According to a recent assessment by the International Monetary Fund, Asia will grow by 7 per cent this year, with its bigger economies, China and India, posting higher rates. But leadership in the global economic recovery casts special responsibilities on these countries. Their current strengths, and the policy choices they will be making from now on, will have a significant bearing on the fortunes of the global economy. The debt crisis in Europe has added to the problems created by financial market volatility. Economic recovery has been uneven across regions; and in many countries, it is still fragile. The outlook is much better for the world's most populous continent. Output in most of Asia is well above pre-crisis levels and, for the first time, its contribution to a global recovery is outstripping that of other regions. In a development that portends well for the sustainability of growth, domestic consumption rather than an overwhelming dependence on exports has become the growth driver in most Asian economies.
There are two sets of risks the global economy faces. First, many advanced countries have practically exhausted the fiscal space available for continuing policy support. Secondly, the financial sector continues to be vulnerable to external shocks. A key concern is that political leaders in the developed countries have so far not been able to deliver on the promised bank reform packages. Adverse developments in Europe could disrupt trade in Asian economies. But fortunately the financial linkages to euro area economies are limited. The biggest challenge India and a few other emerging economies face relates to capital inflows. Asia's bright prospects have attracted large inflows of capital from developed countries, which have very low interest rates. This could lead to overheating in some cases. On the other hand, portfolio capital is known to be fickle and can quickly reverse course. Policymakers need to strike a balance in the crucial area of unwinding macroeconomic stimulus and financial sector support packages. The correct time frame will depend on the specific circumstances of each country. A key lesson from the crisis is that financial sector reforms are indispensable for lasting financial stability. While the Asian financial system has been resilient, it is important for banks in individual countries to stay ahead of the curve. Asia is not immune from developments elsewhere but the continent is in a very strong position to tackle the risks. At a policy level, it makes eminent sense for Asian countries to cooperate and coordinate their approach to global economic issues.