IMF Survey: Asia: Launching Pad for Tomorrow's Emerging Markets
July 1, 2010
- Enduring lessons from Asia's dynamic emerging markets
- Asia's low-income countries have enormous potential
- New development challenges, opportunities in today's world
Following in the footsteps of Asia’s dynamic emerging markets, low-income countries in the region are poised to become the emerging markets of tomorrow, in the view of IMF economists. This will further help to propel Asia’s global economic leadership.
ASIA'S LOW-INCOME COUNTRIES
With the Fund predicting that Asia will become the largest economic region in the world in about 20 years, the future of low-income countries in the region is a keenly debated topic. Speaking at an IMF-sponsored conference in Vietnam earlier this year, IMF First Deputy Managing Director John Lipsky said that “the region’s developing countries should be central participants and beneficiaries … by moving up the ladder.”
The IMF is committed to supporting these countries make the transformation into emerging markets. How best to do this will be a major topic discussed at a high-level conference co-hosted by the Government of Korea and the IMF in Daejeon, Korea on July 12–13.
Min Zhu, who will open the conference session on this topic, said, “This discussion will allow us to hear a wide range of views of how Asia’s low-income countries can improve their growth prospects. We can find lessons in the path taken by today’s emerging markets in the region, but how countries take advantage of new opportunities and manage risks will also be a crucial factor in determining tomorrow’s emerging markets.”
Rise of Asia’s emerging markets
Asia has had enormous success in transforming low-income countries into emerging markets, raising their level of development and average incomes. Sustained economic growth and expanding employment opportunities have been crucial.
A 2008 report by the Commission on Growth and Development, chaired by Michael Spence who is a keynote speaker at the Korea conference, identified only 13 economies worldwide that had grown on average by 7 percent or more per year, for 25 years or longer. Of those 13 economies, nine are in Asia: China, Hong Kong SAR, Indonesia, Japan, Korea, Malaysia, Singapore, Taiwan POC, and Thailand. India and Vietnam may soon join this list.
Experience in these dynamic emerging markets points to several common success factors.
An important part of their development strategies focused on building competitive manufacturing sectors to export goods to the rest of the world. They also managed to have high rates of saving and investment, and used foreign investment as an important source of financing and new technologies.
But, according to the Commission’s report “no economy can flourish in the midst of macroeconomic instability.” Macroeconomic policies that helped to reduce economic volatility and uncertainty, allowed these economies to attract investment and expand the private sector.
Many of these factors are behind Asia’s recent economic success.
IMF Managing Director Dominique Strauss-Kahn underscored this point in a recent interview with Yonhap news agency, citing Korea’s sound macroeconomic policies and reforms over the past decade. As a result, “the Korean economy faced the latest global economic and financial crisis from a relatively strong position, which helped facilitate the economy’s impressive rebound from the downturn,” Strauss-Kahn said.
Analysts wonder if the performance of Asia’s emerging markets can be repeated by employing similar export-oriented growth strategies.
The next emerging markets
Anoop Singh, Director of the IMF’s Asia and Pacific Department, recently blogged about the “Flying Geese Paradigm”—first conceived by Japanese economist, Kaname Akamatsu—as a way of explaining “the successive waves of Asian countries achieving … emerging or developed market status”. He identified Cambodia, Laos, and Nepal as among the Asian economies preparing to take off. “These countries have huge potential,” said Singh.
For one, they still have lower labor costs than in the region’s emerging markets. But, compared to their predecessors, low-income countries today also face new challenges and new opportunities.
Stricter environmental standards and multilateral trade agreements today limit countries’ pursuit of policies that strategically manage industrialization. The more interconnected global economy means that countries are also more vulnerable to adverse developments in other countries and regions. During a recent visit to Singapore, IMF Deputy Managing Director Naoyuki Shinohara said that, in the wake of the global crisis, weaker demand could disrupt Asia’s export markets.
However, Asia’s low-income countries also have access to a broader pool of technologies that can help them exploit lower communication costs to export services, rather than relying mainly on exporting goods.
And, even if demand elsewhere in the world remains subdued, the expanding middle class within Asia will provide a new export market. “I believe we will see ... emerging Asia becoming a centerpiece of a whole new global trade pattern,” said IMF Special Advisor Min Zhu in an interview for the June 2010 issue of Finance and Development.
Discussing new ideas for growth
With this new economic environment, an open question is whether existing ideas or new ideas, or some combination of the two, can best nurture growth in low-income countries.
Sharing Anoop Singh’s views about the potential of low-income countries in the region, John Lipsky said that, “at a fundamental level, Asia’s developing countries are qualitatively different from their counterparts in other regions. Living standards are higher, populations are less marginalized, and the middle class is more prominent.”
“Of course possessing potential and realizing it is not the same thing. Countries need to make the most of their potential by being well prepared with sound macroeconomic policies and a robust financial sector,” Singh said.
The IMF’s latest Asia and Pacific Regional Economic Outlook said that low-income countries in the region “also need to make significant progress in a series of structural reforms needed to raise their competitiveness.” Priority areas include improving the business environment and ensuring a sound banking sector.
The IMF is committed to helping these countries reach the next level of development through policy advice and capacity building, but also by taking the policy dialogue to the region.
The challenge of achieving emerging market status was the focus of a conference earlier this year in Hanoi organized by the IMF. Speaking at the conference, John Lipsky emphasized that boosting long-term growth in low-income countries requires investment in infrastructure and stronger social safety nets. In this regard, the conference identified the need for increased investment in health and education, and the importance of achieving equitable growth—not just high growth—to reduce poverty.
The IMF will continue its dialogue with member countries in Asia and their development partners, with a session dedicated to this topic, at the high-level conference in Korea in July.