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“Emerging Asia and the Global Economy”

Speech by
Haruhiko Kuroda
President
Asian Development Bank

At the International Institute for Asian Studies

13 September 2006
Amsterdam, The Netherlands

I.  Introduction

Secretary-General Dr. de Heer, Dr. Lindblad, Professor Ruben, distinguished guests, ladies and gentlemen:

It is a privilege to join you today to share some thoughts about emerging Asia in the global economy. I would like to express my sincere appreciation to the International Institute for Asian Studies (IIAS), Clingendael and NGIZ for organizing this seminar, with particular thanks to IIAS Executive Manager Ms. Josine Stremmelaar. I would also like to acknowledge the presence of the Japanese Ambassador to the Netherlands, Mr. Kyoji Komachi. And I thank all of you for your interest and attendance.

This is no doubt a fascinating time for Asia watchers everywhere in the world. Not only are we witnessing the unprecedented rise of two massive economies – China and India – but we are also seeing a new momentum toward Asian regional integration as neighboring economies strive to improve their competitiveness and manage their shared challenges.

These twin tracks of rapid growth and economic integration have brought substantial benefits and opportunities to countries both within and outside Asia. But they also pose some interesting questions and challenges: Can the high rates growth in China and India be sustained? What must other Asian economies do to survive in the shadow of these economic powerhouses? And, how should the global community respond to ensure that Asia’s progress and integration into the world economy is sustained in as harmonious a way as possible?

II.  Emerging Giants: Opportunities and Challenges for Asia

China’s spectacular growth has had a profound impact on economic relationships among the deeply integrated trading economies of East Asia. China is now a key link in the regional production network, absorbing a large volume of foreign direct investment, importing materials and components from East Asian neighbors, and exporting finished products to the region, the United States and Europe. It is the largest market for all the Newly Industrialized Economies, and an important and growing market for Japan, Malaysia, Philippines, Singapore and Thailand, as well as global exporters and foreign services providers.

Similarly, India’s ties with neighboring South Asian economies have strengthened in recent years with the spread of Indian exports and investment. Its trade and investment linkages with East Asian economies are expanding rapidly as a result of its large and dynamic market, English speaking workforce, and international reputation in information technology services and pharmaceuticals.

Together, these emerging giants are generating significant opportunities for neighboring economies. To take advantage of these opportunities, Asian governments will need to continuously fine tune macroeconomic policy regimes; undertake major structural reforms to increase productivity and competitiveness; and provide incentives to help certain economic sectors adapt to increased economic integration. In Southeast Asia, for example, policies that once served well to develop large, unskilled laborintensive manufacturing sectors are being adjusted to support more technology- and knowledge-intensive manufacturing and service activities. Developing Asian countries also need to improve investment climates, invest in research and development, upgrade industrial skills and human capital, and strengthen social safety nets to deal with the social consequences of adjustment.

China and India will continue to be important drivers of Asian and global growth. ADB recently revised its 2006 full-year growth forecast for China upward to 10.4% and its 2007 forecast to 9.5%,¹ based on surging fixed investment and exports. We also revised India’s forecast slightly upward to 7.8% for fiscal year 2006, based on strong agricultural performance and a steady expansion of industry and services. Growth of 7.8% is also expected in 2007.

However, these countries too face major economic challenges. In China, the risk of over-heating, over-investment and overcapacity in some industries, the possibility of a painful economic adjustment, weaknesses in the banking sector, energy inefficiency and environmental degradation are of ongoing concern. India has a huge need for infrastructure investment. India also needs to accelerate domestic market integration, as well as economic integration with its Asian neighbors.

Above all, China, India and their neighbors must find ways to bring the poor into the mainstream economy. Despite remarkable success in reducing poverty, the Asia and Pacific region is home to a huge proportion of the world’s poor, with nearly 1.9 billion people living on less than $2 a day in 2003.² Inequality is growing – in India as well as China – and there are wide income gaps among Asian countries. Narrowing these development gaps is crucial to sustain regional growth and stability.

III.  Regional Economic Integration – Progress and Prospects

Regional cooperation and economic integration, while not a panacea, holds an important key to meeting these challenges. By working together, Asian countries can ensure that they and their citizens have greater opportunities to connect to the global economy, participate in growth and pull themselves out of poverty. The Asian Development Bank is strongly committed to promoting such efforts with support for “cross-border infrastructure and logistics development”, trade and investment integration; monetary and financial integration, and cooperation in the provision of regional public goods.

Asia has historically been a very open and integrated region. Trade and investment liberalization, the emergence of global value chains, improved physical connectivity, reductions in transport and logistics costs, and technological progress have brought Asian economies ever closer. In East Asia, intraregional trade has risen from 43% of total trade in 1990 to 55% in 2005 – only modestly lower than the 62% figure for the 15 European Union countries.

With the phenomenal growth the region is experiencing today, there is enormous potential to build on this success and realize an unprecedented era of prosperity. However, like globalization, the process of regionalization needs to be managed effectively so that its potential is realized for the benefit of all.

