Shock-Proofing Asia’s Economies
Op-Ed by Dr. Noeleen Heyzer, Under-Secretary-General of the United Nations and Executive Secretary of ESCAP
Date: 10 May 2012
BANGKOK – Uncertainty and volatility have quickly become the “new normal” of the global economy. For several reasons, this turbulent external environment poses the most significant threat to Asia-Pacific growth in 2012.
One of this environment’s main features is the ongoing weakness of major developed economies. The expected V-shaped global recovery, from the depths of the 2008 financial crisis, proved short-lived. The world economy entered a second stage of crisis in 2011, owing to eurozone’s sovereign-debt crisis and continuing uncertainty about the economic outlook for the United States.
Mapping the landscape of these threats, forecasting their impact, and presenting a range of policy options to help countries ensure inclusive and sustainable growth despite the uncertainty, is the focus of the United Nations’ 2012 Economic and Social Survey of Asia and the Pacific [http://www.unescap.org/survey2012/].
Our forecast is that persistent headwinds will slow Asia-Pacific economic growth to 6.5% this year, down from 7% in 2011. Reduced demand for regional exports and higher costs of capital, combined with loose monetary policies and trade protectionism in some advanced economies, will contribute to the slowdown.
Nevertheless, Asia-Pacific growth will continue to outpace that of all other regions, acting as an anchor of stability and a new pole of dynamism for the world economy. For example, South-South trade with the Asia-Pacific countries in 2012 will help other developing regions, especially Africa and Latin America, to reduce further their dependence on the low-growth advanced economies.
Moreover, robust growth from the Asian economic powerhouses will continue in 2012, with China likely to grow at 8.6% and India’s growth expected to accelerate from 6.9% to 7.5%. The South-East Asian sub-region is likely to record a slight increase in growth, owing to Thailand’s strong recovery following the 2011 floods, and annual inflation in the Asia-Pacific region as a whole is projected to fall from 6.1% to 4.8%.
The greatest risk to the Asia-Pacific economy in 2012 is a disorderly sovereign-debt default in Europe, or an unraveling of the eurozone. This worst-case scenario could lead to Asia-Pacific export losses of up to $390 billion in one year, with least-developed and landlocked developing countries worst hit – losing as much as 10% of their total exports. Although unlikely, such a scenario could reduce regional growth by as much as 1.3 percentage points, and prevent 22 million people from escaping $2-a-day poverty in 2012.
A second key challenge to Asian regional growth in 2012 is commodity price volatility, together with a long-term rising trend. High prices and persistent volatility are increasingly features of the “new normal,” and both national and regional economies need to adjust to this reality.
The commodity boom that has resulted from higher prices presents both risks and opportunities. Price shifts alter incentives, but the less-developed economies of Asia and the Pacific must resist the impulse towards narrow commodity specialization. The lesson from the first round of Western globalization was that natural-resource specialization, especially in the poorest countries, can delay industrialization, economic diversification, and the creation of productive capacity.
Another key step in “shock-proofing” Asian economies will be to address the problem of jobless growth, unemployment, and rising inequalities. This needs to be a gradual process of rebalancing, supporting greater domestic consumption as an enhanced engine of growth and productivity, job creation, and income equality.
Other critical economic-policy challenges in 2012 will include managing the balance between growth and price stability – which will require inflation-fighting measures beyond monetary policy alone; coping with capital flows, especially the surge in short-term debt; dealing with exchange-rate volatility; and addressing the impact of extreme weather and natural disasters.
The Asia-Pacific countries are fortunate to face the turbulence and uncertainty of the global economy this year from a position of relative strength. High GDP growth rates, significant fiscal room for maneuver, and increasing economic cooperation make the region’s prospects for 2012 brighter than almost anywhere else.
Making the right policy choices – to build resilience and pursue a sustainable pathway to shared prosperity – will prepare Asia and the Pacific to flourish in the context of sustained global uncertainty. That is good news in a troubled and turbulent world.
Noeleen Heyzer is Under-Secretary-General of the United Nations and Executive Secretary of the Economic and Social Commission for Asia and the Pacific.