Asian economies, led by China and India, are in the forefront of a global recovery. According to international institutions such as the International Monetary Fund, these economies will not only make up for the stuttering growth in the developed economies but also play a key role in a future world order that will be well supported by a more robust and stable economic and financial framework.
In a speech delivered recently in Singapore*, IMF Deputy Managing Director Naoyuki Shinohara discussed the current global economic outlook and the policy challenges facing Asia. Highlights of the speech are given here.
Even though the worst economic crisis in 60 years has abated, shock waves are still being felt. The continuing European debt crisis has brought substantial volatility to the financial markets. There are three important messages from the recent experiences: (a) No country or region stands alone in today's global economy. (b) Policies and institutions must evolve with the global economy. (c) Global growth depends on a collaborative policy across countries and regions.
The lessons learnt from the crisis need to be used to forge a better balanced and more inclusive global economy in the future. Asia is well positioned to assume the leadership role, set the standards of policies, performance and collaboration in the years ahead.
Policymakers everywhere face two sets of challenges: (a) Framing policies that support global recovery and achieve a more sustainable and balanced growth path. (b) Finding ways of strengthening the international monetary system to reduce the risks of another crisis.
Uneven growth
Growth is uneven across regions and even within regions. In the developed world, growth is fragile and beset with uncertainties. The U.S. has fared better than Europe where a number of countries face problems of public finance.
The outlook is better for many emerging and developing economies. Asia is leading the way. Its growth has rebounded swiftly and output in many cases is well above pre-crisis levels.
For the first time, Asia's contribution to global recovery is outstripping that of others. But unlike before, domestic consumption, particularly household con- sumption, rather than exports, is reinforcing Asian growth. Also, instead of the slow return of capital inflows that was the norm in the past, there has been a surge. The IMF sees this as a vindication of sound economic policies pursued by many Asian countries.
Buoyed by strong recoveries in China and India, Asia is expected to post a 7 per cent growth but the pace of recovery will vary across the region.
Downside risks
The global outlook remains unusually uncertain and downside risks have increased significantly. first, many advanced economies have either run out of fiscal space for continued policy support or nearing the limit. Such financial vulnerabilities pose a threat to the global economy.
Second, developments in the financial markets too pose major downside risks. The inability of banks to withstand major funding shocks is of particular concern.
There are doubts whether politicians will be able to deliver on the promised reform packages.
Even more specifically, adverse developments in Europe could disrupt global trade. Although Asia's direct financial linkages to euro area economies are limited, there could be a spill over of the crisis which affect banks dependent on wholesale funding.
The outlook for capital flows is uncertain with a large potential for volatility. If the Asian economies fare as well as expected, they will attract capital from the developed countries, especially because the latter have very low rates of interest. That could lead to risks of overheating in some countries if policy action is not taken. On the other hand, further increases in global risk aversion could see capital flows change direction quickly.
Well positioned
Nevertheless, while Asia is not immune from developments in the outside world, the region is in a strong position to tackle these risks, should they be realised. The key will be for policymakers to keep an eye on the bigger picture and be ready to act swiftly as developments unfold. The policy choices made in Asia will have an important bearing on the global economy.
The three critical areas are: (a) judging the appropriate pace for unwinding macroeconomic stimulus and financial sector support; (b) advancing financial sector reform and (C) devising appropriate policies to manage volatile capital flows.
The IMF strongly recommends a collaborative approach at the regional and global levels. Policies in one country can have far-reaching effects on others. As many advanced countries consolidate their fiscal position, offsetting demand has to come from elsewhere in the global economy including Asia, which in any case has to spend large sums to build a modern physical infrastructure.
