As we emerge from the Great Recession, a new economic order is forming - one no longer dominated by wealthy nations
Tan Keng Yam 19 January 2010
The next decade could be a golden age for Asia. But seeing this become reality 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 development and running of the financial sector, dealing with short-term economic and financial risks, particularly avoiding destabilising asset bubbles, rebalancing domestic versus external demand in growth models, and developing broader, deeper and more efficient financial systems. Given Asia’s strengths, I see no reason why Asian countries cannot do so and become a new source of global stability and prosperity (SEHK: 0803, announcements, news) .
The global economy has rebounded. After hitting a trough in the first half of 2009, it has seen consistent growth. Massive policy support provided by governments and central banks has worked. The recovery is stronger in economies that are not overleveraged and have room for huge fiscal stimulus, such as those in Asia, led by China and India, Brazil, and now followed by the US and Europe. The recovery should be sustained over this year, after which growth should settle to its long-term trend next year. Global growth could hit 3 per cent to 4 per cent this year, up from a contraction of close to 2 per cent last year. The global recovery has generally been stronger than most analysts’ expectations and could further surprise on the upside, at least for the next few quarters.
Growth, however, will be uneven, with the strongest performance coming from the emerging market economies, especially in Asia, which will benefit from an expected pickup in global trade and manufacturing; additionally, strong balance-sheet fundamentals remain supportive of domestic demand.
Economies at the centre of this crisis - the US and Europe - should continue to grow over the coming year. In the US, growth could be moderately strong in the first half of the year before slowing to a below-average pace. Although prospects for the US economy have improved, it does not look like the US will enjoy the growth spurt that typically follows a deep contraction. Europe, too, should benefit from the pickup in global trade, although a muted response in consumption tempers the likelihood of a strong bounce. Growth in Europe is likely to be weak.
Nevertheless, despite differences in growth, and other risks, the good news is that we appear to have avoided a global depression. The global economy has stabilised and is now recovering.
Beyond this recovery, the post-crisis environment will be very different from the world we have been used to, a world that has been dominated by the Organisation for Economic Co-operation and Development. My sense is that the global economic and financial environment will change in three important ways.
First, the global economy will be, to a greater extent than before, 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 major impact on the global economic and financial environment.
A key challenge for policymakers is how to properly time the withdrawal of unprecedented monetary and fiscal policies. 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.
The challenge for policymakers will be to convince markets that they have credible plans to ensure sustainable public finances over the medium to long term, while maintaining fiscal stimulus in the short term. In the emerging economies, policymakers will have to deal with rising inflation and likely asset price bubbles. In contrast to the developed countries, the strong recovery in emerging markets means that consumer price index inflation will be driven by narrowing and then positive output gaps and rising commodity prices. Asset prices, particularly property for Asia, have been supported by accommodative credit policies, a positive structural story and, in some countries, capital inflows.
Given the probability of protracted, extremely easy monetary policy settings in the developed world, and the managed currency regimes of some emerging markets - combined with their vulnerable underlying demand - it will be a challenging balancing act for policymakers to keep prices under control while not snuffing out growth or precipitating another downturn.
Finally, high unemployment and unhappiness over “bailouts” could lead to populist policies, including excessive regulation and protectionism. 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 are 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 the Bric nations: Brazil, Russia, India and China.
The rise of emerging markets is not a new trend but, over the next decade, we are going to hit a tipping point where the influence of emerging markets in economic, financial and geopolitical issues will be important, if not dominant.
The shift in economic power to the emerging world will probably increase geopolitical risks. For one, the emerging economies, especially the Brics, will become key global powers and increasingly demand more say in world affairs. Conflicts could also arise over natural resources. Severe demand and supply imbalances could lead to greater and more intense competition among nations for vital resources such as energy, arable land and key commodities.
The rise of emerging markets also puts pressure on unrestrained carbon-based growth. Aside from rising commodity prices, countries are going to face increasing environmental constraints which will require adaption and innovation if growth is not to be stifled.
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 and perhaps alternative part of their portfolio, emerging markets will become a core and unavoidable asset class. At the same time, emerging markets will become large players in new and old financial markets.
The third and final aspect of the post-crisis environment 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 what has occurred in the past. We should, therefore, not expect growth in the developed world to power a strong sustained recovery.
Over the next couple of years, government policies will have an inordinately large impact on the global economy and financial markets. A tipping point will be reached where emerging markets will be a significant then dominant global actor, and developed economies could face years of low to modest growth.
