There were many lessons from the financial crisis. One lesson — particularly relevant now, looking at government debt around the world — is that if something seems too good to be true, it probably is too good to be true. Or, putting it another way, if something looks out of line with reality, it probably is. Markets now are paying closer attention to governments with high debt and big borrowing requirements.
In developing Asia, government debt is not a big problem. However, the crisis has taught Asia an important lesson — that it is not decoupled from events in the rest of the world. The crisis in the West hit Asia hard. It is strange to think that anyone thought Asia was decoupled, but this was a big debate as the crisis was breaking.
Thankfully, the view we took at Standard Chartered was that Asia was, “not decoupled, but better insulated.” So it proved. The export dependency of many Asian economies meant they were not immune to events in the West. Following the Lehman Brothers debacle, we witnessed a collapse in trade finance and a slump in demand. As a result, Asian economies that had not engaged in the financial engineering seen in many Western countries were hit hard: The innocent suffered as much as the guilty.
While the crisis showed that events in one part of the world could have a global impact, Asia was better protected. Prudent fiscal policies, credible monetary regimes and high levels of foreign currency reserves enabled the region to absorb the huge external shock. Like a boxer caught unawares in the ring, Asia may have been knocked down, but it bounced straight back up. The latest financial crisis was not a knock-out blow for Asia, but another important lesson to learn.
The integration of Asia with the global economy will be every bit as important in shaping the recovery as it was in the crisis itself. A key issue, therefore, is the approach Asia will take to shaping the post-crisis world.
Much has already been said about the new global policy forum, the G20, and the role that Asia will play within it, with South Korea as host this year. The five Asian members — Japan, China, India, South Korea and Indonesia — will have a vital role to play in addressing global challenges. At the national level, too, there is much Asia can do. Policy tools and institutions across the region stood up well during the crisis. But they will be tested in the coming months in response to capital flows. Across Asia, in the future, we need to see credible anti-inflationary macroeconomic policies that can generate jobs on a large scale. China talks of a “harmonious society,” but this is a necessity across most of the region.
REGIONALISM
While the global and the national responses are crucial, Asia’s regional agenda will also play a vital role. Headway is being made in this area. This was very evident at this year’s annual Asian Development Bank (ADB) meeting that took place in Uzbekistan at the start of this month. Policymakers from all over Asia were there, joined by bankers from around the world.
Regionalism was the big theme at the event — in particular, the need to accelerate regional integration to contribute to global growth and help correct economic and trade imbalances. The focus on regionalism has been one of the three thrusts of the ADB in recent years, alongside inclusive growth to reduce poverty and environmentally sustainable growth. There is naturally some overlap between these, with, for instance, increased focus on a regional approach to water and climate change, as the new Asia Solar Energy Initiative testifies.
It was also announced in Tashkent that a new ASEAN+3 Macro Research Office will be established in Singapore to provide economic analysis in support of the Chiang Mai Initiative. The aim of that is to make the US$120 billion existing multilateral currency swap mechanism between the 10 ASEAN countries and Japan, China and South Korea operational.
As I traveled from Tashkent back to London following the Asian Development Bank meeting, the change in the mood could not have been more apparent. The crisis in Greece, fears of a domino effect and political uncertainty in the UK contrasted with talk of Asian growth, investment and outperformance.
CHANGE
The contrast between the West and the East is particularly clear when one considers China. China’s reach is immense, its impact significant. Last year, the world economy shrank by US$3.3 trillion to US$58 trillion. That followed a near doubling of the size of the world economy during the boom of the previous decade.
What is remarkable about last year was that among the major nations, few actually grew. The advanced economies shrank by US$2.2 trillion to US$40.1 trillion. Even emerging economies, despite their attractive fundamentals, shrank by US$1.1 trillion to US$17.9 trillion. China was one of the exceptions. It grew by US$0.4 trillion. While there were others across Asia that expanded, it is China’s scale that makes a difference. But it would be wrong to think this is just a China story. When I travel across Asia, the pace and scale of change is breathtaking, and many countries are moving up the value curve as they compete.
This was reflected in the positive mood at the gathering in Tashkent. It was noticeable, in talking and listening to people, that the financial sector across Asia appears to be in good shape, with international banks also looking more to the region. As for the economy, the ADB’s views are probably not too dissimilar to mine. It expects another year of solid growth this year and next year. Developing Asia is forecast to pick up from 5.2 percent growth last year, its lowest in eight years, to 7.5 percent this year and 7.3 percent next year.
Within this, as ADB president Haruhiko Kuroda told the governors’ meeting, there were still many fragile economies, and the need to focus on the ADB’s development agenda was strong.
Following an era of boom, I believe Asia is now in an era of investment. Apart from the overall health of the financial sector and Asia’s economic prospects, the scale of investment is the aspect which stood out in Tashkent. Asia faces an infrastructure boom, as indeed do some other regions, such as the Middle East. At least US$8.3 trillion is the broad figure bandied about as Asia’s infrastructure needs over the next decade. Yet the challenge is how to fund this huge amount. Multilateral agencies provide about US$40 billion a year at present, whereas about US$700 billion a year will be needed in the future. That leaves a huge amount to raise from the private and public sectors. In Tashkent, the Chinese called for a new investment corporation to help provide finance.
If this investment takes place on the scale required, Asia will move from an era of investment to one of outperformance. In that environment, Asia will not be decoupled. Instead, it will be increasingly able to chart its own course and have a greater influence on the global agenda.
Gerard Lyons is head of global research and chief economist at Standard Chartered Bank.
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