This is Tony Tan's vision of a “Golden Age” for Asia.It is published by the Straits Times of Singapore."Over the past two years, the world has experienced what is likely to have been the most severe economic and financial crisis of the modern era. But my belief is that the next decade could be a “Golden Age” for Asia. Seeing this become a reality, however, will require us to adapt and innovate, so we can overcome some difficult challenges. These include finding the right balance between the private sector and public management in the financial sector; dealing with short-term economic and financial risks, particularly destabilising asset bubbles; rebalancing domestic versus external demand in growth models; and developing broader, deeper and more efficient financial systems.
First, an update on the global financial crisis.
The global economy has rebounded. After hitting a trough in the first half of 2009, the global economy has seen consistent growth. Massive policy support by governments and central banks has worked.
The recovery should be sustained over this year, after which growth should settle to its long-term trend in 2011. Global growth could hit 3 per cent to 4 per cent in 2010, up from a contraction of close to 2 per cent last year. The recovery has generally been stronger than most analysts expected and could further surprise on the upside.
Growth, however, will be uneven, with the strongest performance coming from the emerging market economies, especially Asia.
Economies at the centre of this crisis — the United States and Europe — should continue to grow over the coming year. In the US, growth could be moderately strong in the first half of 2010 before slowing down to a below-average pace. Although prospects have improved, it does not look like the US will enjoy the growth spurt that typically follows from a deep contraction. Growth in Europe is likely to be weak.
Beyond this recovery, the post-crisis environment will be very different from the world we have been used to, a world dominated by Organisation for Economic Cooperation and Development countries. My sense is that the global economic and financial environment will change in three important ways.
First, the global economy will be extremely reliant on policymakers for the next couple of years. Extensive government support for the financial sector — liquidity support, asset purchase and guarantee schemes, and public recapitalisation programmes — remain in place and have facilitated the healing of money and credit markets. Monetary and fiscal policies are extremely loose and have mitigated the collapse in domestic demand. The current recovery is being sustained by such unprecedented policies. Changes in policies or mistakes will thus have a significant impact.
A key challenge for policymakers is how to time the withdrawal of monetary and fiscal supports. The recovery could be derailed if withdrawal is too early or too sharp. However, policymakers run the risk of creating excessive inflation over the medium term, if emergency levels of policy stimulus are left unchanged for too long.
In the emerging economies, policymakers will have to deal with rising inflation and likely asset price bubbles. Asset prices, particularly real estate for Asia, have been supported by accommodative credit policies and, in some countries, capital inflows. Given likely protracted easy monetary policy settings in the developed world and managed currency regimes in some emerging markets, it will be a challenging balancing act for policymakers to keep prices under control while not snuffing out growth or precipitating another economic downturn.
High unemployment and unhappiness over “bailouts” could lead to populist policies, including excessive regulation and protectionism. There is, especially in the developed world, a feeling that the financial sector has “rigged” the system, so that it cannot lose. The upcoming bonus season, when investment professionals are expected to receive record compensation so soon after last year’s turmoil, will only serve to accentuate such feelings.
There is little doubt that some rebalancing towards better regulation and supervision is needed. But in this environment, there is a risk that such reforms may be too excessive and end up stifling innovation and growth.
The second major change in the post-crisis environment is the increasing importance of the emerging economies, anchored by Brazil, Russia, India and China, or the Brics. As noted by Antoine van Agtmael, who first coined the term “emerging markets”, the next decade is likely to demonstrate that we are truly living in an ‘emerging markets century’.
Emerging economies are expected to account for more than half of the world’s gross domestic product (GDP) growth over the next decade. As estimated by Goldman Sachs, the combined GDP of the Brics will exceed that of the US by then. China will be three times larger than today and two-thirds the size of the US. Emerging economies are going to displace the G-7 as the world’s largest economies, even if their per capita incomes are still lower.
