Tag Archive for: economic growth

Governance reform is key to reviving China’s economy

When it comes to economic slowdowns, things often get worse before they get better. This is being borne out in China, following the government’s introduction in late September of its biggest stimulus package since the COVID-19 pandemic.

The government’s announcement took many by surprise, but abrupt policy shifts are nothing new for China. The regulatory crackdown on the internet sector in 2021, the end of the zero-COVID policy in 2022, and the changes to fertility rules since 2014 were similarly sharp reversals.

In my recent book, High Wire: How China regulates Big Tech and governs its economy, I explain that Chinese policymaking has three defining features: hierarchy, volatility, and fragility. Sudden and dramatic policy shifts are made possible by China’s centralised decision-making structures, in which policy is dictated from the top down (hierarchy). Policies tend to follow a cyclical pattern, with often-sharp swings between tightening and easing (volatility). And, even when well-intentioned, they often generate unintended consequences, which may take so long to materialise that, by the time the authorities grasp them, reversing course carries high costs (fragility).

China’s delayed response to the looming threat of deflation fits squarely within this pattern. Though the warning signs have been apparent for more than a year, the government was reluctant to take bold steps to jump-start growth, for a few (legitimate) reasons. Most notably, the authorities are acutely aware of the need to shift away from the economy’s traditional reliance on real-estate and infrastructure investment, toward more sustainable sources of growth, such as high-tech innovation.

It does not help that China is still grappling with the effects of the massive 2008 stimulus, especially excessive debt accumulation among local governments and state-owned enterprises—a trend that pushed the country to a critical threshold of systemic financial risk a few years ago. In addition, China’s top leadership worries that consumption-driven growth could pave the way for a welfare state, which they view as wasteful and misaligned with their long-term vision of China as a self-reliant industrial and technological powerhouse.

So, rather than heed calls for bold stimulus measures, China’s government took only modest steps to stave off economic decline. Predictably, these steps did little to address the deflation threat. Meanwhile, policymakers focused on maintaining fiscal discipline while continuing to invest in production, even though this exacerbated the overcapacity that, in sectors like solar panels and electric vehicles, is fueling trade tensions with the rest of the world.

Now, China is staring down the barrel of a Japan-style ‘lost decade’ of deflation and stagnation. And the longer deflation persists, economists warn, the costlier it will be to reverse. Fortunately, China’s leaders finally seem to be listening: in a dramatic shift, the government has fully mobilised its monetary and fiscal tools to rescue the faltering economy.

This was the right move. A supercharged stimulus effort is exactly what China needs at this point. But it is not without its risks. The stock market responded to the stimulus with a powerful rally, and equities recorded their best week since 2008. With investors expecting the government to roll out more fiscal measures to prop up the economy, speculation is running rampant.

The fear now is that this sudden injection of capital into the economy could create stock market bubbles, sowing the seeds of the next financial crisis. If this risk materialises, Chinese policymakers will once again face a crisis management situation that resembles a game of whac-a-mole: as soon as one crisis is quashed, another emerges.

To avoid this outcome, China must take steps to minimise the unintended consequences of its policy interventions, such as creating mechanisms for obtaining real-time, accurate feedback that can guide mid-course corrections before bubbles form and crises erupt. More fundamentally, China must break its habit of hasty and dramatic policy shifts based on top-down decrees and return to the approach that served it so well in the past: gradual and incremental reforms, based on decentralised policy experimentation.

Such experimentation was a hallmark of the first three decades of China’s market-reform process, when the economy achieved year after year of double-digit GDP growth. By empowering subnational authorities to leverage local knowledge and test new ideas, the central government ensured that policy innovation flourished. In recent years, however, the central government has increased its reliance on sweeping top-down decision-making, to the economy’s detriment.

