Asia has come of age. In a few days, the region’s rising powers — India, China, Korea and Indonesia — will be sitting at the global high table to decide on ways to reshape the world’s financial and economic order.
As leaders from the Group of 20 nations converge in London next week, there are expectations that the outcome will include concrete steps to revive economic growth, a boost in funding for the IMF and an understanding on the new financial architecture to restore trust in the financial system.
Asian policymakers are looking for two other critical assurances from the meeting: one, that the developed countries will keep their markets open; and two, that global capital flows needed to finance trade and investment will remain unchecked.
No one doubts the difficulty of reaching consensus. But the stakes have never been higher.
Amid frenetic attempts by individual governments to tackle the biggest economic crisis since the Great Depression, it is easy to forget that the progressive dismantling of barriers against international trade and investment contributed to the biggest economic boom the world has seen.
More than 200 million jobs were created worldwide between 2000 and 2007, according to the Institute of International Finance, and millions of people in the developing world were lifted out of poverty as a result of the free flow of capital, goods and services.
Yet, as the crisis continues, governments and businesses in Asia are increasingly worried that the world’s biggest and most developed economies will explicitly or implicitly legislate to encourage manufacturers to keep production onshore and for banks and insurance companies to keep money within their borders.
Any such protectionism comes at a dark time. Although Asia remains fundamentally robust thanks to high private savings, conservative balance sheets of companies and financial institutions and mammoth foreign reserves, the ongoing financial turmoil has caused consumers and lenders in developed countries to tighten their purse strings.
Exports from Asia have declined sharply, bringing down economic growth. Meanwhile, many borrowers are struggling to refinance their debts or to access trade finance at reasonable costs.
In addition, the International Institute of Finance estimates that net private capital flows to emerging markets could drop to US$165 billion this year from over US$925 billion in 2007.
Steps to ensure that trade and capital keep flowing ought to be at the top of the agenda for the G20 leaders.
Getting developing nations to the table with the Group of Seven developed countries is a good start. The G20 was born as a response to the Asian financial crisis of the late 1990s, and although a G20 group of finance ministers and central bank governors has been meeting since 1999, it is in this financial crisis that its role has taken center stage.
REAL BENEFITS?
The G20, whose member countries account for more than 80 percent of the world’s output and two-thirds of the world’s population, is a forum that truly represents the global economy. But will it produce real benefits for Asia?
The London meeting will be only the second time that the leaders of the G20 nations have held a summit meeting. The first, held last November in Washington, came as a direct response to the economic crisis.
At this second summit, the emerging Asian powerhouses are expected to assert more leverage because of the relative strength of their position. Though weakened, the economies of China, India and Indonesia are still expected to show reasonable GDP growth this year of 6.8 percent, 5 percent and 4 percent respectively, according to forecasts by Standard Chartered economists.
Meanwhile, China has the world’s largest currency reserves, ahead of Japan, with India, South Korea, Taiwan, Singapore and Hong Kong also ranking in the top 10.
The emerging powers have already notched up some gains. The G20 finance ministers, meeting in London in March, agreed to expand the Financial Stability Forum — a body that will set new standards for global financial institutions — to include developing country members. These countries will also join global forums that will set new international accounting and risk regulatory frameworks.
Greater participation of the rising powers in such key decision-making bodies should help resolve potential conflicts and go a long way in helping to rebalance the world economic order.
Ironically, it is the financial upheaval in the West that has brought the systemic importance of the emerging markets to the forefront. It is now clear that the imbalances between the high saving nations in the East and overspending economies of the West led to the asset bubbles in the US and Europe.
To correct the imbalances, the big savers, particularly in Asia, will have to find ways to spend more to boost domestic economies. Higher local consumption will help the economies reduce their dependence on exports. Domestic spending will also help ameliorate the slowdown in investments from the West.
China has made a decisive move on this front, with its stimulus plan to spend almost US$600 billion, largely on infrastructure projects. It has also pulled out all stops to make foreign direct investment easier for domestic companies.
As a result, Standard Chartered economists estimate that overseas investment by Chinese companies touched almost US$65 billion last month alone after doubling to US$52 billion in all of last year. A significant part of those investments went into acquiring raw material assets in Africa, Latin America and Australia, injecting substantial liquidity into these markets.
Other countries in the region have also taken unprecedented fiscal and monetary steps to stimulate local consumption. Meanwhile, Asian governments, including the capital surplus nations of Japan, China and Korea and their Southeast Asian counterparts, have agreed to a US$120 billion pool of foreign exchange reserves to defend their currencies.
Asian economies will need to trade more between themselves and with the Middle East and Africa. That is already happening in some trade corridors. Trade between China and Africa has expanded 20-fold in just over a decade. For some countries in the region, China has replaced the US and Europe as the biggest export market. This process is likely to accelerate as Western consumers cut back on spending and increase savings.
CASH-STRAPPED
Asian members of the G20 are also looking to international financial institutions such as the IMF and the World Bank to revive investments into the region’s developing economies. But the IMF is cash-strapped after having provided bailouts to several East European economies. It is hardly in any position to rescue another medium-sized economy in Asia, Africa or Latin America should the need arise.
The meeting of G20 finance ministers in London this month made some headway on this issue. The ministers agreed to substantially expand the IMF’s resources, possibly increasing the Fund’s emergency borrowing programme by US$500 billion, so that the institution can once again play its role as a lender of last resort in times of international crisis.
The Asian Development Bank also plans to triple its capital base to US$165 billion, enabling it to serve the poorest and most vulnerable populations in the region.
Emerging Asian powerhouses such as China and Korea, apart from the established members like Japan, are now expected to provide a significant part of the funding required to recapitalize these global financial institutions.
However, greater monetary contribution from the rising powers would have to be accompanied by giving them a greater say in the running of these institutions. For instance, Korea today has more than twice the economic output of Belgium, but Belgium’s representation in the IMF is 50 percent greater than Korea’s. This is where the developed countries will have to give up some more ground.
At the upcoming meeting, G20 leaders must accelerate the process of revising the quota allotted to IMF member countries so that the emerging markets can get voting rights that reflect their financial weight.
Progress has been made since the G20 leaders met in November with the aim to restore normalcy to the global economy and markets. But risks remain.
It was the progressively free movement of capital, goods, people and services across borders that fueled the economic rise of the emerging markets and raised affluence in the developed world.
The risk is that this could unravel if the current financial turmoil leads to heightened protectionism, curbed capital flows and fragmentation of the global economy. The G20 has the duty to ensure that this does not happen.
Jaspal Bindra is chief executive (Asia) for Standard Chartered Bank.
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