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Manila:
The latest economic indicators from the world's advanced economies
remain mixed. There are some signs of stabilization — industrial
output and consumer spending are, for example, falling much more
slowly than they were, but stabilization does not mean imminent
recovery. A decline is still a decline.
Unemployment is still on the rise. Consumer and business confidence
has not recovered. It is clear that the recession has yet to bottom
out in the United States and Europe.
By contrast, signs are much more favorable in Asia. Markets, which
are typically the first indicators of recovery, are rebounding much
more sharply here. While the Dow Jones Industrial Average rose 11
percent in the second quarter, Japan's Nikkei 225 jumped 23 percent.
Equity markets in China rose 25 percent, India 53 percent and
Vietnam 60 percent.
Asia's real economy is doing much better too. Industrial production
in South Korea, Singapore and Thailand has been rising in recent
months. And while most economies in Asia have suffered their worst
performance since the 1997-98 Asian financial crisis, we believe
they have hit bottom.
The Asian Development Bank forecasts that gross domestic product
(GDP) growth for emerging East Asia will still be 3.0 percent this
year. While that's a significant reduction from the 6.1 percent
growth in 2008, it is growth nonetheless — and much better than
other regions of the world.
Will Asia lead the global recovery? Quite possibly. We expect a
V-shaped recovery; growth in the region is likely to rise to around
6.0 percent next year, still two percentage points below the 8
percent average growth between 2003 and 2007. The reason is that
while we expect government stimulus to boost domestic demand, we
doubt the external demand that drove exports during the years before
the latest crisis will return anytime soon. We now see the U.S.
economy contracting 3.0 percent this year while the economies in
Europe and Japan will likely shrink 4.3 percent and 5.8 percent,
respectively.
China is leading the recovery in Asia. Aggressive government
spending there — more than 7 percent of GDP this year, and 8 percent
in 2010 — will fuel domestic growth. And that, in turn, should help
other Asian economies recover as they fill Chinese demand for their
goods. China is the biggest offshore buyer of Korean products and
the second-largest for Japan, snapping up about a quarter of Korean
exports and one-sixth of Japan's. About 12 percent of total exports
from the five largest Southeast Asian economies — Indonesia,
Malaysia, the Philippines, Thailand and Vietnam — go to China.
But that won't be enough to restore developing Asia to the growth
levels seen in recent years. For that to begin to happen, consumers
in the world's major economies also need to start buying Asia's
goods again. The U.S., Japan and Europe remain major markets for
Asian exporters. Intra-Asian trade has grown rapidly in recent
years, but remains largely based on parts and components rather than
final goods. Asians still don't buy finished products made in their
own backyard.
In fact, economic growth in the U.S., Japan and Europe influences
East Asia's regional output at least as much as China's does. Plus,
China's ability to sustain economic growth over 8 percent is also
reliant on a global recovery to provide external demand for its
exports. Economic growth that relies on stimulus is not sustainable.
Clearly, China or Asia alone cannot be the region's sole engine of
growth. Developing Asia needs two engines — China and, just as
important, the major advanced economies.
The implications are clear. First, a rebalancing of the sources of
growth is needed. Even if demand in advanced economies recovers to
pre-crisis levels, that won't be enough to meet Asia's expanding
exports. The key for sustaining long-term economic growth in Asia is
how to strengthen Asia's own domestic and regional demand.
Governments can no longer rely on export-oriented development
strategies. Strengthening social safety nets, broadening and
deepening financial markets, supporting small and medium enterprises
(especially in services), and increasing exchange rate flexibility
will all help strengthen domestic demand.
But effective rebalancing requires both demand-side and supply-side
polices. Developing more competitive and efficient domestic
industries to serve domestic markets will take time.
Second, to avoid any repeat of the global financial crisis, the
region's policymakers should improve and streamline their regulatory
and supervisory regimes, while reinforcing regional and global
cooperation. By and large, emerging East Asia's financial systems
and institutions were shielded from the direct impact of the global
financial crisis.
The resilience of Asia's banking systems has been attributed to
reforms taken following the 1997-98 Asian financial crisis.
Nevertheless, current risk-management and prudential oversight are
clearly insufficient. Both banks and regulators must upgrade their
systems to prepare for future risks and challenges.
The underlying causes of the current global turmoil — emanating from
financial innovation and globalization — stress the need to better
supervise financial institutions and protect financial stability.
While Asia may already be on the path to recovery, a return to
sustained and rapid long-term economic growth will require
rebalancing the sources of that growth and safeguarding financial
market stability.
(The Japan Times)
Jong-Wha Lee is chief economist of the Asian Development Bank.
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