Emerging Asian countries should be proud of their economic resilience. Despite a global economy plagued by weak growth, persistently high unemployment and heavy debt loads, the region’s emerging and developing economies grew at an average annual rate of 6.8 percent from 2000 to 2010, propping up global output and buttressing recovery efforts.
The region’s success has been underpinned by dynamic growth in China and India, which account for almost 60 percent of the continent’s total GDP in purchasing power parity terms. Furthermore, changes in economic policy and structural reforms that were enacted in the wake of the 1997-1998 Asian financial crisis significantly reduced the region’s vulnerability to financial shocks over the past decade.
However, Asia cannot be complacent. Financial systems remain fragile, economies are burdened with high fiscal and current-account deficits, and Asia remains too heavily dependent on North American and European export markets, increasing its vulnerability to external shocks.
Moreover, if conditions in the eurozone continue to deteriorate, Asia could be more severely affected. Already, spillover effects from trade and financial transmission channels are beginning to take their toll — China’s GDP growth rate in the second quarter of this year averaged 7.6 percent, reflecting a significant slowdown, and India’s growth rate is expected to decline to about 6 percent this year.
China’s potentially strong domestic demand base and ample room for policy maneuvers can help it to avoid a hard landing. It has already aggressively loosened monetary policy and it can employ further fiscal stimulus. However, policy mismanagement and structural weaknesses in the financial sector and local governments could undermine efforts to safeguard growth.
Meanwhile, India, constrained by a high fiscal deficit and persistent inflationary pressures, has less scope for expansionary policies and faces significant challenges in pursuing credible structural reform.
This has serious implications for the rest of Asia. Over the past three decades, increased economic and trade integration has bolstered the region’s growth. For example, segmented production for global supply chains has stimulated trade in intermediate goods and promoted foreign direct investment. However, now closer economic integration means that sluggish growth in China and India will reduce job opportunities and slow the rate of poverty reduction throughout the region.
Faced with weak demand in advanced countries, Asian economies are working to rebalance their sources of growth by shifting toward domestic and regional markets. As a result, growth in intra-regional trade has outpaced overall trade growth, with intra-Asian trade now accounting for more than half of the continent’s total trade turnover.
However, China’s established role as the assembly hub for the region’s production-sharing networks means that it is becoming a source of autonomous shocks — with a large and persistent impact on fluctuations in the business cycle.
So, what policies must emerging Asian economies pursue to reduce their vulnerability to regional and global volatility?
The most immediate challenge is to safeguard the financial system’s stability against external shocks. Policy reform should aim to promote market transparency, improve risk management, and strengthen effective supervision and regulations.