Sunday, January 9, 2011

Asia to Lead Global Recovery, Flex Muscle on World Stage

As Asia rings in the new year in 2011, will it ring in a new economic order too? For two generations, with India a conspicuous exception, much of Asia relied on global demand to power its growth. But as the world economy claws its way back from crisis, some are looking to Asia to step up and lead the road to recovery.

With the glaring exception of Japan, Asian economies are recovering earlier and stronger than many others worldwide.

From Bangalore to Beijing, Asians have become a growing force on the global canvas — trading, building, investing and innovating.

Asians have assumed new weight in the G20 and Bretton Woods institutions.

In May, as part of a general increase in capital, rich countries agreed to give up 3.1 percentage points of voting shares in the World Bank to give emerging economies greater voting power.

Bretton Woods is hardly the only table that matters in international relations but the agreement made India the No. 7 shareholder in the Bank, with greater voting power than Russia, Canada, Australia, Italy and Saudi Arabia.

Still, Asia’s major economies have not managed to become assertive actors on the global stage.

The central question then will be whether Asia’s most successful countries can turn their economic success into global clout in 2011.

Looking back, three things strike me about Asia’s economic role on the world stage in 2010:

First, Asia consolidated its role as the essential player driving global recovery.

Developing Asia, including China, India and five major Asean nations, maintained or exceeded 6.5 per cent economic growth in 2008 and 2009, a stark contrast to the advanced economies’ collective negative growth over the same period.

Indeed, while the advanced economies are predicted to muster 2.1 percent growth this financial year, this will be easily outstripped by developing Asia’s 8.4 percent economic growth over the same period.

Second, Chinese demand now powers much of Asia’s growth — South Korea is a case in point. Long one of Asia’s best performers, South Korea’s economy contracted by 5.6 percent in the fourth quarter of 2008.

Yet it bounced back in 2010, with International Monetary Fund projections reaching 6.1 percent growth for the year, on the back of strong domestic, Chinese, Indian and emerging market demand for its products.

In fact, demand in China and the rest of Asia managed to insulate South Korea’s economy from slowdowns in the United States and Europe. Persistent worries in Seoul about the export sector are therefore as much about weakening demand in China, where growth is moderating, as they are about weakness in traditional markets.

Third, Asians continued to forge trade agreements and investment arrangements, often on a regional basis.

By contrast, the US dithered until the 11th hour on its free trade agreement with Seoul. One question for Washington now will be how quickly it can get back into the trade game in 2011.

My bet is that the dominant strategic pattern will be reinforced in 2011.

Across Asia, Chinese demand is now a central driver of other countries’ economic growth and in many cases, China is the top trade partner. But Beijing’s long-term strategic intentions inspire deep anxiety.

As a result, economic and security policies will increasingly collide. Economic integration with China will tighten, but Asian countries will strengthen defense and political coordination with the United States — and each other — as a hedge against Beijing’s expanding strategic weight.

Will 2011 be interesting? You bet.

At Eurasia Group, the political risk consulting firm where I run the Asia practice group, we’re watching several stories as they unfold:

For one, currency intervention in Asia should rise as governments and central banks navigate the exchange rate thicket.

US quantitative easing, inflation fears in emerging markets and the effects of euro-zone debt presage a tumultuous year for currency management in Asia.

Governments will continue to intervene in markets, fiddle with interest rates and potentially raise the cost of moving capital to limit both the pace and extent of currency appreciation.

Responses to inflation will diverge.

Many governments will struggle to control inflation — the result of two years of expansionary monetary policies, government initiatives to limit currency appreciation and food shortages from difficult harvests across Asia in 2010.

The general goal will be to normalize monetary policies, but this will not happen at a uniform pace.

Asia’s infrastructure buildout should accelerate in China and India, and also Southeast Asia.

The murky regulatory regimes and political constraints that persist in many less-developed Asian countries will be a hurdle.

But investors should notice improvements, particularly in Southeast Asia.

To my mind, 2010 was a bellwether for Asia’s future significance on the world economic stage.

But 2011 should be more significant still.

East Asia Forum

By Evan A. Feigenbaum adjunct senior fellow for East, Central and South Asia at the Council on Foreign Relations.

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