"Asia and the Promise of Economic Cooperation" By Christine Lagarde, Managing Director, International Monetary Fund

November 14, 2012

By Christine Lagarde
Managing Director, International Monetary Fund
Kuala Lumpur, November 14, 2012

As prepared for delivery

Good evening. Selamat sejahtera! It is a great pleasure to be here. Let me thank the Malaysian Economic Association and the Bank Negara Malaysia for organizing this event. I would especially like to recognize Governor Zeti, who is quite rightly regarded as one of the world’s best central bankers—and one of the longest serving! Let me also recognize Tan Sri Dato’ Mohamed Sheriff, the president of the Malaysia Economics Association.

It is good to be back in Asia. I was just here last month for the IMF Annual Meetings in Tokyo. I keep coming back for one simple reason: the increasing leadership role that Asia plays in the global economy—and in the IMF too.

Just look at how far the region has come. Over the course of three decades, emerging Asia’s share of world GDP jumped from 10 percent to 30 percent, living standards rose sixfold, and an incredible half billion people pulled themselves out of poverty. Over the past decade alone, emerging Asia has grown by more than 7½ percent a year.

More recently, during the dark days of the global financial crisis, it was Asia that kept the flame alive, accounting for about two-thirds of global growth. Clearly, the momentum is here, the dynamism is here, and the future starts here.

Malaysia is big part of this story. This is a country with a rich and ancient history. It has always been a great trading nation where cultures meet and thrive. I see this today as I visit between two important holidays for the different traditions—Deepavali and Awal Muharram. Today, Malaysia is one of Asia’s most dynamic and innovative centers—with eyes fixed firmly on the future.

It is with this future in mind that I would like to talk about three things today:

1. The policy agenda for advanced economies—and the implications for Asia.

2. The virtues and benefits of further economic cooperation within Asia.

3. And the broader importance of international policy cooperation.

1. Policy agenda in advanced economies and implications for Asia

Let me start with the global economy, where momentum continues to slow. We expect global growth of 3.3 percent in 2012 and 3.6 percent in 2013—lower than we thought a few months ago.

The slowdown itself is not the main story. The main story is that the slowdown is spreading to regions that have previously held up well. This is what worries me the most. In this interconnected world, there is really nowhere to hide.

We see this here. Malaysia has held up well so far with growth above 4½ percent, but we are in risky territory. This year, growth in emerging Asia fell to its lowest level since 2008—partly from domestic slowdowns in China and India, but also because of strong gusts from storms in the west.

These links are strong. Demand from Europe and the United States each account for about a third of emerging Asia’s net exports. Foreign participation in local sovereign debt markets has nearly doubled over the past five years. Again, we see this here in Malaysia, where foreigners now hold almost 30 percent of government bonds. So from all sides, Asia is exposed to sudden shifts in sentiment.

Going forward, we believe that growth will pick up again, and that Asia will retain its position as a growth leader—expanding 2 percentage points faster than the world average next year.

But none of this can be taken for granted. It depends on the actions of global policymakers, especially in the United States and Europe. And “action” is the operative word.

Here, I believe the west can learn from Asia’s own brush with crisis in the 1990s. In the wake of that crisis, Asia came through strong and resilient, on the back of sound macroeconomic and structural policies. Asians did not draw the wrong lesson from the crisis—they did not hunker down, pull up drawbridges, or withdraw from the world. Quite the contrary.

Look at the recent record. Both public and private sector finances have been managed well. Since the Asian crisis, corporate debt-equity ratios fell by two-thirds. Financial leverage and reliance on foreign funding are also lower. The ratio of short-term foreign debt to official reserves—a key indicator of external vulnerability—fell by a third or more.

In short, 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.

Given their importance, let me talk a bit about the United States and Europe, which have a special responsibility to act.

Of immediate concern, American policymakers must avoid the so-called “fiscal cliff” at all costs. If expiring tax provisions and spending cuts were indeed to come into play, growth in the United States would fall to zero or below—and the rest of the world will not be immune. This policy uncertainty must be resolved, and it will require all sides coming together.

The Eurozone, which is still facing crisis, must also deliver on its policy commitments at the national and regional level—fiscal, financial, structural. And again, all players must play their part.

So Europe must forge ahead with greater economic cooperation—especially through deeper fiscal and financial integration. A major priority for the Eurozone is a true banking union to complement its monetary union. As a first step, this means a single supervisory framework; and ultimately, there also needs to be a pan-European deposit guarantee scheme and a bank resolution mechanism with common backstops.

