IMF Survey: 'Second Engine of Growth' to Bolster Asian Leadership
July 12, 2010
- Conference focuses on Asia's leadership role in the global economy
- IMF to reflect Asia's stronger economic weight
- Asia encouraged to play greater part in shaping multilateral policies
Asia is playing an increasingly prominent role in the world economy, but to sustain its strong performance it needs to develop a “second engine of growth,” IMF Managing Director Dominique Strauss-Kahn said at the opening of a two-day conference in Korea titled "Asia 21: Leading the Way Forward."
ASIA 21 CONFERENCE
“In the past, Asia’s growth was heavily dependent on exports. But with Asia’s major trading partners—in particular Europe and the U.S.—entering a period of extensive balance sheet repair, export markets may not be so buoyant. A second, internal, engine of growth is needed to sustain Asia’s strong performance,” Strauss-Kahn said in his opening address to around 1,000 high-level delegates and media at the conference held in the city of Daejeon.
The conference, that aims to learn lessons from the global economic crisis, assess the growth drivers for Asia in the post-crisis period, and listen to Asia’s views, was launched with a video welcome to a packed opening plenary by President Lee Myung-bak of South Korea, followed by addresses by Finance Minister Yoon Jeung-Hyun and the IMF Managing Director.
“In line with individual countries’ efforts to boost domestic demand, we should also continue measures to expand overall demand in the regional market, so that the region would become more resilient to external shocks in the future,” Yoon said. “With the center of gravity of the world economy shifting toward Asia, countries in Asia should fulfill their roles as responsible members of the global economy.”
Already under way
Strauss-Kahn said that many of the changes needed to foster the second engine of growth for Asia were already under way across the region.
These include stronger social safety nets, which can boost private consumption by reducing the need for precautionary saving; better infrastructure, to encourage private investment; financial sector deepening to support both consumption and investment by small and medium-sized enterprises, but also by major companies seeking financing for large investment projects; and, where needed, more flexibility in exchange rates.
Strauss-Kahn said that as Asia’s economic weight in the world continues to rise, its stake in the economic performance of other countries was rising too. “This increases the value—to Asia—of having an effective international policy dialogue—to assess global economic risks, and reach collaborative decisions on the policies needed by each country to tackle global challenges.”
“I sincerely hope,” said Yoon, “that the IMF will join hands with Korea in efforts to serve as a bridge between advanced and emerging economies.”
IMF—a “second home” for Asia
“In the wake of the global financial crisis, Asia has emerged as a global economic powerhouse—and no one can doubt that Asia’s economic importance will only continue to grow,” Strauss-Kahn said. “But the world is changing, and so too will the way in which Asia will grow and prosper. The decisions made now will impact Asia’s performance for decades to come.”
He urged Asia to consider the IMF as its “second home.” Along with boosting Asia’s quota share in the organization of 187 members through a 5 percent shift to dynamic emerging market and underrepresented countries, he also pledged to take steps to make Asians feel more at home by employing more Asians in the Fund. “This change also has to be reflected at the top of the IMF,” he said, pointing to Deputy Managing Director, Naoyuki Shinohara, from Japan, and Min Zhu from China, who recently took over as a Special Advisor to the Managing Director.
The Managing Director also vowed that the IMF will strengthen its support for Asia, particularly with respect to improving its analysis of economic and financial risks, facilitating international policy collaboration, and strengthening further what he termed the global financial safety net—a set of facilities that countries could draw on in the event of a systemic crisis—to be finalized by November.
South Korea, which has taken over as head of the Group of Twenty (G-20) industrialized and emerging market countries, is staging the conference in advance of a planned G-20 summit in November. Korea is the first emerging market to head the G-20.
The conference--including ministers, central bank governors, leading academics, commercial bankers, financial experts, and journalists from around the region—is covering a range of topics, including Asia’s resilience in the global economic crisis, financial sector issues, Asia and the IMF, the region’s low-income countries, and prospects for Asian integration.
“Make no mistake,” Minister Yoon Jeung-Hyun said, “this is the time we should begin our new partnership between the IMF and Asia when new circumstances require the region to help reinvent the new growth engines that will take Asia to the next phase of our remarkable journey.”
He said a key issue to be considered at the Seoul summit would be the need for a strengthened financial safety net around the globe.
IMF chief economist Olivier Blanchard told a packed side session at the conference that the Fund was working with Korea to develop a way to provide help to countries if there was a systemic event that threatened parts of the global economy, including possible arrangements between regional institutions and the IMF.
Potential risks for Asia
While emphasizing Asia’s strong growth, Strauss-Kahn also cautioned that downside risks—including from the recent turmoil in Europe—means that Asian policymakers need to remain attuned to further possible shocks. Major policy challenges include how best to manage the sharp rebound in capital inflows, and the related risks of overheating and credit and asset bubbles.
In a plenary session on the challenges ahead for Asia, moderated by BBC presenter Nik Gowing, panelists spoke about potential difficulties for Asia, with Europe’s growth in the doldrums and the risk, if remote, of a “double dip recession.” Victor Fung, honorary chairman of the International Chamber of Commerce in Hong Kong, said trade remained the lifeblood of the world economy. Countries should resist the lure of protectionism. In fact, completion of the stalled Doha trade round would act as a $300 billion stimulus for the world.
Although Asian banks had got through the crisis period relatively unscathed, partly because they had focused on traditional forms of banking, Eiji Hirano, executive vice president of Toyota Financial Services, said “growth masks many potential problems” that Asia should try to address now, including through financial sector reform.
Speakers at a separate session on Asia and the IMF said the region had got through the current crisis better than other parts of the world because of reforms undertaken at the time of the 1997-98 Asian financial crisis. Part of the credit for this should go to the IMF, said Eisuke Sakakibara, Japan’s former Vice Minister of Finance for International Affairs, who had been critical of the Fund.
Dong-Soo Chin, chairman of Korea’s Financial Services Commission, said a slowdown in western economies would have a cascading effect that would impact Asia, a point reflected by Y.V. Reddy, a former Governor of the Reserve Bank of India. A twin slowdown in Europe and China could be a “double wammy,” he said.
In the short run, “The U.S. consumer is still the key to sustaining growth,” Fung argued.