Rapid recovery from the 1997 Asian financial crisis, and China’s 2001 membership of the World Trade Organisation presaged a period of very strong economic growth in the Asia-Pacific region.  This was underpinned by important policy reforms in Asia’s emerging economies and the “great moderation” in the developed OECD countries.

Optimism was so high that even when the first signs of the global financial crisis appeared, some observers believed Asia would be little affected.  It was argued that regional economic momentum was so strong that Asia could “de-link” itself from the negative effects of the crisis.

This was not to be.  Asia was struck by the “great trade collapse” with exports falling dramatically in most countries in 2009.  For example, the People’s Republic of China recorded a decrease of 16 per cent, while similar falls were experienced by countries like Indonesia, Korea, and Singapore.

It became evident that East Asia’s export-oriented growth was unbalanced.  Much of the strong intra-regional trade was in reality in parts and components of the final goods that were ultimately destined for Western markets.  The clear conclusion was that developing Asia should “re-balance” its growth.

In the immediate aftermath of the Lehman-shock world leaders convened the first-ever Summit meeting of the G20(1), in November 2008, to tackle the still unfolding crisis -- rather than calling on the G8.  This was recognition of the importance of giving emerging economies an equal seat at the table for managing the world economy. 

While only one Asian country, Japan, is a member of the G8, five Asian countries (PR China, India, Indonesia, Japan and Korea) are members of the G20 (2), along with other countries of the Asia-Pacific, notably Australia, Canada, Mexico and the United States.  At their September 2009 Pittsburgh Summit, G20 Leaders “designated the G20 to be the premier forum for our international cooperation”.

Asia responded impressively to the G20 calls for concerted fiscal expansion to save or create jobs and restore economic growth.  Thus, while regional growth weakened in 2009, and was even negative in economies like Hong Kong, Malaysia, Thailand and Singapore, economic growth rebounded very strongly in 2010.  Emerging Asia became virtually the main source of economic dynamism in the global economy.  Asia’s strong fiscal expansion also softened the effect of the crisis in developed OECD markets.  Another key factor supporting growth was the commitment of both G20 and APEC leaders to open markets and resisting protectionism.

Looking beyond the short term, G20 and APEC leaders have established a framework for strong, sustainable and balanced growth.  This agenda is most critical of all to Asia’s emerging economies because, while pre-crisis growth was very strong, it was unbalanced in several respects: 

- First, in most economies income inequality between rich and poor has widened substantially.  This reduces the poverty reduction impact of a given rate of growth.  Unequal societies can also pose a threat to social and political stability.

- Second, Asia’s environment has suffered greatly from air and water pollution, degraded natural resources and threatened ecosystems, worsening water stress, natural disasters, and increased generation of wastes, including hazardous waste.  Climate change is exacerbating these problems, and threatening the region’s future well-being and that of the environment, and the world.

- Third, Asia’s growth has been excessively dependent on US and European export markets.  Such exports have been implicitly subsidized through artificially low wages, interest rates and exchange rates, and also low prices for land, oil, water, gas and electricity.  In addition, a large share of exports are produced in special economic zones which also receive other favorable conditions.  It is imperative to unwind these distortions and promote greater domestic and regional demand.

The agenda for achieving strong, sustainable and balanced growth is vast, but the stakes are high.  There are already many positive signs of progress on the rebalancing agenda:

- Many countries in the region recognize the importance of improving social policies in the areas of health, pensions and education.  It is however necessary to make greater efforts to fight corruption and bribery, which is another important factor driving inequality.

- As emerging Asian economies become more prosperous they have more financial wherewithal to address environmental problems, and citizens also demand policy makers to address environmental problems more seriously, especially for water and air quality.  Asia’s economies have a double incentive to reduce fossil fuel consumption by improving the energy efficiency and using alternative energies.  The dual benefits are minimizing their dependence on imported energy and thus exposure to insecurity of energy supply, as well as reducing carbon emissions which contribute to global warming.

- There are several factors which are already boosting domestic and regional demand.  For example, markets are now opening substantially through free trade agreements, and domestic regulatory reforms.  In addition, the region’s growing middle class is also a growing source of demand across a wide range of areas including tourism.

The fact most of the leading emerging economies of the Asia-Pacific region are members of both the G20 and APEC is very significant.  It recognizes that the global economic power shift taking place should be matched by commensurate changes in the system of global governance.  These countries are better placed to express their interests on the international stage and shape the global agenda, notably regarding the policy reforms that developed OECD countries must also make for achieving strong, sustainable and balanced growth.

The developed OECD countries are now stumbling again.  There is a risk of a double-dip recession in the US, as the effects of economic stimulus are fading, and the private sector has not been able to pick up the momentum.  The euro area has fallen again into the depths of its sovereign debt crisis, from which there seems to be no quick and easy way out.

Can the Asia-Pacific's leading economies remain the growth leaders in this period of renewed global weakness?  A second round of stimulus is less easy to engineer, and its effects will be far less certain.

But the time has now really come for the Asia-Pacific region to show if it can lead the global economy. 

Footnotes:

(1)          This G20 was initially a group of finance ministers and central bank governors established following the Asian financial crisis.

(2)          The following are members of the G20 -- Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, Republic of Korea, Turkey, United Kingdom, United States of America, European Union.

A version of this paper was published by the APEC Study Centre at RMIT, at:

http://www.apec.org.au/docs/currentsRMIT/2011-1/index.html#3