Asian economy


IMF Annual meetings in Singapore of the World Bank are the first to take place in Asia since the Hong Kong meetings nearly a decade ago.

The contrast for the region could hardly be starker as global financial leaders gather here. In the intervening nine years, Asia has recovered from a financial crisis and reestablished itself as the most dynamic and rapidly growing region in the global economy.

IMF’s current Asia and Pacific Regional Economic Outlook shows, prospects continue to look good. Economic growth in emerging and industrial Asia is expected to reach 7.25% this year, and remain at about 7% in 2007. Inflation should also remain well contained.

Indeed, Asia has shown considerable resilience, reflected by its quick recovery from global financial market volatility. Prospects for capital flows to support investment are solid.

It is true that the global economic environment presents real risks for Asia. Growth in the US, in particular, remains critical to the region’s prospects. Higher oil prices could also reduce growth and push up inflation. And a more fundamental turn away from investment in emerging markets than seen in the middle of the year could slow growth and weaken regional financial markets. On the whole the region is well placed to deal with any risks.

Looking to the next decade, Asian policy makers will face new challenges as they seek to maintain economic momentum and extend the benefits of rapid growth to all. The IMF’s current regional outlook focuses on several of these challenges.

First, sustaining Asia’s impressive economic performance over the medium term will require a rebalancing of growth away from a heavy dependence on exports and toward more autonomous domestic demand. Such rebalancing would also contribute along with structural reforms in the European Union, fiscal consolidation in the US, and increased exchange rate flexibility in Asia to an orderly unwinding of global imbalances. Consumption in emerging

Asia has failed to keep up with rapid GDP growth, reflecting in part its still young population, which favors saving for the future.

The prospective ageing of much of Asia, which will bring many of its own challenges, should raise consumption over the medium term. But policies can help. While the right approach will vary from one country to the next, reducing the need for precautionary savings—by ensuring adequate provision of education, healthcare and social safety nets and enhancing household access to bank lending and capital markets can play a significant role.

Investment also continues to lag in some countries, in particular for small and medium-sized enterprises producing for domestic markets. Access to bank lending can be done by improving information on credit risk and developing capital markets including corporate bonds.

Countries are developing domestic bond markets, strengthening market infrastructure, harmonizing rules and practices, and removing impediments to cross-border capital flows. But greater integration also brings new risks, which will place a premium on better risk-based supervision and more international co-operation and supervision.

Asia is facing a growing divide between divide between the rich and the poor. For many years, emerging Asia experienced the best of both worlds rapid growth and increased equality but more recently the region has been steadily rising inequality and growing polarization. This has been prevalent along both geographic and urban and rural lines. This matters, because rising inequality makes it more difficult to reduce poverty, and also because large income disparities can make it harder to achieve consensus on good policies.

These disparities only make for a more volatile macroeconomic environment, and lower economic growth over the longer term.

No single factor can explain the rise in inequality. It is a global phenomenon, and no single policy measure can reverse it. But governments interested in spreading economic opportunity may need to consider increased and more effective education spending, providing economic infrastructure, especially in lagging regions, and reforms to eliminate both labor market dualism and barriers to financial sector access by the poor.

Asia’s leaders are well aware of these challenges, each of which will require considerable attention in coming years. Others, perhaps not yet anticipated, may also arise. But the region appears well equipped to meet these challenges and to continue its role as a global leader in the decade ahead.