Growth in Asian region has rebounded since crisis, with economic output already returning to pre-crisis levels (photo: Hoang Dinh Nam/AFP/Getty Images)
ASIA'S GROWTH REBOUND
In a public lecture in Singapore, jointly hosted by the Lee Kuan Yew School and the Monetary Authority of Singapore, Shinohara said that Asia will be “a leading force in reshaping the global economy. Asia’s voice through its economic success and policy leadership is louder than ever before.”
Economic strength amid financial turbulence
Growth in Asia has rebounded impressively since the crisis, and output has returned to its pre-crisis levels. The greater role of domestic demand as a source of growth and the quick return of foreign capital have helped underpin Asia’s turnaround. The outlook remains favorable, notwithstanding the downdraft of recent turbulence in international financial markets.
Asia’s strong recovery marks a break from the past. “For the first time, Asia’s contribution to a global recovery is outstripping that of other regions,” Shinohara said. He sees this as “a testament to Asia’s resilient regional economy and the improvements in the economic framework that have been put in place over the past decade.”
The immediate challenge will be to manage any fallout from economic strains elsewhere in the world. Shinohara said that financial market troubles, reflecting concerns about the large deficits and high public debts in many advanced economies, are the key risk.
Most of Asia is not weighed down by the same debt problems, so policymakers generally have room to respond to developments.
Shinohara stressed, however, that ample policy space does not make Asia immune to adverse developments outside the region. Weaker demand in advanced economies would disrupt Asia’s export markets. He also called for policymakers in Asia to be alert to the threat that financial flows could be affected by sudden shifts in investor sentiment.
Policy coordination important to global growth
Shinohara said that “there is enormous benefit from—and indeed durable global growth depends on—a collaborative policy effort across countries and regions.” In this regard, Asia is well placed to lead by example through its successful economic management and track-record of constructive intra-regional dialogue.
“In today’s world, policies in one country often have far-reaching effects on others. This is particularly true with the need for many advanced countries to consolidate their fiscal positions in the coming years,” said Shinohara.
Securing global growth in this context will require carefully timed, growth-friendly fiscal adjustment tailored to country circumstances.
But, safeguarding Asia’s growth prospects will require policies that bolster home-grown sources of growth. In this regard, Shinohara said that “financial sector reform and growth-enhancing structural policies will help, as will a more flexible exchange rate.”
Countries in Asia should frame their policies to contend with the potential for both capital inflows and outflows.
The challenge will be to ensure that capital flows are intermediated efficiently and do not undermine the stability of asset markets or local financial systems.
In addition to sound macroeconomic policies and the possibility of more flexible exchange rate management, Mr. Shinohara said that “macro-prudential measures can help safeguard financial stability and shield the real economy from disturbances stemming from volatile capital flows.” “In some exceptional circumstances, controls on capital flows may be useful and can provide temporary breathing space during periods of large swings in capital flows.”
Lessons for all
Not only do policy choices of Asian economies have an important bearing on the global economy, but there are lessons for all in Asia’s skillful economic management through the crisis.
Asia’s “economic strength is a lesson in itself—the dividend of effective policies, enduring reforms, and growing regional cooperation,” Shinohara said. While experiences in Asia can benefit countries the world over, they also have broader relevance to the IMF’s efforts to make the international financial system less prone to crises.
Advances in regional economic monitoring and analysis complement the IMF’s efforts to strengthen its assessment of cross-border linkages and vulnerabilities.
The benefits of regional arrangements are well known in Asia. The multilateralization of the Chiang Mai Initiative last March is another important regional initiative, and Shinohara said the IMF will soon consult with members of regional arrangements to explore the scope for greater collaboration.
Shinohara said that his participation in the event in Singapore, and “others in the months ahead, are an opportunity to exchange views with Asia.” The high-level conference co-hosted by the Government of Korea and the IMF planned for July will be an opportunity to exchange views about the lessons learned from the past as well as about Asia’s vision about managing the challenges ahead.
