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West Could Learn Lessons from Asia, Says IMF Chief

Greater financial integration can help promote inclusive growth, the IMF chief told an audience in the Malaysian capital, Kuala Lumpur (photo: IMF)

ASIAN FINANCIAL INTEGRATION

West Could Learn Lessons from Asia, Says IMF Chief

IMF Survey online

November 14, 2012

  • Resilient Asia still vulnerable to negative global economic developments
  • Greater intra-regional cooperation needs careful economic management
  • Asia has growing regional and global role

Advanced economies could learn from Asia’s experience to develop more resilient, sounder economies, says IMF chief Christine Lagarde, at the beginning of a week-long visit to Southeast Asia.

Addressing the Malaysian Economic Association in a packed session in the Malaysian capital, Kuala Lumpur, during her first visit to the country as head of the IMF, Lagarde said that in the face of slowing growth, the United States and Europe had “a special responsibility to act.”

“The West can learn from Asia’s own brush with crisis in the 1990s,” said Lagarde.

“Asia’s economic foundations became safer, sounder, and more resilient—but still open to the world and open for business. This has important lessons for the advanced economies currently facing severe challenges,” she said.

Greater intra-regional cooperation

In Lagarde’s speech on “Asia and the Promise of Economic Cooperation,” the IMF head told the audience at Malaysia’s central bank auditorium that Asia could also enhance its own economic strength through greater intra-regional cooperation.

The IMF head pointed to the fact that more than 90 percent of cross-border portfolio investment flows in the region covering the Association of Southeast Asian Nations were with advanced economies outside Asia.

“Asia—with its current account surplus—is simply not investing enough of its savings in itself,” she said.

Lagarde said that Asia had already made great strides in trade integration. Over the past decade, trade within Asia has tripped and regional trade among emerging Asia has grown even faster.

The IMF chief added that the region could benefit from greater financial integration. This could boost domestic demand—partly by making it easier for small business to gain access to credit. It could make economies safer by allowing more insurance against volatility and adverse developments.

Lagarde said that greater integration also made it imperative to pursue inclusive growth. “In a more integrated world, it is sometimes too easy for people to get lost or forgotten. In such a world, it becomes even more important to make sure that growth benefits everyone,” she said.

Benefits of financial integration

Greater financial integration could help promote more spending on health and education, improve pension and unemployment schemes, help raise minimum wages, and improve access to financial markets, she said.

Lagarde acknowledged that greater financial integration came with greater risks, but “economic management is the key.”

The IMF chief pointed to measures that could mitigate the greater risks produced by financial integration including tighter conditions for housing loans, or the greater use of global rules such as Basel III reforms—the recently agreed global regulatory standard on bank capital adequacy, stress testing, and market liquidity risk.

Lagarde highlighted the benefits that capital flows could deliver, but said “they can also overwhelm countries with damaging cycles of crescendos and crashes.”

“In other circumstances, temporary capital controls might prove useful,” she said.

Asia’s increasing policy cooperation

The IMF head also praised Asia’s increasing policy cooperation in the global arena, pointing to the example of the Chiang Mai Initiative—the multilateral currency swap arrangement among the 10 members of the Association of Southeast Asian Nations, China, Japan, and Korea.

Echoing the words of Tunku Abdul Rahman—Malaysia’s father of independence—“Our future depends on how well many different kinds of people can live and work together,” Lagarde said Asia understood the need for cooperation and collaboration at both the regional and global level.

Asia is also playing an increasingly important role within the IMF. When the current round of governance reforms is completed, emerging markets and developing countries will see a 9 percent increase in quotas, while China, India, and Japan will be among the IMF’s top 10 shareholders.

Asia’s contribution to increased IMF resources

Lagarde gave the speech at the end of a day of meetings with top Malaysian officials including Prime Minister and Minister of Finance Mohammad Najib Abdul Razak, Bank Negara Malaysia Governor Zeti Aziz, and Minister of Finance II, Ahmad Husni.

During her stay in the Southeast Asian country, Lagarde paid tribute to Malaysia’s recent contribution to the IMF’s increased resources. Another contributor nation was the Philippines—her second port of call after Malaysia.