Op-Ed Contributors

Asia's recovery - 'Exit' to where?

By Jong-Wha Lee (China Daily)
Updated: 2010-04-14 08:21

Editor's note: When Asia is rebounding from the global economic crisis, it also has to find a way to avert the next crisis. Asian countries require consistent and broad adjustments on the demand and supply sides of the economy over the long term.

Developing Asia's rebound from the global economic crisis has taken hold. The Asian Development Bank predicts growth of 7.5 percent this year, up from a projected 5.2 percent in 2009 and exceeding 2008 growth.

Such robust expansion suggests authorities will "exit" accommodative policies adopted during the crisis earlier than the rest of the world. Indeed, monetary authorities in countries such as India and Malaysia have already pushed policy rates up a quarter-point, while many governments plan to reduce fiscal deficit targets this year.

But, the important question is: exit to where? As developing Asia exits this crisis, it must ensure it is not entering another. Authorities around the world have so far failed to deal with its underlying causes in a meaningful way. Structural problems, such as inadequate financial market regulation and excessive liquidity, remain despite constructive proposals on coordination of global macro-policy and financial regulatory reform. In developing Asia, large current account surpluses and reserve accumulation will continue to exacerbate the global imbalances that underpinned the current global crisis. Current account surpluses in the region, particularly in the People's Republic of China (PRC), declined only marginally during the crisis and are expected to reach even higher levels over the next few years.

The uneven pace of recovery between developing Asia and the advanced economies suggests that capital inflows to Asia will surge once more. Even without any major disruptions here, the region will remain vulnerable to large and potentially volatile capital movements, which could fuel inflation and asset price bubbles. As the 1997/98 Asian financial crisis demonstrated, rapid reversal of capital flows can have catastrophic economic effects. Excessive openness in international trade and financial transactions leave Asia susceptible to global financial turmoil.

The 1997/98 Asian crisis and the current global crisis exposed weaknesses in developing Asia's financial and real sectors. To avert the next crisis-that is, to choose the right exit-policy makers must learn the right lessons and follow a more balanced and sustainable growth path.

That requires consistent adjustments on the demand and supply sides of the economy over the long term. It means a broader monetary policy framework, more flexible exchange rates, continued fiscal discipline, greater domestic and regional demand, and better social protection.

First, leaders must implement a monetary policy framework that takes into account asset prices and financial market stability, and adopt a judicious mix of policies, including regulatory and direct capital control measures to manage volatile capital flows effectively. This also involves strengthening surveillance and regulatory regimes, including establishing an institutional framework for macro- and micro-prudential surveillance and regulation, ideally managed by a systemic stability regulator empowered with adequate enforcement tools and mandates.