Saturday, November 1, 2014
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Safeguarding Asia’s Growth

SEOUL – Emerging Asian countries should be proud of their economic resilience. Despite a global economy plagued by weak growth, persistently high unemployment, and heavy debt loads, the region’s emerging and developing economies grew at an average annual rate of 6.8% from 2000-2010, propping up global output and buttressing recovery efforts.

The region’s success has been underpinned by dynamic growth in China and India, which account for almost 60% of the continent’s total GDP in purchasing power parity terms. Furthermore, economic-policy changes and structural reforms that were enacted in the wake of the 1997-1998 Asian financial crisis significantly reduced the region’s vulnerability to financial shocks over the past decade.

But Asia cannot be complacent: financial systems remain fragile; economies are burdened with high fiscal and current-account deficits; and Asia remains too heavily dependent on North American and European export markets, increasing its vulnerability to external shocks.

Moreover, if conditions in the eurozone continue to deteriorate, Asia could be more severely affected. Already, spillover effects from trade and financial transmission channels are beginning to take their toll: China’s GDP growth rate in the second quarter of 2012 averaged 7.6%, reflecting a significant slowdown, and India’s growth rate is expected to decline to roughly 6% this year.

China’s potentially strong domestic-demand base and ample room for policy maneuvers can help it to avoid a hard landing. It has already aggressively loosened monetary policy, and it can employ further fiscal stimulus. But policy mismanagement and structural weaknesses in the financial sector and local governments could undermine efforts to safeguard growth.

Meanwhile, India, constrained by a high fiscal deficit and persistent inflationary pressure, has less scope for expansionary policies and faces significant challenges in pursuing credible structural reform.

This has serious implications for the rest of Asia. Over the last three decades, increased economic and trade integration has bolstered the region’s growth. For example, segmented production for global supply chains has stimulated trade in intermediate goods and promoted foreign direct investment. Now, however, closer economic integration means that sluggish growth in China and India will reduce job opportunities and slow the rate of poverty reduction throughout the region.

Faced with weak demand in advanced countries, Asian economies are working to rebalance their sources of growth by shifting toward domestic and regional markets. As a result, growth in intra-regional trade has outpaced overall trade growth, with intra-Asian trade now accounting for more than half of the continent’s total trade turnover.

But China’s established role as the assembly hub for the region’s production-sharing networks means that it is becoming a source of autonomous shocks – with a large and persistent impact on business-cycle fluctuations.

So, what policies must emerging Asian economies pursue to reduce their vulnerability to regional and global volatility?

The most immediate challenge is to safeguard the financial system’s stability against external shocks. Policy reform should aim to promote market transparency, improve risk management, and strengthen effective supervision and regulations.

Second, emerging countries must develop more effective macroeconomic frameworks, including better macro-prudential regulation and a broader monetary-policy framework that takes into account asset prices and financial-market stability. A wide range of official measures could be employed to support domestic demand while protecting medium-term fiscal sustainability. And, to address volatile capital flows, countries should increase exchange-rate flexibility, maintain adequate international reserves, and implement carefully designed capital controls.

Third, emerging economies must further rebalance their sources of growth. Reducing dependence on external demand – for example, by promoting private-sector investment and encouraging household expenditure – is crucial. Supply-side policies that promote small and medium-size enterprises and service industries accommodating domestic demand are also critical to ensuring more inclusive and sustainable growth.

Finally, enhanced regional and global financial cooperation – including closer policy coordination at the G-20 and International Monetary Fund – would help countries to respond more effectively to shocks and crises. A key regional initiative is the $240 billion multilateral reserve pool of the ASEAN+3 (the Association of Southeast Asian Nations plus China, Japan, and South Korea), which can provide short-term liquidity to members when needed. Institutional arrangements in regional liquidity provision and economic surveillance must be enhanced.

Asians need not be pessimistic; the perfect storm of a hard landing in China, a double-dip recession in the United States, and a collapse of the eurozone is unlikely. But they cannot rule out the downside risk of a synchronized global downturn. Only with preemptive policies designed to manage risk better can emerging Asian countries protect economic growth from the threat of current and future crises.

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  1. CommentedJonathan Lam

    Gamesmith94134: How to Compete in Europe

    What is the difference between a Clydesdale and a Hinny? One is a horse and the other is a mule.

    Each excels its competition over the other under the effectiveness and efficiency through their performances. The giant horse carries the heavy load over the opened road; and the miniature mule bring his load passing through the tunnels of a mine. If we set aside the price and value in evaluation of profits and resources, the gain from competitiveness would show that these effectiveness and efficiency are more like the intangible capitals. R&D through history gave the distinctions on the winnings; that how we understand what the capacity and agility of the animal can do or how the route or environment makes it difference. Such advantage or gain resulted when two are confronted with conditions in similar or differences are accounted for what we called intangible capital. For sake of transportation of goods, Clydesdale and Hinny won over the other by its conditions. So, we must understand the elements of tools and conditions as well through competitions; conditions could be created or innovated to the intangible capitals that beat its competition.

    In term of import and export, merchandize is shipped does not mean a sale is done till consumed or sold. So, it is how the importer or exporter must find its match and not the producer. Producer makes the distinction and quality of the product to beat the similar product on its market; but it is how the importer or exporter sees what is marketable. In the earlier China/US trade, Chinese found its customers in US in quantity since they found the masses of the middle class and the poor who favored cheaper Chinese products or “made in China” over the quality US made products. Marketwise, China gained its surplus just because Americans were poorer in the 90’s and today. Personally, I prefer German kitchen knives over Chinese ones, even though it is twice as much; and I buy Chinese ones only when my dilemma is overblown by affordability and sustainability that my income lost to growth.
    When I studied Tourism, I always wanted to travel Spain and Greece. I dreamed to live in a castle or hostel and travel Europe till I realize they were replaced by Hyatt or Marriot and the cost of my meal went doubled. It was streamlined in American standard. Why would I travel afar than watching TV on the screen? I went China every year since China tolerated those with lower budget spending and cheaper flight tickets.

    During the tour in China, I saw Chinese who put eight people to water the pots of plants and flower at the sides and center of the roads during the exhibition, and they made $22 a day; but China was low in employment in the region and it was an effective application of human resources. And then, I cry over US for its effectiveness using the half million dollars water truck to clean the sidewalk with its $35/per hour driver, afterward the street was not cleaned when the city budget cut the street cleaning and the half million dollars truck went idle. Why doesn’t the city hire eight workers to clean the street like Chinese? It was another success for technology over human resources; the half million dollars water truck was sold. Then, we are at the doors of sustainability and affordability; perhaps, it is not really how or why they are being compared but to understand what really makes the wheel turns and what the EU politicians focused on----employment or capital goods and how they market EU in the globalization of trade.

    For much we come back to the supply and demand or how we market the product in competition, I see the polarization of the North and the South that Euro the currency set their pre-conditions in ways to compete that social instability and inadequate exchange rate make it worse to complete. Clydesdale may cause more for ones to dig in the tunnel, and Hinny may work overtime to carry in capacity. In navigating the tunnel or opened road to prosperity is not easy, but the EU politicians must understand both the pre-conditions and capacity to market the integration of its Union. In the end, I still prefer the bi-system currency method to keep the EU integrated till it really becomes a Union.

    May the Buddha bless you?

  2. CommentedPUNDALIK Kamath

    It is so annoying to read everywhere that growth rate in a percentage notation is the only indicator of "growth" of a nation. What about things like good governance, peace, high standards in justice system, no-corruption etc etc.

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