Bold stimulus may buy China time, but it won’t deliver lasting prosperity. For that, China must embrace the kind of decentralised governance that powered its rise. This means restoring local governments’ autonomy and encouraging bottom-up initiatives through which authorities test solutions tailored to their regions’ circumstances. The question is whether Beijing is prepared to cede any control in its quest to secure greater long-term command over the economy.

China’s strong economic growth forecast signals further trade tensions in 2021

Analysts are expecting China’s economic output in the first three months of 2021 to be 15% to 18% higher than in the same period in 2020 when the coronavirus struck, highlighting the enormous power and resilience of the country’s vast manufacturing sector.

Perhaps the biggest economic surprise of last year was the strength of China’s economic recovery, despite it having been the first to suffer the pandemic.

While the Chinese economy fell sharply in the first quarter of 2020, contracting by 6.8%, it has been recovering strongly since June and full-year figures to be released next week are expected to show growth of around 2%.

A review of economic forecasts by the Chinese financial newspaper Caixin suggests that after a strong bounce-back in the first quarter, the country is headed for growth of between 8% and 10% over the course of 2021.

While global trade remains deeply depressed, with the World Trade Organization’s latest forecast suggesting a 9.2% decline for 2020, China’s exports have been growing stronger every month since June.

Trade figures show that the value of China’s exports in November was 21% above the pre-pandemic level in the same month in 2019, led by an extraordinary 45% increase in sales to the United States.

Monthly figures are volatile, but China still managed to lift exports over the full year despite the global recession. China’s December trade report, to be released on Friday, is expected to show a surplus in 2020 of more than US$500 billion.

China’s manufacturers benefit from an immense internal market delivering unrivalled economies of scale. At the same time, productivity gains are coming from the adoption of advanced manufacturing systems, an increasingly educated workforce and fully developed local supply chains.

A 2018 report on Chinese manufacturing by management consultancy BCG reported that China’s factories are generating more value added—US$3.7 trillion in 2017—than those of the Germany, South Korea, the UK and the US combined.

It found that China accounted for 27% of global manufacturing value added, which was 1.7 times more than the US, 2.8 times more than Japan and 4.4 times more than Germany.

China’s strong performance over the past year while the rest of the world was mired in managing the pandemic would have increased its dominance.

Rising labour costs, which have been increasing at an average of 15.6% a year, have eroded some of China’s edge in traditional industries, but its advantages of scale are overwhelming.

For example, Chinese clothing exports rose by a third to US$145 billion in the decade to 2017, despite fast-rising wages. Exports of competitor nations in the clothing sector—Vietnam, Bangladesh, Indonesia, India and Thailand—also rose strongly over the period, reaching a combined US$88 billion, but almost none of those sales went to China. The competitive advantage delivered by China’s domestic market was untouched.

These trends are increasingly evident in high-technology industries. China has surpassed South Korea as the largest manufacturer of flat-screen TVs and produces more than 90% of the world’s smartphones. Its automotive factories now deploy as many robots as those in the US.

Chinese companies benefit from highly networked clusters. Automotive and electronics clusters are increasingly important in Chongqing, smartphones come from Shenzhen, and a quarter of the world’s optical fibre comes from Wuhan.

As BCG comments, ‘The breadth, efficiency, and vertical integration of Chinese supply chains is a major reason why little production of goods ranging from smartphones to chemicals has gone offshore, despite rising costs.’

Indeed, the trend over the past decade has been for Chinese companies to bring elements of production that had been spread across Asia back onshore. The share of regional trade that forms part of value chains declined from 55.4% to 48.7% over the decade to 2017. It is a trend which members of ASEAN hope that the recently concluded Regional Comprehensive Economic Partnership trade deal will reverse.

The vitality of Chinese manufacturing helps to explain why foreign businesses that have successfully established themselves in the Chinese market are so reluctant to withdraw. In the latest survey by the American Chamber of Commerce in Shanghai, only 5% of companies with global revenues over US$500 million said they had plans to relocate operations out of China, despite the heavy tariffs that Chinese-made goods now face entering the US.

