In recent years, emerging-market economies, including those in Asia, have made impressive strides in strengthening their fundamentals, accelerating their economic growth and cushioning themselves against external shocks. Nevertheless, as the events of recent months have shown, emerging markets are not immune from the current bout of global financial turmoil.
In particular, slowing global economic demand poses daunting challenges for many Asian economies, especially those that are export dependent. While most Asian countries have had relatively limited direct exposure to mortgage-related assets, deleveraging by foreign investors and slowing external demand have simultaneously created tighter credit conditions and lower expectations for growth. This has led to heightened volatility in equity, money and debt markets.
These developments put to rest the notion of “decoupling,” the idea that economic growth in emerging markets, whether in Asia or elsewhere, is independent from that of the developed world. As the current crisis makes painfully clear, in this era of global trade and investment, our economies — and our prosperity — are inextricably linked. In order to maintain strong economic growth in the US, we need a strong, growing Asia, just as Asia’s success depends on a thriving US.
The US-Asia economic partnership can be strengthened if we heed the lessons that we have already learned from the ongoing turmoil. Undoubtedly, much of the current situation will be best understood with the benefit of time, but five lessons are already coming into focus, and we should consider their implications for the choices policymakers will make in the future.
First, openness to international trade and investment has been and will continue to be the linchpin of economic growth for the global economy. The US and Asia are more mutually dependent than ever for their economic growth and prosperity. In the current climate of anxiety and uncertainty, policymakers must ensure strong communication and coordination, avoid beggar-thy-neighbor policies, and guard against protectionism.
Fortunately, as the crisis has worsened, global policymakers have responded with coordinated policy action. The G7 action plan aims to restore the flow of credit by securing interbank lending, and coordinated central bank actions have provided unprecedented levels of liquidity to the market.
Bilaterally, the Strategic Economic Dialogue, which has been an invaluable forum for building US-China economic relations, has been especially important in strengthening our lines of communication and cooperation during the crisis.
And many policymakers around the world have reaffirmed their commitment to completing a successful Doha trade round and refraining from raising new barriers to trade and investment.
Second, it is also clear that developed countries must act rapidly and in concert to minimize the impact of the crisis on emerging markets. As is always the case, however, resources alone cannot solve problems rooted in weak policies.
Before we provide financial assistance, whether bilaterally or through the international financial institutions (IFIs), we must determine the underlying cause of economic vulnerability and ensure necessary corrective action.
Lending large sums before assessing root causes and determining appropriate policy responses can undermine the IFIs’ credibility and reduce the capital available to assist other countries in need.