Asia is vulnerable to global uncertainty
It is not easy to keep an orderly house in an unsettled neighbourhood. That’s the major hurdle facing Asian economies as the advanced world deals with unusual economic, financial, institutional and political fluidity. Judging from China’s gross domestic product data released this week, Asia is in a relatively favourable position to navigate the challenges. But the battle is far from won.
In more normal times, Asia only needed to ask two major economic questions about the advanced countries: How strong a locomotive would these nations provide for trade? And to what extent would they supply relatively stable capital flows, a coherent interest rate structure and limited volatility for the dollar, euro and yen, the world’s three principal reserve currencies?
In the past year, a third concern — this one more structural because it pertains to the stability of the world’s trading regimes — has been added. Given the UK vote to exit the European Union, the anti-trade rhetoric in the US presidential election and the headwinds to the Trans-Pacific Partnership, Asia can no longer take for granted longstanding tenets of trade and financial globalisation.
This development is underpinned by a new reality: Too many years of slow and non-inclusive growth in the advanced world have led to highly unusual monetary conditions, including negative nominal interest rates, artificially priced equity and bond markets and weaker growth potential. The associated amplification of antiestablishment political movements has also shaken confidence in the advanced world’s ability to follow through on needed domestic policies, let alone global responsibilities.
Advanced countries are at the core of today’s global system, giving them huge privileges and responsibilities. Because they issue the world’s reserve currencies, they are able to exchange currency for goods and services produced by others. Their securities provide the main form of external saving for emerging economies, many of which outsource an important element of financial intermediation. And advanced countries have de facto veto power at the two world’s most influential multilateral economic organisations, the International Monetary Fund and the World Bank, and have the determining say over who is picked to lead these institutions.
These significant privileges come with expectations that the advanced world will pursue sound and responsible economic management. Their pre-eminent role means their actions have notable spillover effects. But confidence that these expectations will be consistently met has been shaken, as messy politics have hindered proper policy responses, including by placing an excessive burden on central banks. In addition, politics have also contaminated economic management by weakening the advanced world’s flexibility to deal with potential cyclical downturns, never mind break out of a prolonged period of low and insufficiently inclusive growth.
This increases emerging countries’ vulnerability to sudden changes in trade and financial flows. For Asia, it means having to operate with weaker international drivers of domestic prosperity, and with global financial conditions that could be subject to bouts of unsettling volatility. Fortunately, many Asian countries have built substantial financial resilience — including comfortable levels of international reserves, the capacity to avoid major currency/maturity debt mismatches and a tradition of professional management of sovereign wealth. These nations also are anchored by a regional Chinese growth rate that is higher than those of the US and Europe.
Nonetheless, the coast isn’t clear. These countries would be well advised to develop even greater financial and economic resilience, including by deepening their own financial markets and relying more on domestic drivers of economic growth. Furthermore, they must contend with an environment that tips the relative regional potential in favour of the larger economies (such as China, India and Indonesia). The historically impressive agility of the smaller open economies (such as Singapore) will be tested even more because the basic tenets of a growth model that has served well for decades are now subject to greater uncertainty as Europe and the US signal a lot less enthusiasm for globalisation.
Asia is in a better relative position than other regions to navigate today’s unusually uncertain global economy and outperform. When judged against the absolute standard of delivering growing prosperity to citizens, these countries now need to think a lot harder about developing deeper domestic engines of economic growth and more efficient internal financial intermediation.
The historically impressive agility of the smaller open economies will be tested even more.
Mohamed A El-Erian, Chief Economic Adviser at Allianz and a member of its International Executive Committee, is Chairman of President Barack Obama’s Global Development Council and the author, most recently, of ‘When Markets Collide’.