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Asia’s unprecedented opportunity

Finance Blogger: Ian Fraser Ian Fraser

Asia has a critical role to play in pulling the global economy out of recession and towards a more sustainable future, according to Dominique Strauss Kahn, the French-born managing director of the International Monetary Fund. But delivering the Monetary Authority of Singapore lecture on Friday, November 13th, he stressed the continent can only be the motor for sustainable global recovery if it mends at least some of its ways.

Strauss Kahn said countries such as China, Malaysia, Japan, South Korea, Taiwan, and Singapore will first need to wean themselves off their dependence on exports and learn more of the joys of consumption.

As part of what he sees as a much-needed “rebalancing,” the left-leaning Frenchman also urged Asian nations to allow their currencies to appreciate against the dollar and the euro.

Strauss Kahn is right about global imbalances—they are now widely recognized as one of the key causes of the financial crisis. (By imbalances, he means the current-account deficits in developed countries such as the US and the massive surpluses in emerging economies including many Asian countries). They must somehow be corrected if we are to have a sustainable recovery. However, rediscovering equilibrium is probably going to take longer than Strauss Kahn imagines.

Deep psychological and cultural attitudes could make the transition from export-led growth to fully fledged domestic demand painfully slow. Furthermore, the notion that local currencies should be allowed to climb against the dollar and euro will seem like shooting themselves in the foot by policymakers in the region: it would dangerously undermine the competitiveness of Asian exports on which current levels of prosperity depend.

In a recent blog post Claus Vistesen, an associate blogger on Nouriel Roubini’s RGE EconoMonitor, said: “The likes of China, Japan (and Korea) hold little promise in terms of providing a decisive engine for rebalancing through sustainable growth in domestic demand … I am more than a little bit sceptical on the prospects of a sustained recovery across Asia driven by domestic demand, especially in relation to Japan and China.”

In his Singapore speech Strauss Kahn also called on Asian nations to step up public investment programs in transport, energy, and communications infrastructure and introduce regulatory reforms that would facilitate public–private partnerships.

He said it is time that some Asian nations withdrew their economic stimulus packages and urged policymakers across the region to be wary of further asset-price bubbles and other market distortions. He said global investors are losing their risk aversion and piling money into emerging markets.

Strauss Kahn, a former economics professor who took over as head of the Washington-based IMF in September 2007, does not believe that the financial crisis has been all bad—pointing out that it provided a wake-up call to the world’s leading nations that they have to introduce a more inclusive system of global governance. Strauss Kahn said this brings “tremendous opportunities” for Asia.

He added: “The last two years have made abundantly clear that the world of tomorrow cannot achieve long-term success based on the rules of yesterday.

“A fundamental reset is needed—across economic sectors, and across economic regions. We now have a historic opportunity to lay the foundations of a safer and more stable economic and financial framework.”

The IMF has in the past been criticized for being US-centric and foisting inappropriate policies on emerging markets. Professor Joseph Stliglitz excoriated the fund for its behavior during the Asian crisis of 1997–98, accusing it of exacerbating the situation for Asian nations by forcing them to reduce fiscal deficits and raise interest rates during recessions. But even Stiglitz believes the fund is transforming itself under Strauss Kahn.

In an interview with the Wall Street Journal at last month’s IMF Istanbul summit Stiglitz said the IMF “now says it believes in Keynesian economics, that stimulus works and that it cares about unemployment.”

As the IMF’s governance model evolves and becomes more inclusive Strauss Kahn said the fund intends to deepen its engagement with Asia. He intends to offer a global perspective on the prospects for 2010 at the CBI conference in London on November 23rd.

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Tags: Asia , banking , economic recovery , financial crisis , fiscal stimulus , global imbalances , IMF , protectionism , regulation
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