The shift in economic power to the emerging world will likely increase geopolitical risks. For one, emerging economies, especially the Brics, will become key global powers and demand more say on world affairs. An awkward transition is likely to occur: In terms of military power, the US is likely to be dominant for decades to come, and will be called upon to carry out most of the heavy lifting in global trouble spots. However, the US will be heavily dependent on foreign countries, including key emerging geopolitical rivals, to finance its large public debt.
The rise of emerging markets will also put pressure on unrestrained carbon-based growth. Countries are going to face increasing environmental constraints, which will require adaptation and innovation if growth is not to be stifled. Our current carbon-based growth model will need to become more carbon-efficient and environmentally sustainable. This is especially true as an increasingly sophisticated population adds to pressures for more environmentally friendly policies.
Finally, for investors, the rise of emerging markets will mean that a larger proportion of their investments will be in these markets. Far from being a risky part of their portfolio, emerging markets will become a core and unavoidable asset class. At the same time, emerging markets will become a leading source of investment and credit.
The third aspect of the post-crisis environment that I would like to emphasise is the longer-than-expected time it might take for the developed world to fully heal from this crisis. The current recovery could be strong, at least in the very short term, but even the most optimistic economist expects the bounce to be much weaker than in the past. We should not expect growth in the developed world to power a strong sustained recovery.
There are several reasons for this: Notwithstanding substantial improvements, the bulk of the globalised banking system, consisting of major banks in the US and key parts of Europe, are likely to remain impaired and subject to greater regulation. In the US, the banking sector is being supported by massive policy intervention and will likely be stable enough to support sub-par growth. However, it may not be strong enough to support credit needed for sustained growth above potential growth.
Also, US household consumption is unlikely to be robust. Household de-leveraging is likely to take a number of years, keeping overall recovery muted.
What will all this imply for Asia? I group Asia’s challenges into four areas.
First, at the very broad level are the fundamental uncertainties raised by the apparent failure of Anglo-Saxon models of financial sector regulation. At the extreme, these paradigms seem to have placed blind faith in markets and a lightly regulated private sector.
Notwithstanding this, the longer-term evidence points to the great benefits that sound financial sector development and liberalisation can bestow, especially in enabling a successful transition from an emerging to a developed economy.
So, what should Asia do to keep the potential of well-functioning markets while minimising the risks of instability? It will take time before we will know the answers to this question, but Asian countries have never had a blind belief that markets work best or that the public sector is always inferior to the private sector.
Second, Asian policymakers need to respond flexibly to risks as the global economy recovers. One medium-term challenge is managing asset prices. Across the region, we have seen significant rises in equity and real estate prices. These have not, in general, hit their previous peak and can be justified by positive fundamentals. But continued low interest rates could push prices higher and eventually lead to bubbles. Like in the early 1990s, managing large capital inflows and prospective bubbles will be a major task for policymakers. Asian countries have to be vigilant, so that they do not repeat the same mistakes that led to the 1997-98 Asian financial crisis.
The third area of challenge for Asia is the need to rebalance to a more sustainable growth model. This is particularly true for countries with large populations like China and India. Asia’s economic growth model will need to be reoriented from depending largely on exports to a more balanced model that is also dependent on services and domestic consumption.
This brings me to the fourth challenge for Asia. Asian financial institutions and markets have been given a golden opportunity. The globalised Western banking system, hampered by capital constraints and re-regulation, will likely not be able to intermediate the massive capital demand needed to finance Asian growth. This leaves the playing field unusually open for Asian financial institutions.
Fortunately, they generally came into this crisis much healthier than their global counterparts. In order to take advantage of this opportunity, however, Asian banks and capital markets will need to develop quickly. In this context, the regulatory authorities in Asia need to cooperate as never before with one another and financial institutions to develop regional financial and capital markets.
These are difficult challenges, but I am optimistic we can overcome them. Asia’s fundamentals are generally sound, policymakers have lots of flexibility, and the population is hard-working and educated. The next decade could thus be a “Golden Age” for Asia."