Chamber president Ker Gibbs told the South China Morning Post that members were aware of the national security issues but were ‘dedicated to the market, which is attractive, large and growing’.

China is increasingly the irreplaceable supplier of many of the staples of modern consumer and industrial life. A survey by Japan’s Nikkei data team found that of 3,800 internationally traded products, China held a market share of more than 50% in 320 products. When China joined the WTO in 2001, it held a dominant market share in just 61 products.

For example, China accounts for two-thirds of the global export market for small computers. Its share of liquid crystal components is above 50%, and it has higher shares in the global traded markets for air conditioners, ceramic washstands and toilet seats.

Suppliers to the Chinese economy are benefiting from its dynamism. These include Australia, notwithstanding China’s steps to roll back Australia’s gains under the China–Australia Free Trade Agreement. Australia’s exports to China are still double the level of just the four years ago. Other prominent suppliers to China, including Taiwan and South Korea, are also gaining. However, the weight of advantage rests heavily on the Chinese side both in the Asian region and globally as China’s economy grows more powerful relative to everyone else’s.

China’s economy has its flaws— burdened by heavy debts, inefficient state-owned enterprises and an ageing population—but it is going into 2021 brimming with economic self-confidence. The pride that Chinese feel about their economic performance will be matched by rising resentment among those displaced by the inroads Chinese goods are making in global markets. It is a recipe for global trade tensions in the year ahead.

Africa’s historic pivot

The year 2018 has been marked by tremendous economic and political turbulence around the world. And yet, for future historians, it may well be the year when Africa started to claim its intellectual and economic-policy independence.

The unlikely trigger for what could turn out to be a continent-wide strategic shift was Rwanda’s decision to increase tariffs on imported secondhand clothes and footwear in support of its local garment industry. This provoked an immediate hostile response from the United States, which suspended duty-free status for Rwandan textile exports under the African Growth and Opportunity Act, America’s flagship trade legislation for the continent.

For a small, landlocked African country that relies heavily on trade, this was a big deal. But the fact that Rwanda held its ground confirmed that times have changed. If Rwanda is willing to risk preferential access to the US market in order to develop its domestic garment industry, then it must be confident that it will find alternative markets for its exports.

Meanwhile, other African countries have also adopted a more independent attitude vis-à-vis the major trading powers. African governments have increasingly been taking a stand on a wide range of potentially controversial issues, including trade policy in East Africa, land redistribution in Southern Africa, and macroeconomic and debt-management policies in North Africa.

African governments’ motives for stepping up now are not only economic; it is also about dignity, intellectual freedom and a willingness to risk charting one’s own course. And, more broadly, African leaders recognise that the ongoing transformation of the global economy means that no country will have enough power to impose its strategic preferences on others, even when they are much smaller, as in the case of Rwanda and the US.

Empirical research from the World Economic Forum shows that tariff reductions and market access have become much less relevant for economic growth than was the case a generation ago. Trade is no longer about manufacturing a product in one country and selling it elsewhere; rather, it is about cooperating across borders and time zones to minimise production costs and maximise market coverage.

The WEF estimates that, ‘Reducing supply chain barriers to trade could increase [global] GDP up to six times more than removing tariffs’. If all countries could bring the performance of border administration, together with transport and communications infrastructure, up to just half the level of global best practice, global GDP would grow by US$2.6 trillion (4.7%), and total exports would increase by US$1.6 trillion (14.5%). By comparison, the complete elimination of all tariffs worldwide would boost global GDP by only US$400 billion (0.7%), and exports by US$1.1 trillion (10.1%).

Clearly, global value chains are now the dominant framework for trade. And, as we have seen, African countries such as Rwanda (as well as Ethiopia and Morocco) are already taking advantage of this paradigm shift. Rather than wasting time in unproductive policy discussions over tariffs, they are redirecting their strategies to focus on trade facilitation.

