Emerging countries must develop more effective macroeconomic frameworks, including better macro-prudential regulation and a broader monetary-policy framework that takes into account asset prices and financial-market stability. A wide range of official measures could be employed to support domestic demand, while protecting medium-term fiscal sustainability. To address volatile capital flows, countries should increase exchange-rate flexibility, maintain adequate international reserves and implement carefully designed capital controls.
Emerging economies must also further rebalance their sources of growth. Reducing dependence on external demand — for example, by promoting private-sector investment and encouraging household expenditure — is crucial. Supply-side policies that promote small and medium-sized enterprises and service industries accommodating domestic demand are also critical to ensuring more inclusive and sustainable growth.
Finally, enhanced regional and global financial cooperation — including closer policy coordination at the G20 and the IMF — would help countries to respond more effectively to shocks and crises.
A key regional initiative is the US$240 billion multilateral reserve pool of the ASEAN+3 (ASEAN plus China, Japan and South Korea) which can provide short-term liquidity to members when needed. Institutional arrangements in regional liquidity provision and economic surveillance must be enhanced.
Asians need not be pessimistic — the perfect storm of a hard landing in China, a double-dip recession in the US and a collapse of the eurozone is unlikely — but they cannot rule out the downside risk of a synchronized global downturn. Only with preemptive policies designed to manage risk better can emerging Asian countries protect economic growth from the threat of current and future crises.
Lee Jong-wha is a senior adviser to South Korean President Lee Myung-bak and professor of economics at Korea University.
Copyright: Project Syndicate