Typical street scene in Santa Ana, El Salvador. (Photo: iStock)

Typical street scene in Santa Ana, El Salvador. (Photo: iStock)

IMF Survey : Asia Faces Five Challenges to Its Economic Future

May 29, 2014

  • F&D magazine examines the five hurdles to Asia’s sustained growth
  • China rebalancing offers economic opportunity for rest of developing Asia
  • Region’s diversity and adaptability key to continued growth

Asia faces five challenges as it pursues sustained economic growth, says the IMF’s Finance & Development magazine: overcoming the middle-income trap, improving its institutions and governance, coping with an aging population, curbing rising inequality, and promoting financial development.

Hanoi, Vietnam, celebrates its 1,000-year anniversary; Asian countries face diverse challenges as they strive for economic success (photo: Getty Images)

Hanoi, Vietnam, celebrates its 1,000-year anniversary; Asian countries face diverse challenges as they strive for economic success (photo: Getty Images)

ASIA’S PROSPECTS

If current trends continue, Asia’s economy will surpass those of the United States and Europe combined in less than two decades—a prospect that has prompted some to dub the 21st century the Asian century. But, “while Asia’s future appears bright,” writes the IMF’s Asia director Changyong Rhee, “its success is not guaranteed. It depends crucially on choosing the right policy mix to contain risks and secure growth.”

Poverty, middle-class trap, or new growth model

The June 2014 issue of F&D magazine, just released, says that all parts of the diverse region face challenges. Asia still has close to 700 million poor people—65 percent of the world’s poor, defined as living on less than $1.25 a day—and income inequality is growing. The region’s emerging markets face the task of moving beyond middle-income status and joining the ranks of advanced economies. And several of Asia’s industrial economies have embarked on the difficult process of transforming their growth model.

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If things slow down more in China than expected, other countries in the region will pay the price. In Japan, there is a risk that Abenomics-related measures—based on Prime Minster Shinzo Abe’s “three arrows” economic plan—could be less effective in boosting growth than envisaged, particularly if structural reforms in labor and product markets fall short of expectations and fail to raise consumer and investor confidence. And domestic and global political tensions could hamper trade or weaken investment and growth across the region.

If any of these risks come to pass, they would likely moderate, rather than halt, positive momentum in the region. But deeper structural problems could create more difficult hurdles for countries across the region as they pursue sustained growth. The latest issue of F&D looks at Asia’s prospects from a variety of angles, seeking to provide insight into the region’s economic present—and future.

David Dollar of the Brookings Institution looks at the rebalancing of China’s economy—from investment toward consumption—and assesses the implications of that shift for developing economies in the region. Gradual appreciation of the renminbi, increased flexibility in rural-urban migration, and other adjustments by the regional powerhouse are opening up opportunities for other developing countries in Asia, including increased tourism and manufactures exports.

Rules of the road

Shikha Jha and Juzhong Zhuang of the Asian Development Bank researched the role of governance in Asia’s prosperity. They found that different elements of governance come into play at different stages of development. In particular, the link between growth and two indicators of governance--government effectiveness and regulatory quality-- is stronger in Asia than in other parts of the world.

A glimpse at the future of Asian finance by the IMF’s James Walsh concludes that even as the region’s financial systems become larger, more complex, and more interconnected, they must remain nimble and ready to adjust to new realities.

Malaysian central bank governor Zeti Akhtar Aziz offers her point of view on Asia’s resilience and how the region can cope with financial and economic transitions in the rest of the world. She says its diversity, both within economies and across the region, is key to sustaining Asia’s growth potential.

Articles on Australia’s increased integration with Asia, the Korean staple kimchi, and the global reach and economic impact of Asian cultural exports such as Korean soap operas and Bollywood round out F&D’s Asia package.

â–  Also in the June 2014 issue of F&D, researchers Andrea Pescatori, Damiano Sandri, and John Simon find that over 5-, 10-, and 15-year horizons, there is no clear point at which a nation’s debt compromises its medium-term growth. IMF economists Rex Ghosh, Mahvash Qureshi, and Charalambos Tsangarides examine the cost of committing to a fixed exchange rate, whether explicit or not. Prakash Loungani profiles Christopher Pissarides, whose pioneering work on unemployment and labor markets earned him the Nobel Prize in 2010. And Journal of Economic Perspectives managing editor Timothy Taylor discusses economics and morality, delving into the rich yet sometimes tortured relationship between the two.