9 June 2009 - 14 September 2010
Asian integration and global growth
Asian Development Bank
Board of Governors' Meeting
3 May 2010
Thank you for inviting me to present at today's seminar on Asian integration and global growth.
When I spoke to this forum in Bali a year ago almost every major advanced economy was in recession, except Australia, which has remained out of recession throughout.
Global exports were collapsing at an alarming rate and the region was in the midst of an immense and largely unanticipated economic shock.
Now, twelve months on, Asia is leading the global recovery.
In 2010, nearly half of the world's growth is expected to come from emerging Asian economies.
In many ways, the crisis and the rise of the G20, with its 6 Asian members (China, Japan, Korea, Indonesia, India, Australia), was a tilt point in world economic history that cemented the role of Asia in world affairs.
The short-term challenge has shifted from a concern about how much worse things could get, to how best Asian economies can continue to grow in a sustainable way.
But the lessons of this crisis, just as those from the Asian financial crisis, should not be forgotten.
Let me now turn to the issue of Asian integration in a post-crisis world.
The crisis as a trigger to greater Asian integration
A key source of economic Asian integration to date has been the development of regional production networks linked to global supply chains.
Indeed, much of Asia's impressive and continuing economic growth has derived from trade and investment with other parts of the world.
But a significant part of the damage during the current crisis was also inflicted through trade channels that had become imbalanced — especially impacting on Asian countries that rely heavily on manufacturing exports as a driver of growth.
Consumers in advanced countries now saving more and spending less. And there is a growing recognition that export-led may no longer pay the same dividends.
Setting aside the difficult challenges of high unemployment and fiscal sustainability facing many advanced economies, the simple mathematics of growth mean that the capacity of advanced economies to continue to absorb Asian exports at pre-crisis growth rates will decline.
As the composition of world demand changes, Asian policymakers will need to look more closely at their own, and neighbouring, economies as an engine of growth.
The crisis brought home the point that Asian integration needs to extend beyond the linkages generated by global production chains to encompass a much broader range of economic, trade and investment flows within the regions.
Of course, these activities should complement, not replace, the existing global export based linkages that have served the Asian region so well.
Asia's role in promoting future global growth
Asia is vital to global growth prospects. It is the fastest growing region in the world and will remain so for decades to come.
Demographic and economic trends suggest that forty years from now, in 2050, four of the top ten economies in the world will be in Asia — with China being the world's largest economy and India not far behind the US. As a result, Asia's share of world output is expected to grow from about 30 per cent to just under half.
While the crisis has provided an impetus for greater regional integration in Asia, the underlying reasons why it should be pursued run much deeper.
Integration should assist in economies becoming more productive, more competitive and more flexible.
It should encourage a greater flow of technology and ideas.
By underpinning robust growth in the region, greater integration will enhance the prospects for a dynamic yet stable global economy.
We have already seen some of the benefits from Asian integration, particularly since the Asian financial crisis. The service sectors of Asian economies have grown and the efficiency, availability and security of economic infrastructure and supply channels have become key concerns to business and government in the region.
Improvements in information and communications technology as well as rapid increases in prosperity are opening up further possibilities for trade and interaction through things like expanded tourism and education services and greater business mobility.
And the region as a whole is stronger for it.
Now is the time to build on this momentum
Policies to boost Asian integration
But achieving greater regional integration will not be easy.
There is no getting around the fact that greater regional integration will hinge to a large degree on the level of commitment of individual economies, particularly the major economies, to liberalisation — both at the border and behind it.
But high level initiatives to improve integration in the Asian region through institutions like APEC, ASEAN, ASEAN+3 and the East Asia Summit also have an important supporting role to play.
By encouraging a shift towards greater market openness and promoting awareness of the benefits of such a shift, these institutions can reinforce commitment to domestic liberalisation in Asian economies.
They can also improve mutual surveillance and transparency and promote trade-facilitation and 'best-practice' measures.
Coordination of government reform efforts will also be important.
Further pursuit of more liberal regional trade is also critical – whether that be bilaterally between regional states, multilaterally across the region or as part of the global WTO process.
Of course, increased regional integration through strengthening of intra-regional trade will mean that any changes to growth models in one economy will affect other economies in the region.
Given the inter-dependencies between Asian economies, rebalancing of growth needs to be coordinated and considered collectively as a region in order to minimise the adverse effects in transitioning towards domestically led growth.
Further, the underdevelopment of financial sectors in some Asian economies, combined with a lack of harmonisation and coordination in regulation and enforcement, create impediments to domestic and cross-border investment in the region.
Financial sector reform priorities include strengthening legal and regulatory frameworks, improved coordination between regulators, improving corporate governance and improving the infrastructure for payments systems.
The Chiang Mai Initiative is an important crisis defence mechanism for financial stability in the region. Australia welcomes the ADB's role in assisting the ASEAN Secretariat to multilateralise the CMI, and to enhance the current surveillance mechanism.
Similarly, the Credit Guarantee Investment Facility (CGIF) between the ADB and ASEAN+3 is another important example and is strongly supported by Australia.
Strengthening regional economic integration will yield better results if it is accompanied by targeted capacity building and information sharing activities that support the reform efforts of individual member economies.
In conclusion, Asia is a region of remarkable political, economic, institutional and cultural diversity. Such diversity, while presenting challenges for regional integration, also promises great economic benefits.
In the past few decades Asian economies have shown an extraordinary capacity to adapt to change, indeed to thrive and prosper from it.
The global economic crisis has reminded us of the need to embrace further change. Greater regional integration will be a key means of doing this and we should not let the opportunity pass us by.