Asia leading the way:

Heralding a new global economy

Asia is well aware of the challenges and the countries are taking action on many fronts to fight any future recession. Asia is now standing tall by strengthened monetary and fiscal policy frameworks and deepening trade and financial linkages with other economies.

Anoop Singh

Continued From yesterday

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.

Technical advancement drives Asia forward. File photo

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.

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. This would also help manage global imbalances. More important, for many 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. With the recovery in advanced economies likely to be sluggish by historical standards, and their demand likely to remain below pre-crisis 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 improving and broadening 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. 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.

Countries across the region are 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. The infrastructure development 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 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.”

While Asia is growing in both world trade and economic governance, 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. Concluded

Finance & Development, June 2010, Volume 47, Number 2