January 26, 2013 00:00 By Li Xiangyang
Although growth for the region is on an upward trajectory, emerging economies this year will have to tackle both internal and external negative factors
The growth rate of emerging Asian economies is expected to increase in 2013. But inflation and gloomy external conditions still pose a challenge for the macro-economic policies of many of these economies. In the medium term, their growth rate will be higher than other regions but lower than before the global financial crisis. This puts the focus squarely on economic reform and restructuring.
Though Asia’s economy is likely to bottom out this year, it will find it difficult to overcome the problems created by the sovereign debt crisis in Western countries. Besides, emerging Asian economies face several source risks.
First, they cannot avoid the impact of slow growth and weak demand in developed economies, which will take a long time to emerge out of crisis despite deleveraging.
Second, emerging Asian economies experienced fast growth because of excessive credit. Now that credit has trickled, they are stumbling. In the first half of the 1990s, a similar phenomenon led to the Asian financial crisis. During the ongoing global financial crisis, because of frequently adjusted macro-economic policies, asset bubbles in many Asian countries haven’t deflated to the level of developed countries. But the recent turbulence in Vietnam’s financial market is the result of excessive credit.
Third, quantitative easing (QE) by the US, euro zone and Japan has had a considerable effect on emerging Asian economies. Because of Asian economies’ export-oriented development model and asset bubbles, overseas short-term capital flow will probably lead to appreciation of exchange rates. It is also likely to trigger inflation and further inflate asset bubbles.
If QE in the West succeeds in reversing the price rise, the transfer of debts could be a way out of the sovereign debt crisis. Therefore, emerging Asian economies, as the biggest foreign exchange reserve holders, must take steps to avert the risk of debt transfer from developed countries.
Fourth, the Diaoyu/Senkaku Islands dispute between China and Japan poses a serious risk to Asia’s economies. China and Japan are Asia’s two largest economies and the mainstays of East Asia’s global production network. Any deterioration in Sino-Japanese ties will have an impact beyond the two countries’ economies.
Moreover, the Diaoyu/Senkaku dispute is likely to linger for a long time. Therefore, Sino-Japanese economic ties cannot be strengthened. This exogenous factor will increase uncertainties in Asia. Considering the source risks, Asia’s emerging economies have no option but to take up economic reform and restructuring in order to pursue sustained growth.
The aggressive economic stimulus packages in the wake of the global financial crisis gave policy-makers in emerging Asian economies a sense of false confidence that they were immune to external crises. They also undermined the impetus to change their development model. Now, the economic trends of the past four years show that overcoming the impact of the global financial crisis is the toughest challenge Asian economies face.
Emerging Asian economies, including China and India, have indeed placed reforms high on their agendas. True, economic reforms and restructuring in Asian countries have certain factors in common, but their focus differs.
The overall performance of emerging Asian economies, however, depends to a large extent on Asia’s economic integration. In the past, regional cooperation frameworks such as Asean+3, Asean+6 and a free trade agreement (FTA) among China, Japan and South Korea were promoted by Beijing and Tokyo without the involvement of Washington. But since the Diaoyu/Senkaku dispute has soured Sino-Japanese ties and the US has been pushing ahead with the Trans-Pacific Partnership (TPP), new avenues have to be explored for regional economic cooperation.
China will not join the TPP under its current framework, though the prospects of negotiations are still promising. In November 2012, Thailand agreed to join the TPP talks, and half the Asean members are likely to join the US-led group by October.
Moreover, the Sino-Japanese territorial dispute imperils not only bilateral diplomatic relations, but also economic ties. Against this background, it would be over-ambitious to begin trilateral FTA talks. But the three-way pact was being jointly pursued because of the persistent will of the three countries to deepen cooperation. It is likely then that FTA talks between China and South Korea will precede that for China, Japan and South Korea.
Also, the Regional Comprehensive Economic Partnership (RCEP) has become increasingly important. The new proposal on the RCEP by Asean has won extensive support from different countries. The RCEP aims to forge a regional free trade area that would initially include Asean members, Australia, China, India, Japan, South Korea and New Zealand.
The big powers back the RCEP because they agree on broader cooperation on regional development and realise that differences and disputes among countries cannot be resolved overnight. Asean, by proposing the RCEP, has provided a platform for expediting regional cooperation, and wants to become a pole of growth in the Asia-Pacific because it stands to gain and could consolidate the free trade area it has with regional powers.
Based on the above source risks and directional options, regional economic cooperation faces many uncertainties. Strained relations between China and Japan will not only be the biggest hurdle for an FTA among China, Japan and South Korea, but will also influence the RCEP negotiation process.
It’s also possible that two groups would be formed: the RCEP without the US, and TPP without China, with one favouring China and the other the US. Japan probably will be the only country participating in the negotiations of three FTAs at the same time. But its domestic political uncertainty is likely to hamper the process of regional cooperation. And Sino-Japanese territorial disputes will have a direct impact on regional cooperation.
Li Xiangyang is director of the National Institute of International Strategy, the Chinese Academy of Social Sciences.