Growth in tur­bu­lent times

The Pak Banker - - OPINION - Changy­ong Rhee

Anew re­al­ity is emerg­ing in Asia. In re­cent decades, many of Asia's economies have boomed. The re­gion to­day ac­counts for about 40 per­cent of the world's GDP - up from 25 per­cent in 1990 - and con­trib­utes about two-thirds of global eco­nomic growth.

There's more. Asia has made un­prece­dented strides in re­duc­ing poverty and im­prov­ing broad de­vel­op­ment in­di­ca­tors. The poverty rate fell from 55 per­cent in 1990 to 21 per­cent in 2010, while education and health out­comes have im­proved sig­nif­i­cantly. Hun­dreds of mil­lions of lives have been im­proved in the process. And, look­ing ahead, Asia is ex­pected to con­tinue to grow at an av­er­age an­nual rate of 5 per­cent, lead­ing global eco­nomic ex­pan­sion. But to­day, the re­gion is fac­ing chal­leng­ing new eco­nomic con­di­tions. With growth in ad­vanced economies tepid, risk aver­sion in­creas­ing in global fi­nan­cial mar­kets, and the com­mod­ity su­per-cy­cle com­ing to an end, the world econ­omy is pro­vid­ing lit­tle im­pe­tus to Asian growth.

At the same time, China is mov­ing to­ward a more sus­tain­able growth model that im­plies slower ex­pan­sion. Given the grow­ing links be­tween China and the rest of the world, par­tic­u­larly Asia, the spillover ef­fects are sig­nif­i­cant. In­deed, China is now the top trad­ing part­ner of most ma­jor re­gional economies, par­tic­u­larly in East Asia and ASEAN. New re­search by the In­ter­na­tional Mon­e­tary Fund, to be pub­lished in next month's Re­gional Eco­nomic Out­look for Asia and the Pa­cific, sug­gests that the me­dian Asian coun­try's eco­nomic sen­si­tiv­ity to China's GDP has dou­bled in the last cou­ple of decades. So China's slow­down means a slower pace of growth across Asia.

Asia's achieve­ments in re­cent decades at­test to the hard work of the re­gion's peo­ple, as well as to the sound­ness of the poli­cies that many Asian gov­ern­ments have adopted since the late 1990s, in­clud­ing im­proved mon­e­tary­pol­icy and ex­change-rate frame­works, in­creased in­ter­na­tional re­serve buf­fers, and stronger fi­nan­cial sec­tor regulation and su­per­vi­sion. Against this back­drop, the re­gion at­tracted vast amounts of for­eign di­rect in­vest­ment. As trade links ex­panded, a so­phis­ti­cated net­work of in­te­grated sup­ply chains emerged, cre­at­ing the con­di­tions for Asia to be­come a man­u­fac­tur­ing pow­er­house and, in­creas­ingly, an ex­porter of ser­vices as well. More re­cently, thanks to strong poli­cies and am­ple re­serves, the re­gion quickly re­cov­ered from the global fi­nan­cial cri­sis. Asia also ben­e­fited dur­ing th­ese years from strong global tail­winds, in­clud­ing fa­vor­able ex­ter­nal fi­nanc­ing con­di­tions and the rapid ex­pan­sion of the Chi­nese econ­omy.

Amid this new test­ing re­al­ity now dawn­ing in Asia, we must not lose sight of the deep, and long term, struc­tural chal­lenges fac­ing the re­gion. Pop­u­la­tions are rapidly ag­ing and even de­clin­ing in coun­tries like Ja­pan, Korea, Sin­ga­pore, and Thai­land, drag­ging down po­ten­tial growth and putting pres­sure on fis­cal bal­ances. In­come in­equal­ity is a fur­ther chal­lenge. While in­equal­ity has re­mained sta­ble or de­clined in Malaysia, Thai­land, and the Philip­pines, it is ris­ing in many parts of the re­gion, most no­tably in In­dia and China (as well as other parts of East Asia). In many emerg­ing mar­kets and de­vel­op­ing coun­tries, wide­spread in­fra­struc­ture gaps per­sist, no­tably in power and trans­port. And, else­where in the re­gion - the small Pa­cific is­lands in par­tic­u­lar - vul­ner­a­bil­ity to the ef­fects of cli­mate change is in­creas­ing.

This shift­ing land­scape calls for bold ac­tion on sev­eral fronts. While the re­sponse will cer­tainly need to be tailored to each coun­try's spe­cific cir­cum­stances, some rec­om­men­da­tions could be help­ful for most coun­tries:

l Be­cause in­fla­tion re­mains low across most of the re­gion, mon­e­tary pol­icy should re­main sup­port­ive of growth in case down­side risks ma­te­ri­al­ize. l Ex­change-rate flex­i­bil­ity and tar­geted macro­pru­den­tial poli­cies should be part of the risk-man­age­ment tool­kit.

l Coun­tries need to deepen their fi­nan­cial sys­tems to chan­nel the large pool of do­mes­tic and re­gional sav­ings to­ward fi­nanc­ing their de­vel­op­ment needs; clos­ing the re­gion's in­fra­struc­ture gaps, for ex­am­ple, re­mains crit­i­cal.

l Struc­tural re­forms, aided by fis­cal pol­icy, should sup­port the eco­nomic tran­si­tions and re­bal­anc­ing, while boost­ing po­ten­tial growth and al­le­vi­at­ing poverty.

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