Asian Development Outlook 2015: Financing Asia s Future Growth

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2 Asian Development Outlook 2015: Financing Asia s Future Growth Donghyun Park Principal Economist Asian Development Bank Peterson Institute for International Economics, Washington DC, USA, 1 December 2015 The views expressed in this document are those of the author and do not necessarily reflect the views and policies of the Asian Development Bank or its Board of Governors or the governments they represent. 2

3 Outline Financial development for growth Financial access for inclusion Financial stability to safeguard inclusive growth 3

4 Evidence confirms growth benefits of finance Estrada, Park, and Ramayandi (2015) perform additional empirical analysis Updates data to 2011, and expands sample to 108 countries [20 from Asia] Incorporates country characteris cs e.g. developed vs developing Incorporates financial openness Incorporates foreign exchange rate regime Use GMM to address endogeneity 4

5 Evidence confirms growth benefits of finance Key results from Estrada, Park, and Ramayandi (2015) Re confirm positive effect of financial depth on economic growth Positive effect is especially evident in developing countries, especially Asia Both banks and capital markets have a positive impact Financial openness has a positive effect Foreign exchange regime is insignificant 5

6 Evidence confirms growth benefits of finance Key results from Estrada, Park, and Ramayandi (2015) For example, boosting developing Asia s average ratio to GDP of liquid liabilities currency plus checking and interestbearing accounts in financial institutions from about 65% to 75% adds almost 0.4 percentage points to average annual growth of GDP per capita. 6

7 Tighter link between finance and investment in Asia than elsewhere Developing Asia Rest of the world All countries Investment to GDP (%) 80 Developing Asia Investment to GDP (%) BHU MON 60 BHU MON PRC IND INO TON SRI GEO NEP BAN ARM AZE KAZ TAJ AFG PHI PAK BRU THA SIN VIE MAL PRC KOR HKG IND INO TON SRI NEP GEO BAN ARM AZE KAZ TAJ PHI AFG PAK BRU THA SIN VIE MAL KOR HKG Private credit to GDP (%) Private credit to GDP (%) 7

8 Banking sector development contributes to investment, which feeds into growth Banking sector and investment Investment and economic growth Latin American countries Asian countries PRC GDP growth, % PER SRI INS PHI ARG MAL CHL COL THA VEN KOR BRA IND VIE 2 MEX Gross investment, % of GDP ( ) 8

9 Outline Financial development for growth Financial access for inclusion Financial stability to safeguard inclusive growth 9

10 Finance equity link is conceptually ambiguous Conceptually, finance can either reduce inequality or worsen inequality Financial development can reduce inequality if it leads to more and better financial services to the poor The poor can borrow to finance their education On the other hand, financial development can worsen inequality if it mainly raises returns to capital or the pay of financial professionals The US before the global financial crisis 10

11 Empirical evidence is mixed too Log Gini in market income 0.15 y=0.008x x (0.002)*** (0.013)*** (0.021)*** Log private credit to GDP Park and Shin (forthcoming) 11

12 Finance inequality nexus Negative correlation between income inequality and financial inclusion Gini index of inequality in equivalized household disposable income y = x (0.1696) (1.8424) Loan from a financial institution in the past year, income, bottom 40% (% age 15+),

13 Low degree of financial inclusion % of adults with account at a formal financial institution Formal account penetration across the world High income Europe Latin America & Caribbean Developing Asia Middle East and North Africa Global median Sub Saharan Africa 13

14 Outline Financial development for growth Financial access for inclusion Financial stability to safeguard inclusive growth 14

15 Financial instability harms growth, and exacerbates poverty and inequality Pre and post Asian financial crisis growth rates Pre and post global financial crisis unemployment rates INO KOR MAL PHI THA 0 GRE IRE POR SPA INO=Indonesia; KOR=Korea, Rep. of; MAL=Malaysia; PHI=Philippines; THA=Thailand GRE=Greece; IRE=Ireland; POR=Portugal; SPA=Spain 15

16 Asia is vulnerable to global financial shocks Nominal rate changes against the US dollar during the taper tantrum, 23 May 30 June 2013 % India Indonesia Republic of Korea Malaysia Philippines Thailand 16

17 Bank regulation is first line of defense International experience during the global financial crisis provides valuable lessons for Asian bank regulators Above all, the crisis underlined that sound and effective bank regulation is vitally important to financial stability The crisis reflected the failure of the regulatory authorities to keep pace with financial innovation The sobering lesson for Asia is that even financially advanced economies are susceptible to risks from lax regulation and reckless lending. 17

18 Credit growth response to credit related macroprudential tightening in India Credit growth response Upper bound Lower bound Impulse response