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Finance & Development
A quarterly magazine of the IMF
June 2006, Volume 43, Number 2

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Asia's Role in the World Economy

ASIA has become a key part of the global economy, boasting three of the ten largest economies (China, Japan, and India) and
accounting for more than 35 percent of world GDP.

Asia's share of world GDP exceeds that of the European Union and of the United States...

Asia's share of world GDP is rising, thanks to its economic dynamism. Indeed, the region's economy, having fully recovered from the 1997–98 financial crisis, is now the fastest growing in the world, contributing close to 50 percent of world growth.

...and the region leads the world in growth.

Asia's vitality largely reflects its successful integration into the world economy. Apart from a brief dip after the collapse of the 2001 information technology boom, its share of world exports has increased steadily and now stands at 27 percent. Intraregional trade is also growing as countries position themselves at different stages of a regional supply chain. The rise in exports, coupled with generally sluggish domestic demand, has translated into sizable current account surpluses. But if China is excluded, Asia's surplus is now decreasing under the weight of growing oil import bills and, in some cases, a domestic demand recovery. In contrast, China's current account surplus more than doubled in 2005 on the back of strong export growth, reaching 7 percent of GDP.

As Asia' exports have increased, so has its current account surplus...

...but excluding China, the region's surplus is diminishing, mostly due to high oil prices.

Asia has also integrated into global capital markets, capturing about 40 percent of net private capital flows going to emerging markets. Two-thirds of private equity flowing into the region is in the form of direct investment. These capital inflows, combined with the region's current account surplus, have led to a large accumulation of foreign exchange reserves.

Over the past few years, foreign exchange reserves have risen sharply...

Exchange rate flexibility has increased significantly in most of the region (outside China, Hong Kong SAR, and Malaysia). While the strong wave of capital inflows in 2003 led to a large accumulation of reserves, more recent waves have led to less reserve accumulation and greater exchange rate movement.

...but outside China, the reserve buildup has slowed since 2004, as exchange rates have become more flexible.

In the years ahead, the region is expected to account for a rising share of the world economy, thanks in large part to fast-growing India and China. The challenge will be to strengthen domestic demand by reviving investment in emerging Asia and consumption in China.

Asia needs to put its surpluses to work at home...

In Asia, the proportion of old people is expected to increase, as it is in other regions. This is particularly true in Japan, where the overall population is already shrinking. Aging populations will reduce potential GDP growth and strain fiscal positions, as pension and health care expenditures increase.

...and plan now for challenges posed by aging populations.

Unless otherwise indicated, the source for all charts is IMF, World Economic Outlook database.