For example, bilateral and regional trade agreements (FTAs) are spreading in Asia, with some 81 such agreements in existence and over 100 more either proposed or under negotiation.³ Such arrangements can be beneficial, as long as they induce domestic structural reforms and create open, competitive market environments. But the danger is that they are not of similar scope, nor is participation consistent throughout the region. In the wake of the suspension of multilateral trade negotiations – the WTO Doha development round – there are growing concerns that disparate and overlapping trade agreements could further proliferate. This could then create the Asian “noodle bowl effect” due to differential rules of origin from different agreements, and present greater challenges for harmonization and broader regional and global integration.

To effectively manage regional integration, Asia will need new and stronger regional institutions to exploit opportunities and meet a variety of challenges. In this respect, the Association of Southeast Asian Nations, or ASEAN, is emerging as a regional leader. Through ASEAN, Asian policymakers are engaging in policy dialogue, coordination, and cooperation to further liberalize trade and investment and strengthen monetary and financial integration. The Chiang Mai Initiative, for example, was a significant step toward reserve pooling among the ASEAN+3 countries in the post-crisis years. The Asian Bond Markets Initiative is also making some progress in strengthening the region’s financial architecture and promoting economic integration. And ASEAN countries are working together to improve cross-border infrastructure, facilitate trade, and manage shared risks such as environmental degradation, communicable diseases, natural disasters, and trans-boundary crimes.

Similar efforts are beginning in other subregions, through initiatives such as the South Asian Association for Regional Cooperation and the Central Asia Regional Economic Cooperation program. And, there are positive signs that a more inclusive, pan-Asian community may eventually emerge.

For instance, South Asia, inspired by India’s “Look East” policy and spearheaded by increasing trade and investment links with its neighbors, is gradually forging closer ties with East Asia and Central Asia. In Central Asia, there is a growing awareness of the need for regional integration, particularly in the area of transport logistics and trade liberalization and facilitation. And ASEAN leaders have agreed to accelerate the establishment of an ASEAN Economic Community (AEC) to 2015. This ambitious initiative would help ASEAN countries maintain economic cohesion, deepen intraregional integration, and enhance their competitiveness, while turning ASEAN into a vibrant hub for pan-Asian integration.

Of course, much more needs to be done to leverage Asia’s diversity and close the developmental gaps before a truly pan-Asian community can be achieved. But it is clear that the economic and political momentum toward deeper and wider integration is building.

IV.  Asia in the Global Community

As I have noted, Asia’s rise presents significant economic opportunities for all players in the international economy. But it also holds challenges for global governance and global integration.

Asia (including Japan) now accounts for nearly 30% of world GDP – double the figure for the 1960s. Global institutions and mechanisms need to evolve to reflect the growing importance of developing economies in Asia and elsewhere. The IMF, for one, recognizes this and will be voting on an important package of reforms in the next few days. Other forums, such as the G8, also need to take this important reality into account. G8 member states today account for only about half of the world’s exports and industrial output. It is difficult to see how global challenges can be met without the participation of some of the world’s largest and fastest growing economies.

For example, any sudden unraveling of the global payments imbalance would have significant repercussions around the world. But this imbalance can only be corrected through a shared approach, with the US raising national savings, oil-exporting countries sustainably increasing domestic demand, and Asian surplus economies, such as China, increasing exchange rate flexibility as well as generating higher domestic demand. Sustained and inclusive dialogue among all parties could help ensure that payments imbalances are adjusted in an orderly and productive fashion.

The global community is at a crucial point in its trade negotiations. While an ambitious Doha trade deal with a comprehensive agricultural agenda would be ideal, even a limited Doha agreement would raise global income, encourage globalization and avoid protectionism. Moreover, a Doha deal would open markets further, hasten domestic reforms, accelerate cross-border direct investment, create new jobs and lay the foundation for future economic growth. Owing to its high trade openness, strong human capital and modern infrastructure, Asian developing countries would witness notable gains from a Doha deal. As APEC strongly urged following its conference last week, efforts to restart the stalled negotiations are critical to the economic progress of Asia and the world.

In the meantime, inter-regional ties, such as those between Asia and Europe, must continually be deepened and nourished. There are a number of mechanisms through which this can be achieved. The Asia-Europe Meeting, for example – ASEM, as it is called – has for ten years worked to bring these two important regions closer together through policy dialogue and joint projects and actions. With the conclusion of its 6th Summit earlier this week, ASEM is well positioned to further strengthen its role in promoting cross-regional and global stability and prosperity.

For our part, ADB will continue to encourage the integration of Asian economies with each other and with the global economy. In fact, we have just released a new Regional Cooperation and Integration Strategy, which will shape our efforts to become even more active in this area.

V.  Concluding Remarks

Let me close by again thanking IIAS for this opportunity. The Institute, too, is a vital partner in the ongoing dialogue about our shared global future. Asia’s rise in the global economy holds out great promise that the future will be one of declining poverty and growing opportunity not only for Asia but for the world. By forging a strong link in the chain of mutual understanding among nations and peoples, all of us can help bring the promise to fruition.

Thank you.