Asia leading the way
Anoop Singh
The recent crisis has underlined the emergence of Asia as a global
economic powerhouse. Several dynamic economies in the region are
generating growth outcomes that register on a global scale and are
helping pull the world economy out of recession. China and India are
leading the way, but the phenomenon is by no means limited to these two
countries. Asia’s economic importance is unmistakable and palpable.
Chart 1 |
Chart 1
Based on expected trends, within five years Asia’s economy (including
Australia and New Zealand) will be about 50 percent larger than it is
today (in purchasing-power-parity terms), account for more than a third
of global output, and be comparable in size to the economies of the
United States and Europe. By 2030, Asian gross domestic product (GDP)
will exceed that of the Group of Seven major industrial economies (G-7)
(see Charts 1 and 2).
Chart 2
It is only natural, then, for Asia’s voice to become increasingly
influential in global economic and financial discourse. Already, six of
the Group of 20 major economies (G-20) are from the Asia-Pacific region.
Asia accounts for just over 20 percent of IMF voting shares, and this
weight is certain to rise as the IMF pursues reforms to bring countries’
voting shares more closely in line with their role in the world economy.
With the right policies, this economic success is likely to continue
and further improve living standards for Asian people, transforming the
livelihoods of almost half the world’s population.
Consolidation of the recovery is still the main challenge for the
world economy. Although Asia was not heavily exposed to the kinds of
toxic securities that caused problems elsewhere, the region is an
important participant in world trade, and its exports were hurt by the
collapse in demand from advanced economies.
The impact of the external shock was mitigated for countries with
large domestic demand bases, such as China, India, and Indonesia, and
some of the commodity producers, such as Australia, but the more
export-oriented economies experienced particularly sharp downturns.
However, economies across the region rebounded strongly, and by end-2009
output and exports had returned to precrisis levels in most of Asia,
including in the hardest-hit economies.
New growth frontiers
At least two notable features mark the ongoing global recovery from
Asia’s perspective. First, unlike in previous global recessions, Asia is
making a stronger
Chart 2 |
contribution to the global recovery than any other region.
Second, also in contrast to previous episodes, recovery in many Asian
countries is being driven by two engines, exports and strong domestic
demand. Strong domestic demand reflects in part policy stimulus, but
resilient private demand is also a factor. All this adds up to an
impression that
Asia is changing in key ways and that these changes have implications
for the rest of the world.
Although there are still near-term risks in the outlook, in many
ways, Asia is emerging from the recession with its standing in the world
strengthened. The risks include Asia’s (and other regions’)
vulnerability to renewed negative shocks to global growth and financial
markets. Nonetheless, the possibility that Asia could become the world’s
largest economic region by 2030 is not idle speculation.
It seems very plausible, based on what Asia has already achieved in
recent decades: emerging Asia’s share of world trade has doubled and of
world GDP tripled in just the past two decades.
In addition, the strengthened policy frameworks and institutions Asia
has developed, particularly over the past decade, stood up well during
the recession and provide a strong foundation for the future.
Furthermore, in many countries in the region, populations are relatively
young and will contribute to burgeoning workforces.
But by no means will rapid growth in the region continue
automatically. Asia will need to build on its robust policy foundation
with reforms to address the challenges the region still faces in both
the near and the long term. In recent quarters, for example, Asia once
again attracted a surge in capital flows as global investors responded
to the region’s stronger growth prospects.
The surge in capital inflows will need to be carefully managed to
prevent overheating in some economies and to avert an increase in those
countries’ vulnerability to credit and asset price cycles and
macroeconomic volatility. However, the region could also be buffeted if
shocks occur in global financial markets, as such shocks in the past
have tended to affect emerging markets all across the world.
Chart 3
Over the medium term, a key policy challenge for many countries in
Asia is to build on domestic demand, making it a more prominent engine
of growth and relying less on exports (see “Deeper Markets, Cheaper
Capital,” in this issue of F&D). This would also help manage global
imbalances. More important, for many
Chart 3 |
countries, the world recession has highlighted the
unsustainability of tying growth too heavily to exports, which account
on average for more than 40 percent of Asian growth (see Chart 3).
With the recovery in advanced economies likely to be sluggish by
historical standards, and their demand likely to remain below precrisis
levels for some time, Asia will need to replace the shortfall in its
external demand with a second, domestic source of demand if it is to
sustain strong growth. Private domestic demand has contributed well to
the recovery so far, but for it to continue it must be nurtured through
policy.
The policy measures will vary: some countries will need to increase
consumption; some to sustain or increase investment, especially in
infrastructure; and others must boost productivity in the service
sector—all within the framework of greater trade integration in the
region. Many countries are already taking steps to improve and broaden
the availability of social services, in addition to developing their
financial sectors, which will help boost domestic demand. Greater
exchange rate flexibility fits into this policy package by helping raise
private consumption and reorient investment toward production for the
domestic economy.
Policy challenges
More broadly, globalization and the reform agenda still have far to
go to bring all countries and populations into the fold. Asia has made
unprecedented progress in poverty reduction in recent decades, with
China alone having pulled some several hundred million people out of
poverty since the launch of its reforms in 1978. Nonetheless, a high
proportion of the world’s poor still live in Asia, and 17 percent of
people in the east Asian and Pacific countries, 40 percent in south
Asia, live on less than $1.25 a day (see Chart 4).
Moreover, the financial crisis has slowed poverty reduction in the
region. The World Bank estimates 14 million more people in Asia will be
living in poverty in 2010 as a result of the crisis.
It is thus more important than ever to design and implement
strategies, including reforms that enhance growth and strengthen safety
nets, to alleviate endemic poverty in the region.
Part of the strategy for low-income countries must include ways to
move from agriculture to manufacturing as the basis for long-term
growth.
This will require development of national and regional infrastructure
to reduce transportation costs and foster the integration of such
countries into regional supply chains.
Chart 4
Countries across the region are, of course, well aware of the
challenges they face and are taking action on many fronts. Strengthened
monetary and fiscal policy frameworks, efforts at boosting domestic
demand, and deepening trade and financial linkages with other economies
have been the focus of reforms.
Chart 4 |
The development of infrastructure to boost the growth potential of
economies is going ahead rapidly in many countries, with the help of
innovative mechanisms such as public-private partnerships. Barriers to
trade, including within the region, are being lifted in ways that will
allow more people to enjoy the gains from international trade, including
by providing new markets and customers for exporters from smaller
economies.
Asia is moving ahead rapidly to advance regional integration more
broadly, including through intraregional groupings such as the
Association of Southeast Asian Nations (ASEAN) and ASEAN+3 (including
China, Japan, and Korea) and across regions, such as through the
Asia-Pacific Economic Cooperation forum, with its emphasis on ‘open
regionalism.’
Asia’s time has come. Its role in the world economy continues to
grow, both in world trade and finance and in economic governance,
through institutions such as the IMF, and it will grow further.
Meanwhile, countries all over the world are interested in Asian
successes in development and managing globalization. The region’s
economies offer a broad range of experiences from countries at various
stages of development and faced with different sets of challenges, and
the broader global economy can draw from them a rich set of lessons.
(Finance & Development, June 2010)
Anoop Singh is Director of the IMF’s Asia and
Pacific Department. |