True, today’s trade wars have disrupted international supply chains, and will continue to do so. But new constraints will also stimulate creativity and innovation. For example, as Meghnad Desai of the London School of Economics points out, ‘In the light of advances in technologies such as 3D printing and artificial intelligence, it is not far-fetched to imagine that businesses could manufacture domestically the intermediate products that they currently import.’ In this case, trade would continue apace, ‘but the product mix would shift from intermediate to final products’.

Moreover, in an increasingly multipolar world, low-income countries will not have to rely solely on the West for financing and policy ideas (though they will have to be mindful of the risks of indebtedness and precarious governance frameworks). Even as global commerce has undergone a tectonic shift, traditional development thinking, policies and practices have not.

Meanwhile, as the major emerging economies pursue technological and industrial development to escape the ‘middle-income trap’, they are altering the distribution of roles and responsibilities across the global production system. Owing to the economic success of countries such as China, Vietnam and Indonesia, other low-income economies in Africa and elsewhere now have substantial opportunities to boost employment in labour-intensive industries. After all, China now produces many of the high-value-added goods that once were the exclusive preserve of advanced economies.

As China and others continue climbing the industrial and technological ladder, the necessary relocation of large parts of their supply chains to lower-cost countries will affect the costing and pricing of goods and labour everywhere. But developing countries can actually use their latecomer status to reap substantial economic benefits. Despite the wildly exaggerated threat of automation, African countries, in particular, can exploit their lower factor costs to promote successful labour-intensive industries in which they have a comparative advantage.

For example, African countries can lower the cost of doing business by building strategically located production clusters and industrial parks (including for green industries). They are also in a strong position to attract foreign direct investment, which brings the positive externalities of technology and know-how transfer, managerial best practices, state-of-the-art learning and access to large global markets.

If managed properly, this two-pronged approach could provide ample employment for a low-skilled labour force, while rapidly increasing fiscal revenues. And this, in turn, would allow for improvements to infrastructure in other areas, thus creating the conditions for long-term prosperity and social stability.

While trade agreements such as the US African Growth and Opportunity Act are still very important to African countries, broader economic and technological changes are opening up new opportunities, and smart policymakers are seizing them. This is a pivotal moment in North–South relations. After centuries of being politically and intellectually tethered to advanced economies with little to show for it, Africa is striking out on a new path of self-affirmation.

In this quest for prosperity, African leaders and policymakers have proved ready to withstand sanctions, threats and setbacks. They may not all have read Nietzsche, but they know that what ‘does not kill us, makes us stronger’.

Don’t cry over dead trade agreements

Image courtesy of Flickr user Richard Schatzberger.

The seven decades since the end of World War II were an era of trade agreements. The world’s major economies were in a perpetual state of trade negotiations, concluding two major global multilateral deals: the General Agreement on Tariffs and Trade (GATT) and the treaty establishing the World Trade Organization. In addition, more than 500 bilateral and regional trade agreements were signed—the vast majority of them since the WTO replaced the GATT in 1995.

The populist revolts of 2016 will almost certainly put an end to this hectic deal-making. While developing countries may pursue smaller trade agreements, the two major deals on the table, the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP), are as good as dead after the election of Donald Trump as US president.

We should not mourn their passing.

What purpose do trade agreements really serve? The answer would seem obvious: countries negotiate trade agreements to achieve freer trade. But the reality is considerably more complex. It’s not just that today’s trade agreements extend to many other policy areas, such as health and safety regulations, patents and copyrights, capital-account regulations, and investor rights. It’s also unclear whether they really have much to do with free trade.

The standard economic case for trade is a domestic one. There will be winners and losers, but trade liberalization enlarges the size of the economic pie at home. Trade is good for us, and we should remove impediments to it for our own sake—not to help other countries. So open trade requires no cosmopolitanism; it just needs the necessary domestic adjustments to ensure that all (or at least politically powerful) groups can partake in the overall benefits.

For economies that are small in world markets, the story ends here. They have no need for trade agreements, because free trade is in their best interest to begin with (and they have no bargaining leverage over larger countries).