What does this imply for Asia? First, at the very broad level are the fundamental uncertainties raised by the apparent failure of Anglo-Saxon models of financial-sector regulation and development, as well as financial stability management. At the extreme, these paradigms seem to have put blind faith in markets and a lightly regulated private sector, including a belief that markets can regulate themselves. In the last decade we have seen a sequence of crises.
Notwithstanding these crises, the longer-term evidence points to the great benefits that sound and mature financial-sector development and liberalisation can bestow.
So what should Asia learn and do to keep the potential of well-functioning markets while minimising the risks of instability or crises? It will take time before we will know the answers 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. The challenge for Asian policymakers is to chart an appropriate path between private-sector leadership and appropriate public intervention and regulation in their financial sectors almost from first principles, learning from the mistakes of the West.
The second area of challenge for Asia is for policymakers to respond flexibly to risks as the global economy recovers. One medium-term challenge is managing asset prices. Like in the early 1990s, managing large capital inflows and prospective bubbles will be a major task.
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.
The rest of Asia will need to look at its own institutions and markets to drive more sustainable and higher-quality growth via strong productivity improvements. The winners will be those countries that can evolve to be among the world’s leading innovators and designers.
This brings me to the fourth important challenge for Asia arising from the economic crisis. Asian financial institutions and markets have been given a golden opportunity. The globalised Western banking system, hampered by capital constraints and re-regulation, will probably 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 and markets.
Fortunately, Asian banks generally came into this crisis much healthier than their global counterparts, given the experience of the Asian financial crisis in the 1990s. To take advantage of this opportunity, however, Asian banks and capital markets will need to develop quickly to step into the breach.
In this context, regulatory and development authorities in the financial sector in Asia need to co-operate as never before with each other and with financial institutions to develop regional financial and capital markets.
There will probably be bumps along the way, perhaps a few crises, but if we learn the right lessons from history, especially those of the recent Great Financial Crisis, we can retool and reorientate ourselves to propel Asia into its next stage of development.
This is an edited version of the speech delivered by Dr Tony Tan Keng Yam, deputy chairman and executive director of the Government of Singapore Investment Corporation at the Commonwealth Economic Forum in Taipei yesterday
3 comments:
The Asian locomotive
As we emerge from the Great Recession, a new economic order is forming - one no longer dominated by wealthy nations
Tan Keng Yam
19 January 2010
The next decade could be a golden age for Asia. But seeing this become reality 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 development and running of the financial sector, dealing with short-term economic and financial risks, particularly avoiding destabilising asset bubbles, rebalancing domestic versus external demand in growth models, and developing broader, deeper and more efficient financial systems. Given Asia’s strengths, I see no reason why Asian countries cannot do so and become a new source of global stability and prosperity (SEHK: 0803, announcements, news) .
The global economy has rebounded. After hitting a trough in the first half of 2009, it has seen consistent growth. Massive policy support provided by governments and central banks has worked. The recovery is stronger in economies that are not overleveraged and have room for huge fiscal stimulus, such as those in Asia, led by China and India, Brazil, and now followed by the US and Europe. The recovery should be sustained over this year, after which growth should settle to its long-term trend next year. Global growth could hit 3 per cent to 4 per cent this year, up from a contraction of close to 2 per cent last year. The global recovery has generally been stronger than most analysts’ expectations and could further surprise on the upside, at least for the next few quarters.
Growth, however, will be uneven, with the strongest performance coming from the emerging market economies, especially in Asia, which will benefit from an expected pickup in global trade and manufacturing; additionally, strong balance-sheet fundamentals remain supportive of domestic demand.
Economies at the centre of this crisis - the US and Europe - should continue to grow over the coming year. In the US, growth could be moderately strong in the first half of the year before slowing to a below-average pace. Although prospects for the US economy have improved, it does not look like the US will enjoy the growth spurt that typically follows a deep contraction. Europe, too, should benefit from the pickup in global trade, although a muted response in consumption tempers the likelihood of a strong bounce. Growth in Europe is likely to be weak.
Nevertheless, despite differences in growth, and other risks, the good news is that we appear to have avoided a global depression. The global economy has stabilised and is now recovering.
Beyond this recovery, the post-crisis environment will be very different from the world we have been used to, a world that has been dominated by the Organisation for Economic Co-operation and Development. My sense is that the global economic and financial environment will change in three important ways.
First, the global economy will be, to a greater extent than before, 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 major impact on the global economic and financial environment.
