Authors: Mahendra Siregar and David Nellor, Republic of Indonesia
While Asia’s emerging economies account for less than 30 per cent of global GDP, they contributed close to 60 per cent of global growth in 2011 and are expected to do the same in 2012.
The simple response here would be to assume that Asia is on the right track and that it simply needs to do ‘more of the same’. Following this rationale, there are four generally accepted drivers of growth in the region that should continue to be a focus throughout the Asian Century.
First, domestic economic policy is relatively sound. The government borrowing requirement in emerging and developing Asian countries was about 2 per cent in 2011, and the region’s external position was strong, with external debt below 30 per cent of GDP.
Second, fundamental drivers of growth are positive for most countries in the region, withfavourable demographics boosting labour supply and increasing domestic demand. For example, 50 per cent of Indonesia’s population is under the age of 30.
Third, the size of Asian markets is growing rapidly. Not only does the region have a large population, its effective market is growing — due to an expanding middle class — and reflects the region’s success in addressing poverty.
Fourth, many countries in the region have commodity endowments that are in high demand. The increase in wealth and cash flow related to the commodity boom has funded investment in the commodity sector and more broadly throughout the region’s economies.
These drivers of growth will continue to be important in ensuring that Asia contributes to, and perhaps drives, global growth. But the story is not quite so simple. Today’s global economy is not the same as it was yesterday, and Asia cannot simply use the recipe of the past. There is a more complex set of issues that must be addressed if Asia is to play its role in driving sustainable global growth in the future.
As a key global economic player, Asia must take on a multifaceted role that helps the global economy tackle serious imbalances at three different levels. Asian economies must have sound domestic policy; without this nothing will be possible. Regional cooperation must also take on greater importance. Increased trade and investment integration as well as greater macroeconomic and financial cooperation are both needed to secure regional economic stability. And at the global level, Asia should take on a stronger leadership role in discussions on current global economic developments and on the reform of the international monetary system. But, in turn, there are issues in each of these three areas.
The first challenge that needs to be addressed at the global level is macroeconomic imbalance. The way forward requires more concerted national policy action with global coordination. Asia’s emerging surplus economies will gradually rely more on domestic demand as a driver of growth, and countries in the region will support this transition through structural reforms in areas such as the passage of social safety-net laws. Indonesia, for example, recently passed laws on social security as an initial step in this direction.
But action in Asia must be complemented by action in the world’s advanced economies. The latter need to develop clearer policies to promote increased savings, including through medium-term fiscal adjustment. The global economy requires a comprehensive and durable solution to the euro zone crisis, and well-defined and credible plans for the debt challenges in other advanced economies, including the US. The slow progress in tackling these globally significant policy challenges has sapped market confidence in the capacity of relevant countries to address these challenges, and has contributed to the uncertain outlook.
A second issue is managing global liquidity, as it has important implications for the global economy. Developments in commodity prices, including food and energy prices, affect the region’s stability and the lives of the poor in the developing world. The global liquidity situation also has implications for capital flows. The current volatility is concerning, and the G20 initiative to support emerging economies in strengthening intermediation by developing domestic bond markets was created to combat the volatility of capital flows.
Finally, it is essential that economic governance reflect the realities of the global economy. This means better representation of emerging markets in international financial institutions, such as the G20. Without these changes, it will be difficult to realise the Asian leadership needed to help drive strong and sustainable global growth. There should also be a stronger role for ASEAN and ASEAN+3 in ensuring regional financial stability.
With success on the domestic front, particularly through sound policy decisions, Asia’s voice on the world stage will be stronger and more credible. American economist Nouriel Roubini stated that Indonesia will be the tenth-largest economy by the end of the decade and could be the sixth-largest economy by 2030, while projections for other countries in the region also show high growth potential. But these country-level goals will only be realised if there is an enabling environment for the necessary investment and employment opportunities in the region.
Beyond Indonesia’s strong economic fundamentals, realised investment also climbed by more than 50 per cent in 2010, with another big increase last year. This reflects Indonesia’s attractiveness as an investment destination, given its large market of 240 million people, rapidly expanding middle class, wealth of natural resources and strategic location. Indonesia is now building the financial and physical capital to complement its young and dynamic workforce as well. It is working to develop stronger capital markets to intermediate domestic saving and to ensure capital inflows are well used, while the government is also providing incentives to promote investment in priority sectors. To facilitate investment, Indonesia has passed a law to provide greater certainty around land access, addressed the political risks in public–private partnership infrastructure projects and enhanced the availability of long-term funding to finance long-term infrastructure projects.
Indonesia’s sustainable fiscal policy was key to protecting its economy from the global economic slowdown and also helped return the economy to investment grade status 13 years after the Asian monetary crisis. In the revised budget for 2012, the Indonesian government is now committed to reducing fossil fuel subsidies, improving education and health care systems for the poor, and addressing infrastructure and logistical connectivity challenges. This is a strategic step to further transform the Indonesian economy and help make Roubini’s prediction a reality.
The simple answer of doing ‘more of the same’ is correct insofar as it means that Asia is likely to account for a disproportionate share of global growth. But the changing global environment means that the way in which this growth is accomplished will be different from the past. A successful Asia requires the region to reform the global economy, address significant challenges within its own borders, and ensure that Asia’s domestic economies are retooled to deliver the sustainable growth that the world so desperately needs.
Mahendra Siregar is Vice Finance Minister, Republic of Indonesia and G20 Sherpa for the President of Indonesia, Susilo Bambang Yudhoyono.
David Nellor is Advisor to the Ministry of Finance, Republic of Indonesia.
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