Economists see a case for trade agreements for large countries because these countries can manipulate their terms of trade—the world prices of the goods they export and import. For example, by imposing an import tariff on, say, steel, the United States can reduce the prices at which Chinese producers sell their products. Or, by taxing aircraft exports, the US can raise the prices that foreigners have to pay. A trade agreement that prohibits such beggar-thy-neighbor policies can be useful to all countries, because, in its absence, they could all end up collectively worse off.

But it is difficult to square this rationale with what happens under actual trade agreements. Even though the US does impose import duties on Chinese steel (and many other products), the motive hardly seems to be to lower the world price of steel. Left to its own devices, the US would much rather subsidize Boeing’s exports—as it often has—than tax them. Indeed, WTO rules prohibit export subsidies—which, economically speaking, are enrich-thy-neighbor policies—while placing no direct restraints on export taxes.

So economics doesn’t take us too far in understanding trade agreements. Politics seems a more promising avenue: US trade policies in steel and aircraft are probably better explained by policymakers’ desire to help those specific industries—both of which have a powerful lobbying presence in Washington, DC—than by their overall economic consequences.

Trade agreements, their proponents often argue, can help rein in such wasteful policies by making it harder for governments to dispense special favors to politically connected industries.

But this argument has a blind spot. If trade policies are largely shaped by political lobbying, wouldn’t international trade negotiations similarly be at the mercy of those same lobbies? And can trade rules written by a combination of domestic and foreign lobbies, rather than by domestic lobbies alone, guarantee a better outcome?

To be sure, domestic lobbies may not get everything they want when they have to contend with foreign lobbies. Then again, common interests among industry groups in different countries may lead to policies that enshrine rent-seeking globally.

When trade agreements were largely about import tariffs, negotiated exchange of market access generally produced lower import barriers—an example of the benefits of lobbies acting as counterweights to one another. But there are certainly plenty of examples of international collusion among special interests as well. The WTO’s prohibition on export subsidies has no real economic rationale, as I have already noted. The rules on anti-dumping are similarly explicitly protectionist in intent.

Such perverse cases have proliferated more recently. Newer trade agreements incorporate rules on ‘intellectual property,’ capital flows, and investment protections that are mainly designed to generate and preserve profits for financial institutions and multinational enterprises at the expense of other legitimate policy goals. These rules provide special protections to foreign investors that often come into conflict with public health or environmental regulations. They make it harder for developing countries to access technology, manage volatile capital flows, and diversify their economies through industrial policies.

Trade policies driven by domestic political lobbying and special interests are beggar-thyself policies. They may have beggar-thy-neighbor consequences, but that is not their motive. They reflect power asymmetries and political failures within societies. International trade agreements can contribute only in limited ways to remedying such domestic political failures, and sometimes they aggravate those failures. Addressing beggar-thyself policies requires improving domestic governance, not establishing international rules.

Let us keep this in mind as we bemoan the passing of the era of trade agreements. If we manage our own economies well, new trade agreements will be largely redundant.

Federal Budget 2016–17: big ideas, small canvas?

Malcolm Turnbull’s aim for an ideas boom looks set to take some flesh in tonight’s Federal Budget, showing up in everything from cities and infrastructure initiatives through to a re-focusing of tax policy.

Yet although many of these potential initiatives may sound big when they are announced, they have to be shoehorned into a Federal Budget which is still feeling the after effects of a tumultuous decade.

It was a decade in which a booming China led to a Budget bubble, as the company tax take in particular, soared. In turn, that rush of incoming revenue got rapidly parcelled back out into a range of permanent promises—everything from eight personal income tax cuts in a row through to family benefits, baby bonuses and, more recently, worthy initiatives such as the National Disability Insurance Scheme.

Yet slower growth in China in recent years means that the combination of a temporary boom with permanent promises has subsequently led to lingering Budget deficits.

