenty of financial challenges, but it all boils down to the excessive use of leverage and rapid credit growth at a time when the country faces significant economic headwinds amid ongoing structural reforms. Researchers have pointed out that China’s corporate leverage (as measured by corporate debt-to-GDP ratios) is now the highest among emerging economies. Moreover, the rapid growth of debt, fueled by both bank credit and shadow credit, coincided with an economic slowdown and weaker corporate profits. Meanwhile, Chinese financial markets are on track to become more open to international investors, and ongoing financial reforms attempt to reduce moral hazard issues. These positive changes however will likely lead to more frequent re-pricing of financial assets and more debt defaults in the near future. (By Cindy Li)
A: According to economic theory, fast-growing economies eventually face a “middle-income trap,” when growth risks stagnating at middle-income levels, preventing the achievement of high-income status. The advantages of and returns to industries that previously had been sources of growth eventually evaporate. Middle-income countries face competition from other developing countries doing similar work at lower wages but most middle-income countries are unable to make technological and productivity gains that enable leaps to more sophisticated manufacturing and services.
It is helpful to think of the issue in the context of the phases of economic development. Economists have identified some helpful rules of thumb to avoid the middle income trap including support for innovation through policies like higher education spending and a generally adaptable policy framework. (By Paul Tierno)
A: Taking a bird’s eye view, politics have a direct impact on the ground work of any economy in any country anywhere in the world. Politics determine business operating environment and conditions—its predictability and stability—and may establish a national agenda of promoting industries and sectors where there is a perceived or desired competitive or strategic advantage. In certain emerging markets, including Southeast Asia, businesses and investors are accustomed to higher levels and certain patterns of political risk and thus have a higher risk tolerance. We have learned that countries are more resilient to political risk than they seem, and politics are riskiest when they directly intervene in the economy with imprudent policies. Examples of government policies with a direct impact on the economy and financial system in Southeast Asia range from infrastructure projects to state-directed lending to the pursuit of economic growth targets. (By Linda True)
A: Asia is at the center of many exciting developments in financial technology and digital innovation. We’ve taken note of several promising trends. In Asia, technology is supporting the inclusion of more and more people in the financial system. This is a big deal because, until recently, roughly half of the estimated 2 billion unbanked people around the world lived in Asia. We’ve also noted exciting trends in financial technology solutions for small businesses in the region, and there’s reason to expect this innovation can spread around the world (see our recent Asia Focus and podcast on the topic). Digital payments not only make life more convenient, but also may enable more sophisticated financial services (for example, digital innovations are reshaping India’s consumption pattern). Still, there is a growing need to balance the convenience of technology with protections for customer privacy and their rights to their own data. As Asia’s experience shows, governments and the private sector can work together to promote technological change and drive inclusive growth. (By Sean Creehan)
A: Researchers use different ratios to measure the balance between young, middle-aged, and old population; these indicators reveal the various ways that demographics affect an economy. United Nations population data suggests that China, Japan, Hong Kong, India, South Korea and the ASEAN-5 (Indonesia, Malaysia, the Philippines, Thailand, and Singapore) are all in the midst of an upward swing in the size of their middle aged population as measured by the M/Y ratio—the ratio of middle aged to young, with some, specifically Japan, expected to peak (and age) faster than others. Meanwhile, as life expectancy increases, all Asian countries are forecasted to see a drop in their M/O ratios (the ratio of middle aged to old) over the next several decades. (By Paul Tierno)