This is a speech I gave earlier this week at the EuroAsia Forum in Rome.
Recent financial and economic turmoil in Europe and the United States has let to a series of policy initiatives aimed at ensuring that such destructive crises are not repeated. Central banks are refocusing on bubbles, moral hazard and deflation. New global rules on financial transfers, tax information exchanges and capital adequacy ratios are being drafted and handed down for immediate implementation. Exchange of information among various authorities about bank accounts and other financial activities are being automatically enforced, without regard to privacy laws or legal jurisdictions.
Many people in the crisis-hit economies see these steps as necessary, perhaps even long overdue. They believe that increased transparency will curtail the kinds of activities that led to the collapse of confidence and economic demand in the United States and Europe.
The perspective from East Asia is somewhat different.
We suffered through financial and sovereign debt crises in the late 1990s, and learned important lessons that allowed the region to avoid the worst of the North Atlantic Crisis.
Among the lessons learned were these:
• Current-account imbalances are dangerous, regardless of fiscal accounts;
• Maintaining sufficient foreign exchange reserves is important;
• If the fundamentals are wrong, there is no such thing as a sufficient amount of foreign exchange reserves;
• Dependence on short-term capital flows to finance longer-term imbalances is dangerous;
• Rigid exchange rate regimes require market interest rates;
• Contagion is real, contagion doesn’t have to be rational, and contagion is very difficult to control;
• Central banks need to place great emphasis on combating moral hazard;
• Maintaining demand is central to economic recovery; and
• The IMF’s solutions are not always the right ones.
While the region did feel the effects of the North Atlantic Financial Crisis, it was in the form of the worst collapse in global trade in living memory. Last year, East Asia’s trade with the world, most of it internal to the region, totaled US$9.7 trillion, double the value of 2005. Today, the recovery is nearly complete, with only Japan, Taiwan and Indonesia yet to surpass their previous trading records.
So, what keeps the leaders of Asian nations awake at night?
• Economic stability,
• Political stability and
• The rise of China.
Economic stability for most East Asian economies means exports, and that depends demand in Europe, the United States and other rich markets. While China is striving to shift from an investment- and trade-led economic model to one more balanced by domestic private consumption, the actual impact on trade flows is still some years off. Therefore, demand in the largest and wealthiest economies is still paramount, and the major concern is Europe.
Political stability comes in two flavors, domestic and international. In many cases, the two are closely tied, as in the case of Pakistan, the two Koreas and China’s western regions. Others, such as Myanmar and Thailand are more domestic and will hinge on decisions made at home.
The third factor is blended in with the first two. The rise of China as an economic, political, diplomatic, social and military power is seen by most as a foregone conclusion. While components and raw materials exporters are delighted with China’s demand for their products, and places like Hong Kong thrive on China-driven services and tourism, there is a growing sense of nervousness over the increase in economic dependency.
China is also seeking to expand its place in the world, including territorial demarcation. Japan, Vietnam and the Philippines are looking for both regional and international support for their objection to Chinese claims to islands and waters where ownership is clouded by history. And, they are worried about the United States’ commitment.
Why is China unique among late 20th century rapidly developing markets? The China market is vast, and cannot be ignored, even at the expense of geopolitical considerations. Today, China has little interest in most of the Bretton Woods multilateral institutions, where the distribution of political power is rooted in mid-20th Century strategic requirements. It will defend its interests in the UN, World Bank, IMF, WTO and elsewhere, but not at the expense of freedom of action.
Many commentators believe China needs to liberalize its political institutions, including the media and the judiciary, in order to protect and extend its economic gains. The balance between political control and economic liberalization is one we have seen in several other examples. What we haven’t experienced before is a rapidly emerging economy that cannot be bullied into submission. The Western world has no power to deny China access to capital.
Further, China’s leaders have seen what happens to a closed political and economic system that attempts to liberalize politics either before or in tandem with economics. Beijing has no interest in following a line it believes led to the collapse of the Soviet Union.
The last item on the list of major issues is water, which is closely linked to the environment and climate change. China is clearly the main player in this arena, owning as it does the source of continental South East Asia’s major rivers, including the Red River, Mekong, Salween, Irrawaddy and Brahmaputra rivers. Including West Bengal, about 100 million people outside of China depend on these waters, and similar number within China’s borders.
In the areas of trade, investment, the environment and international affairs, China will require a seat at the table. This will not always sit well with older, more established powers, but it is a fact of life. China has become too important to be ignored.
In 1980, China’s total imports from the world were just $20 billion. In 1998, China imported about $20 billion worth of goods from the European Union. This year, China imported the same amount, $20 billion, from the EU in a single month.
• China’s economy grew 7.7% in 2013, according to the official statistics, to Rmb57.9 trillion, which is equal to US$9.2 trillion. More important, the economy more than doubled in the past six years.
• It is 80th – behind Brazil and Mexico, among others – in income per person.
• Household consumption, 36% of GDP, is very low, but growing at double-digit rates.
• Capital investment is very high, at 48% of GDP, but so, too, is savings (over 50%).
• Credit has been expanding extremely fast in recent years, but inflation has been low.
• Foreign trade last year was equal to nearly US$4.2 trillion. The “export-led” economy imported nearly $2 trillion worth of goods last year, double the amount for 2009.