The first question that tonight’s Budget has to answer is whether China’s slowdown is still wreaking havoc for both the Australian economy and the Federal Budget, or whether recent better news from China and in the realm of iron ore prices means that the Budget bust of recent years has finally bottomed.

Chances are that there will be relatively good news from Treasury on both fronts, though it remains likely that the economic outlook will be brighter than the Budget outlook. Real growth in the Australian economy has been relatively modest since the initial bounceback that followed the global financial crisis. In fact there’s been only one year of above trend growth in the last eight.

The good news is that Treasury is likely to forecast continuing solid growth; the bad news is that growth isn’t likely to be at rates above 3%–a rough benchmark of trend—in either the financial year just finishing or that soon to start.

Yet while the news on Australia’s economy may be ok, that on the Budget may be more challenging—several factors in play are more important for the Budget than they are for the economy. For example, the continuing pressure on corporate profits is an issue for the Australian economy, but not a big one. However, it looms large for the Budget. Indeed, the Budget forecasts are likely to indicate the company tax take in 2015–16 will be below the collections achieved in 2007–08, before the global financial crisis hit.

Even more so, the weakness in wage growth is a double-edged sword for the economy. Wages are a cost to business and an income to families, meaning that weak wage growth is improving Australian business competitiveness at the same time that it is weighing on family finances. On balance, that’s probably a small net positive for the economy.

But it isn’t a positive for the Budget. There’s three times as much tax collected through personal tax than is raised via company tax. And wage growth traditionally comes with an ‘accelerator effect’, pushing people into higher tax brackets. The absence of wage momentum therefore hangs relatively heavily on the Budget outlook.

That said, the Budget outlook—as usual—can be expected to forecast a return to sunnier conditions, with steadily falling deficits. But, as always, those official forecasts will be worth a closer look.

For example, even the official forecasts of the debt trajectory are likely to be enough to see debt-to-income ratios temporarily move above rates that have previously seen the Australian government lose its AAA credit rating. And while the importance of an AAA credit rating is much exaggerated, it will still be worth monitoring what the ratings agencies have to say in the wake of this Budget. After all, the AAA rating doesn’t only cut credit costs to the Feds—it does the same for State governments, and arguably also cuts funding costs for business and home mortgage borrowing as well.

In addition, there’s a chance that the official forecasts prove too optimistic. That is, after all, the consistent story since China’s economy peaked back in 2011.

So there will be three caveats to the official figures—China, the Senate and the States.

China’s economic transition may yet throw more spanners into the works for Australia’s economy and (even more so) its Budget. Although Chinese growth just took a turn for the better, it’s very much the result of a huge rise in borrowings and debt. In fact the latest surge in Chinese credit aggregates is even bigger than what happened there in response to the global financial crisis. That suggests continuing Chinese strength in the short term may come at the cost of great risks in 2017 and beyond.

Second, don’t forget that some of the improving Budget trajectory in the official figures will rely on the Senate finally agreeing to a bunch of savings measures that it has blocked for several years now. The passage of those bills seems optimistic, particularly in an election year.

Third, the largest savings in the Federal Budget in recent years involve pushing a bunch of costs on to the States. However, although the States could do better on both taxing and spending than they do, they only have a handful of taxes at their disposal, and the States are in the front line of big cost pressures in health and education.

That’s why it was no surprise that the Federal Government just blinked, handing back extra money for hospitals when those earlier cuts were about to bite. In turn, if the official deficit forecasts are therefore optimistic, the same will be true of the debt forecasts.

Finally, it’s worth noting that the above commentary still comes down to my favourite summary of how Australia’s Federal Budget got into this mess in the first place: a temporary boom was spent on permanent promises.

Although Australia’s economy is doing refreshingly well in the circumstances, those words look set to haunt the Federal Budget for some time yet.