A key challenge for policymakers is how to properly time the withdrawal of unprecedented monetary and fiscal policies. 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.
The challenge for policymakers will be to convince markets that they have credible plans to ensure sustainable public finances over the medium to long term, while maintaining fiscal stimulus in the short term. In the emerging economies, policymakers will have to deal with rising inflation and likely asset price bubbles. In contrast to the developed countries, the strong recovery in emerging markets means that consumer price index inflation will be driven by narrowing and then positive output gaps and rising commodity prices. Asset prices, particularly property for Asia, have been supported by accommodative credit policies, a positive structural story and, in some countries, capital inflows.
Given the probability of protracted, extremely easy monetary policy settings in the developed world, and the managed currency regimes of some emerging markets - combined with their vulnerable underlying demand - it will be a challenging balancing act for policymakers to keep prices under control while not snuffing out growth or precipitating another downturn.
Finally, high unemployment and unhappiness over “bailouts” could lead to populist policies, including excessive regulation and protectionism. 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 are 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 the Bric nations: Brazil, Russia, India and China.
The rise of emerging markets is not a new trend but, over the next decade, we are going to hit a tipping point where the influence of emerging markets in economic, financial and geopolitical issues will be important, if not dominant.
The shift in economic power to the emerging world will probably increase geopolitical risks. For one, the emerging economies, especially the Brics, will become key global powers and increasingly demand more say in world affairs. Conflicts could also arise over natural resources. Severe demand and supply imbalances could lead to greater and more intense competition among nations for vital resources such as energy, arable land and key commodities.
The rise of emerging markets also puts pressure on unrestrained carbon-based growth. Aside from rising commodity prices, countries are going to face increasing environmental constraints which will require adaption and innovation if growth is not to be stifled.
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 and perhaps alternative part of their portfolio, emerging markets will become a core and unavoidable asset class. At the same time, emerging markets will become large players in new and old financial markets.
The third and final aspect of the post-crisis environment 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 what has occurred in the past. We should, therefore, not expect growth in the developed world to power a strong sustained recovery.
Over the next couple of years, government policies will have an inordinately large impact on the global economy and financial markets. A tipping point will be reached where emerging markets will be a significant then dominant global actor, and developed economies could face years of low to modest growth.
What does this imply for Asia? First, at the very broad level are the fundamental uncertainties raised by the apparent failure of Anglo-Saxon models of financial-sector regulation and development, as well as financial stability management. At the extreme, these paradigms seem to have put blind faith in markets and a lightly regulated private sector, including a belief that markets can regulate themselves. In the last decade we have seen a sequence of crises.
Notwithstanding these crises, the longer-term evidence points to the great benefits that sound and mature financial-sector development and liberalisation can bestow.
So what should Asia learn and do to keep the potential of well-functioning markets while minimising the risks of instability or crises? It will take time before we will know the answers 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. The challenge for Asian policymakers is to chart an appropriate path between private-sector leadership and appropriate public intervention and regulation in their financial sectors almost from first principles, learning from the mistakes of the West.
The second area of challenge for Asia is for policymakers to respond flexibly to risks as the global economy recovers. One medium-term challenge is managing asset prices. Like in the early 1990s, managing large capital inflows and prospective bubbles will be a major task.
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.
The rest of Asia will need to look at its own institutions and markets to drive more sustainable and higher-quality growth via strong productivity improvements. The winners will be those countries that can evolve to be among the world’s leading innovators and designers.
This brings me to the fourth important challenge for Asia arising from the economic crisis. Asian financial institutions and markets have been given a golden opportunity. The globalised Western banking system, hampered by capital constraints and re-regulation, will probably 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 and markets.
Fortunately, Asian banks generally came into this crisis much healthier than their global counterparts, given the experience of the Asian financial crisis in the 1990s. To take advantage of this opportunity, however, Asian banks and capital markets will need to develop quickly to step into the breach.
In this context, regulatory and development authorities in the financial sector in Asia need to co-operate as never before with each other and with financial institutions to develop regional financial and capital markets.
There will probably be bumps along the way, perhaps a few crises, but if we learn the right lessons from history, especially those of the recent Great Financial Crisis, we can retool and reorientate ourselves to propel Asia into its next stage of development.
This is an edited version of the speech delivered by Dr Tony Tan Keng Yam, deputy chairman and executive director of the Government of Singapore Investment Corporation at the Commonwealth Economic Forum in Taipei yesterday
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