This kind of integration will protect the stability of the region as a whole. By coming closer together, Europe helps itself—and it also helps the entire global economy.

2. Increased Economic Cooperation within Asia

This brings me to my second area this evening—the virtues of further economic cooperation within Asia.

Just as in Europe, our interconnected world calls for new approaches in this region too. As the young Malaysian novelist Tan Twan Eng put it, “Moments in time when the world is changing bring out the best and the worst in people”. May we always choose the best!

Let me be clear on this point: I am not talking about political integration or the kinds of monetary union we see in Europe and in various other parts of the world. Rather, I am talking about the broader promise of economic cooperation in two areas in particular—trade and finance.

Trade integration

In terms of trade integration, Asia has already made great strides. Over the past decade, trade within Asia tripled, and regional trade among emerging Asia grew even faster.

With Asian trade, many tributaries flow together as a single great river. A typical pattern is that Asian economies send intermediate goods to China, which assembles them into final goods for exports. In fact, intermediate goods now account for over 70 percent of all Asian exports.

Malaysia is part of this flow—especially through exporting valuable electronic goods up the chain. Malaysia’s intermediate exports to China have increased fourfold since the mid-1990s. This “relay race” along the supply chain has served Malaysia and the region extremely well, making sure that common rewards flow to common efforts.

But this flow is never static. We know that China’s role is changing fast. Its current account surplus has already fallen from a peak of 10 percent to 3 percent of GDP. This is mainly driven by investment so far, but we expect a shift to consumption. This is the next big phase, and I believe that the ASEAN countries are well placed to benefit from this large and enticing market.

ASEAN countries themselves, of course, will also need to support domestic consumption. After all, the shift toward high-income status can only come through a strong middle class. And again, further regional integration can help with this, by offering new avenues for mutual gain.

Looking ahead, the formation of the ASEAN Economic Community in 2015 offers the vast possibilities of a common market. The Trans-Pacific Partnership can also deliver great benefits, especially by emphasizing service markets—a sector that has been too protected for too long.

There is no question about it: looking ahead, Asia can benefit from opening even more doors to trade.

Financial integration

What about financial integration? Here, there is even more scope for progress because financial integration is currently lagging behind trade integration. More than 90 percent of ASEAN cross-border portfolio investment flows are with advanced economies outside Asia. Asia—with its current account surpluses—is simply not investing enough of its savings in itself.

Certainly, we do see FDI flows within the region. Malaysia, for instance, is a big direct investor in Cambodia, Indonesia, Thailand, and Vietnam.

Greater regional financial integration could open up a host of new benefits. It can boost domestic demand—partly by making it easier for small businesses in countries like Malaysia to gain access to credit. It can make economies safer, by allowing more insurance against volatility and adverse developments. And one other important benefit: greater access to financial services by the poor can reduce inequality.

On a practical level, financial integration is eased by making local banking systems more open and competitive. The integration of ASEAN stock markets would help, as would a larger regional bond market, as envisaged by the Asian Bond Market Initiative.

With its Economic Transformation Program, Malaysia is helping to lead the way and is ready to take the next step—boosting productivity and growth to become a vibrant, high-income, country by 2020. This is more than aspiration—it is based on firm policy intention.

To support this transition, Bank Negara Malaysia has designed a financial sector blueprint that seeks a world-class financial system worthy of a high-income country. I believe that it can be done.

Indeed, Malaysia already has a history of innovative finance. It has become a world leader in sukuk, or shari’ah-compliant bonds—accounting for two-thirds of the sukuk market. Malaysia saw an opening and took it. I expect the future to be no different.

Further economic cooperation—despite the very different span of countries, cultures, and systems across Asia—is a big part of that future.

Making integration work

We should all recognize that integration does not come without costs. More financially-integrated economies are more exposed to storms. In particular, while capital flows can bring great benefits, they can also overwhelm countries with damaging cycles of crescendos and crashes.

At the same time, deeper financial market development allows an economy to put down strong roots and weather storms well. You know this here in Malaysia. Governor Zeti has pointed out that a mature financial system can handle capital flows without being overwhelmed. And it is testament to her superior economic management that Malaysia is well protected.

Economic management is the key. If the flows are coming through the banking system, then macroprudential tools make sense—such as tightening conditions for housing loans or having banks hold more capital. In other circumstances, temporary capital controls might prove useful. I should point out that Malaysia was ahead of the curve in this area.

Making the most of financial integration also means better regulation. Here, I am thinking of global rules like the Basel III reforms. I am also thinking of local rules, like stronger and more harmonized regulatory frameworks, including in the area of cross-border supervision.