Asian growth in turbulent times

A new reality is emerging in Asia. In recent decades, many of Asia’s economies have boomed. The region today accounts for about 40% of the world’s GDP—up from 25% in 1990-and contributes about two-thirds of global economic growth.

There’s more. Asia has made unprecedented strides in reducing poverty and improving broad development indicators. The poverty rate fell from 55% in 1990 to 21% in 2010, while education and health outcomes have improved significantly. Hundreds of millions of lives have been improved in the process. And, looking ahead, Asia is expected to continue to grow at an average annual rate of 5%, leading global economic expansion.

But today, the region is facing challenging new economic conditions. With growth in advanced economies tepid, risk aversion increasing in global financial markets, and the commodity super-cycle coming to an end, the world economy is providing little impetus to Asian growth.

At the same time, China is moving toward a more sustainable growth model that implies slower expansion. Given the growing links between China and the rest of the world, particularly Asia, the spillover effects are significant. Indeed, China is now the top trading partner of most major regional economies, particularly in East Asia and ASEAN. New research by the International Monetary Fund, to be published in next month’s Regional Economic Outlook for Asia and the Pacific, suggests that the median Asian country’s economic sensitivity to China’s GDP has doubled in the last couple of decades. So China’s slowdown means a slower pace of growth across Asia.

Asia’s achievements in recent decades attest to the hard work of the region’s people, as well as to the soundness of the policies that many Asian governments have adopted since the late 1990s, including improved monetary-policy and exchange-rate frameworks, increased international reserve buffers, and stronger financial sector regulation and supervision. Against this backdrop, the region attracted vast amounts of foreign direct investment.

As trade links expanded, a sophisticated network of integrated supply chains emerged, creating the conditions for Asia to become a manufacturing powerhouse and, increasingly, an exporter of services as well. More recently, thanks to strong policies and ample reserves, the region quickly recovered from the global financial crisis. Asia also benefited during these years from strong global tailwinds, including favourable external financing conditions and the rapid expansion of the Chinese economy.

Amid this new testing reality now dawning in Asia, we must not lose sight of the deep, and long term, structural challenges facing the region. Populations are rapidly aging and even declining in countries like Japan, Korea, Singapore, and Thailand, dragging down potential growth and putting pressure on fiscal balances.

Income inequality is a further challenge. While inequality has remained stable or declined in Malaysia, Thailand, and the Philippines, it is rising in many parts of the region, most notably in India and China (as well as other parts of East Asia). In many emerging markets and developing countries, widespread infrastructure gaps persist, notably in power and transport. And, elsewhere in the region—the small Pacific islands in particular—vulnerability to the effects of climate change is increasing.

This shifting landscape calls for bold action on several fronts. While the response will certainly need to be tailored to each country’s specific circumstances, some recommendations could be helpful for most countries:

  • Because inflation remains low across most of the region, monetary policy should remain supportive of growth in case downside risks materialize.
  • Exchange-rate flexibility and targeted macroprudential policies should be part of the risk-management toolkit.
  • Countries need to deepen their financial systems to channel the large pool of domestic and regional savings toward financing their development needs; closing the region’s infrastructure gaps, for example, remains critical.
  • Structural reforms, aided by fiscal policy, should support the economic transitions and rebalancing, while boosting potential growth and alleviating poverty.

The good news is that Asia, as demonstrated by its strong performance in recent years, can meet these challenges and continue to build upon the significant achievements of the past two decades. It has the resources and the people; it has the buffers and resilience; and it has ample opportunities for further trade and financial integration.

To discuss these challenges, the government of India and the IMF are organizing the Advancing Asia conference in New Delhi on March 11-13, bringing together regional policymakers and thinkers. India, a bright spot among emerging markets in these difficult times—indeed, the world’s fastest growing major economy—is an auspicious place to hold this gathering.

Our mutual aim in convening with Asian policymakers is clear and critical, for Asia and for the global economy: to ensure that growth in Asia continues to be robust, sustainable, and inclusive, so that the region remains a powerful locomotive for global growth.