How Will Rebalancing Demand Change Production in the Asia Pacific?

Abstract

Rebalancing expenditures among and within surplus and deficit countries has emerged as a key global policy priority. This paper examines the implications of rebalancing expenditure categories in 10 Asia Pacific economies for the structure of production. An aggressive rebalancing scenario is constructed (based on 2007 current account data, since more recent imbalances are smaller) and its detailed production implications are analyzed using a large international input-output system. The changes associated with eliminating excessive international imbalances are found to be modest relative to major expenditure categories in the Asia Pacific. Moreover, significant overlaps in the production induced by different types of expenditures dampen the output effects of shifts among them. This does not mean that rebalancing will be easy to accomplish - spending reallocations are politically difficult - but the need to "reinvent" Asia's growth model appears to be overstated.