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The outlook naturally rests on a large number of assumptions. It is always possible that events could evolve in surprising and unexpected ways, and derail projections. Given underlying economic momentum, risks remain tilted down.
Markets have moved to reprice risks so far this year in a calm manner, but this could yet give way to less settled conditions. Policy mistakes, geopolitical or other shocks, or unexpectedly bad news about economic direction could lead to a much bumpier time for markets. If asset prices get badly punctured and decisively reverse, the chill would soon be felt.
Although dissonance about the US outlook seems to be receding, the possibility of a sharper slowdown cannot be ruled out. A particular source of uncertainty is in how nonconstruction investment will hold up. If the US were to slow sharply, there would be knock-on effects on global industrial output growth and trade. Developing Asia would certainly not be insulated from such developments (Box 1.1.7). Failure of the Doha Round, too, could easily aggravate any slowdown in trade caused by slower global demand growth. In this regard, the condition of the Doha Round remains critical. Although negotiations are continuing among a small group of key members, time will finally run out at the end of June 2007, and even if an agreement can be brokered, it may not get the go ahead from the US Congress. In the growing vacuum left by any failure of Doha, preferential trade agreements would thrive further and already audible protectionist calls would be amplified.
The overall geopolitical and security situation remains a source of uncertainty. The price of strategic commodities, such as oil, could be hit by negative developments. The relief that lower prices are currently bringing to budgets, to inflationary pressures, and to import bills is welcome, but should not be counted on. In the event of a human flu pandemic, developing Asia would bear a disproportionately large cost.
Finally, recent developments have brought country risks to the fore. Security issues across Asia are largely unresolved. In some countries, important elections are scheduled and their outcomes will be crucial for confidence and prospects.
References
Asian Development Bank. 2006. Asia Economic Monitor. December. Manila.
——. Forthcoming. Key Indicators 2007.
Rodrik, Dani. 2004. "Industrial Policy for the Twenty-First Century. "CEPR Discussion Paper No. 4767. Center for Economic Policy Research, London.
——. 2006. "The Social Cost of Foreign Exchange Reserves. "NBER Working Paper No. 11952. National Bureau of Economic Research, Inc.
Spahn, Paul Bernd. 2002. "On the Feasibility of a Tax on Foreign Exchange Transactions. "Report to the Federal Ministry for Economic Cooperation and Development. OECD, Bonn. February.
Zee, Howell. 2000. "Retarding Short-term Capital Inflows Through Withholding Tax. "IMF Working Paper No. 00/40. International Monetary Fund. Washington, DC. |
1.1.7 Uncoupling Asia: Myth and reality
Is developing Asia uncoupling from the global business cycle? The chapter, Uncoupling Asia: Myth and reality in Part 1, presents evidence to show that the global business cycle is still important for Asia.
Recently, some commentators have argued that the fast-growing Asian economy and its potentially large spending power might represent the emergence of a powerful regional economy that can sustain its own momentum, largely independently of the business cycle in industrialized countries.
However, no evidence points to Asia's uncoupling, either structurally or cyclically. In fact, a renewed process of rapid economic growth and development has been accompanied by increasing economic integration, both intraregional within Asia and interregional with G3 (United States, European Union, and Japan).
Investigating the structure of Asian trade, the chapter demonstrates the close relationship between intra- and interregional trade, with the PRC playing the crucial role. The G3 economies are still the main export destinations for final goods leaving the region. Asia's economy is increasingly integrated both regionally and internationally. These are connected facets of globalization. |
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