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Finance & Development
A quarterly magazine of the IMF
June 2007, Volume 44, Number 2

Point of View

Asia's Decade of Transformation
Zeti Akhtar Aziz, Governor, Bank Negara Malaysia

IN retrospect, the Asian crisis 10 years ago marked not a halt but the start of a greater role for Asia in the global economy. Since the 1997 crisis, Asian countries have seized the opportunity to undertake significant restructuring and reforms and to strengthen the dynamism and resilience of their economies.

The payoffs from these efforts are visible across the region. Asia is now home to the world's fastest-growing economies, which contribute about 40 percent of global output and one-fourth of world trade and hold nearly two-thirds of the world's international reserves. Most economies in the region have shared in this growth, which has helped to reduce poverty, improve living standards, and expand opportunities for more than half the world's population.

Asia has also deepened its integration with the global economy. Total trade increased from 38 percent of GDP in 1996 to 61 percent of GDP in 2006. Although such a high degree of openness means that Asia is exposed to unfavorable external developments, the region has demonstrated time and again its capacity to rebound from adverse shocks within a short period. Indeed, after the 1997 crisis, most affected economies were able to restore stability and resume growth after just one year.

Renewed dynamism

How did Asia achieve this dramatic transformation from crisis to recovery so fast? Three key elements stand out: enhanced economic flexibility, strengthened fundamentals, and improvements in the financial and corporate sectors.

First, the greater flexibility of Asian economies has facilitated adjustment to the changing global and regional environment, resulting in significant changes in Asia's economic structures and a shift to new growth sectors in response to changing dynamics in global competitiveness.

Greater flexibility, including more labor and capital mobility, has enabled Asian countries to increasingly participate in the globalization of production, particularly in manufacturing, and to expand their technology-related services. At the same time that the North Asian economies have developed increasingly sophisticated products with global brands, the Southeast Asian countries have seen shifts to resource-based products and expansion of the services sector.

There has also been a greater rebalancing of the sources of growth between domestic and external demand. Private domestic consumption has grown. With saving rates remaining high, there is still potential for this trend to be augmented. Consumption demand has been supported by rising incomes, with real GDP per capita about 75 percent higher than before the crisis. In the long term, this trend is expected to be reinforced by the demographic structure of many of the countries in the Asian region that have younger populations.

The private sector is also more involved. Private investment, which was initially slow to recover, has gained momentum. The potential for greater investment is also driven by rising infrastructure requirements throughout the region, estimated at $1 trillion over the next five years. The investment climate has improved amid the better economic conditions and more efficient functioning of public delivery systems that have been put in place.

Second, Asia's macroeconomic fundamentals have strengthened. Current account balances are in surplus, foreign currency reserves are at record highs, and external debt levels are significantly lower and have improved maturity profiles. Governments' budget positions are broadly stronger, and governments are taking measures to ensure greater fiscal sustainability. Inflation has generally been contained, despite being affected by the recent higher oil prices. More flexible exchange rate regimes are also in place, creating the potential for more efficient adjustments to external shocks.

Third, financial and corporate reform and restructuring are having an impact. The payoffs from structural enhancements in the financial sector have been significant. Asia's banking sectors are stronger, as seen in their capitalization, profitability, and asset quality. Corporate governance, risk management, and regulatory and supervisory oversight have improved. Similarly, corporate balance sheets have strengthened considerably, with significantly improved standards for corporate governance. Another major development since the crisis has been the development of the capital markets, particularly the bond market. This has led to greater diversification of sources of financing for the corporate sector as well as expanded asset classes for investors.

Asia's stronger domestic financial sectors have established the preconditions for greater liberalization and deregulation, enhancing not only the range of business opportunities for financial institutions but also their potential to expand beyond domestic borders and build further on regional economic linkages.

More regional integration

The cumulative effect of all the changes since the crisis has been to position Asia as a dynamic and resilient region in the global economy. The diversity in economic structures, income levels, and resource endowments has also helped accelerate the regional integration process. Greater economic regional integration will further unlock Asia's potential.

The region has already begun to reap the benefits of increased intraregional integration on several fronts. Trade within Asia now accounts for more than half of total trade in the region. The emergence of large economies in Asia and the rapidly growing economies in Southeast Asia have created a large and expanding export market, thereby reducing overconcentration in the traditional export markets. The Asian economies have also seen increased cross-border investment undertaken to capitalize on growing opportunities and to leverage the region's diversity of comparative advantages and expertise.

Greater regional financial integration will reinforce and complement expanding trade and investment linkages. It will also play an important role in facilitating the allocation of some part of Asia's surplus funds into productive investments in the region. In addition, more effective and efficient intraregional financial intermediation of the funds will help reduce financing costs, stabilize financial prices, and increase the potential for improved diversification, thus promoting regional financial stability.

While integration is gathering momentum, Asia's ties with other emerging regions have also been enhanced. There is a rising trend of trade and financial linkages between Asia and the Middle East. The "silk road," on which silk and spices were once traded, is now a route on which oil, manufactured goods, and investments flow. Already, more than half the exports from the Gulf states are destined for Asia, and more than one-fifth of their imports are from Asia. In addition, the emergence of Islamic financial products and services has brought together financial service providers across continents to trade on this new route. Indeed, the new silk road opens up the prospect of increased opportunities for economic progress and prosperity.

Asian integration, both within the region and with other parts of the world, will boost the region's potential to become an important engine of growth in the global economy. This process should contribute to the rebalancing of global growth and to the adjustment of global imbalances.

Strengthening cooperation

During the 1997 crisis, the Asian economies did not come together to contain the crisis and facilitate its resolution collaboratively. The severity of the crisis for the financial markets and, subsequently, for the domestic financial systems and economies was a new phenomenon for the region. The countries had to restore domestic stability prior to formulating a holistic approach to managing the crisis. In addition, there was no authoritative assessment of whether the programs the crisis countries subsequently implemented would produce the desired outcomes.

Ten years on, efforts to strengthen the domestic economies and the financial systems have been reinforced by improved regional surveillance, including of cross-border financial flows, and by putting in place institutional arrangements that could contribute to crisis containment and management. Regional cooperative efforts will continue to be strengthened.

As Asia advances toward increased integration and strengthened cooperation, it is important to recognize the different regional strengths and complementarities, together with those of the multilateral agencies, and the need to maximize synergies and avoid duplication of efforts. Constructive engagement is essential. Efforts in some areas will need to be undertaken by the regional authorities, and some efforts will benefit from regional and greater international cooperation. As part of this process, Asia needs the space to pursue greater regional integration and cooperation. This process would require mutual respect and greater engagement with the region and the multilateral agencies.

Asia's increasing role in the global economy further reinforces the need for it to have a commensurate voice and representation in the international financial community. Asia's perspectives need to be better understood and to be taken into consideration in international discussions and decisions. This would contribute to more comprehensive and effective solutions to address the current global economic and financial challenges.