Asia has a unique opportunity to get financial integration right—avoiding the missteps and excesses of the west.

One more point: 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 everybody and that vulnerable people are protected—and included.

Asia has some room for improvement here. Despite the tremendous fall in poverty over the past few decades, income inequality is on the rise. Even Malaysia, which made great strides in reducing inequality in the 1970s and 1980s, has not seen further reductions since then.

Making growth more inclusive means moving on many fronts:

  • There is room to spend more on healthcare and education, which are at relatively low levels in Asia.
  • There is room to cover more people under pension and unemployment insurance schemes—only 20 percent of the working-age population is covered in emerging Asia, as opposed to 60 percent in the OECD.
  • There is room to raise minimum wages for the poor, which are relatively low in Asia—and I understand that Malaysia has recently introduced a minimum wage policy.
  • And there is room to improve access to financial markets—right now, nearly 60 percent of the people in East Asia are excluded from the formal financial system.

I know that Malaysia is working hard on this important agenda, and I can see the progress that is being made. Now is the time to push even further.

3. International policy cooperation

So far, I have talked about the policy actions needed from the advanced economies and implications for Asia. I have talked about increased economic integration within Asia. Let me now turn to my third point—the importance of international policy cooperation.

As Tunku Abdul Rahman—Malaysia’s father of independence—put it, “Our future depends on how well many different kinds of people can live and work together”.

Asia understands this well. Countries cooperate and collaborate with each other at the regional level, at the global level, and through the IMF.

Starting with the regional level, the Chiang Mai Initiative Multileralization is a good example of the ASEAN countries’ commitment to deeper cooperation. I am also greatly encouraged by the emergence of the ASEAN+3 Macroeconomic Research Office (AMRO), which has begun to provide independent regional surveillance—gently nudging countries to act in concord with each other.

At the global level, Asia has a major and highly-respected voice in global economic governance, including through the G20 where it has six members.

Asia also plays an increasingly important role in the IMF. When our current round of governance reforms is completed, we will see a shift in quotas—countries’ shares in the Fund—of 9 percent since 2006 to the dynamic emerging markets and developing countries. China, India, and Japan will all be among our top ten shareholders.

Let me also mention that within the top management of the IMF, two Deputy Managing Directors—Naoyuki Shinohara and Min Zhu—are from Asia; as is Anoop Singh, our Director of the Asia-Pacific Department.

As we face an increasingly complex and interconnected world, we understand that the IMF needs to change and modernize—and we are doing so. We have certainly learned some lessons since the Asian crisis.

Let me give you a few examples of how we are trying to be even more effective in serving our global membership:

  • We are deepening our analysis of the dense patchwork of interconnections that crisscrosses the entire global economy and focusing more on economic and policy spillovers.
  • We are more flexible across a number of dimensions, including the time horizon for fiscal adjustment and policy responses for dealing with surges in capital flows.
  • We put more emphasis on protecting social safety nets and sharing the burden of adjustment fairly.

Of course, to support our global membership properly, we must also have the necessary resources. This year, the membership came together to boost our firepower by $461 billion—bringing our total lending power to over $1 trillion. Our membership also came together to ensure that we have enough concessional lending for the IMF’s poorer member countries in the years to come.

Why is this important? First, because it is a vote of confidence in the Fund. More than that, it is a vote of confidence in partnership, in solidarity, in the idea that by helping others, you are also helping yourself.

I am very appreciative that Asia—including Malaysia—played such a leading role in building that financial firewall.

At the end of the day, with its 188 member countries, the IMF is the premier forum for economic cooperation in the world today. It is the leading way for countries to stand together in normal times and help each other in tough times.

You could say that cooperation is in our lifeblood. We believe in cooperation and we want to help our members gain from cooperation.

We are at your service.


Let me conclude. I could not help but notice that Malaysia is using an eye-catching phrase to help brand its many advantages to the world: “Malaysia, Truly Asia”. This contains a wealth of wisdom. It suggests that Malaysia is poised to contribute to and share even more in the great promise of Asia.

Malaysia can do that by further embracing its neighbors, by further embracing the world—and in turn, by fully embracing its destiny.

That destiny lies within the common Asian destiny—to provide strength and leadership to the global economy of the 21st century, through cooperation and in partnership.

In another time, the Indian poet Tagore talked about the “opening of a new chapter in history” after a period of turmoil. “Perhaps that dawn will come from this horizon, from the East where the sun rises” he said.

This sentiment still holds true today. This is why I am back in Asia, and why I will keep coming back to Asia.

Thank you—terima kasih!


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