Asia’s Rise, ASEAN’s future

Zainul Abidin Rasheed

Zainul is Singapore’s Senior Minister of State for Foreign Affairs. This is an edited excerpt of his speech at the 3rd ASEAN & Asia Forum which was held on Wednesday 6 October 2010. The exchanges of the dialogue session can be found on New Asia Republic’s facebook page.

This year’s theme ‘Asia’s Rise, ASEAN’s Future’, is an apt one, as we see Asia leading the global recovery from the financial crisis. Indeed, this is the first time a recovery that is led by Asia is happening. Although the world is recovering from the crisis of the last two years, there is still continued uncertainty and pessimism in the developed economies. High unemployment rates and weak household and bank balance sheets continue to plague the US as it continues its de-leveraging process. Consumer confidence remains weak. Europe now faces a severe and prolonged period of fiscal retrenchment and cuts in spending, which imposes a medium term constraint on growth prospects. Yet the outlook is much brighter for many developing economies, especially emerging economies in Asia, which are rebounding strongly from the crisis.

An Asia-led Recovery

The pattern of demand in the global economy has shifted, if not permanently, then for the next decade at least. Asia has emerged from the crisis on a firm footing. There has been a strong bounce in economic activities for a good part of this year and the recovery in Asia is more entrenched and has progressed further than in the G3 economies. More importantly, Asia’s strong bounce in economic activities has arisen not only as a result of rising exports but also growing domestic demand – both from public stimulus, and also private demand. The ADB has just projected economic growth in Asia to be about 8 per cent this year, up from 5.2 per cent last year to represent about 46 per cent of world growth. The IMF has similarly, in its July World Economic Outlook update, revised its forecast for Asia’s growth from 7 per cent to 7.5 per cent, raised that of the United States by a modest 0.2 per cent to 3.3 per cent while that of Europe remains at 1 per cent.

Divergent growth paths in the advanced world and the emerging economies will continue as the former goes through a period of severe fiscal consolidation and repair of its financial systems. The re-leveraging of Asia, its growing middle class and business capacity-building will gradually shift demand away from advanced economies in the years to come.

Furthermore, relative to advanced economies, emerging markets such as China, India, and Southeast Asia have much wider bandwidth in terms of increasing supply-side potential through productivity catch-up and, or, population growth. With their rising middle class population, these regions will also become more important as a source of final demand.

Strengths of Asia

Asia’s experience from the crisis is testament to its resilience which has been built upon the stringent policies that various governments took up as a result of the Asian Financial Crisis n 1997. Back then, economies ran out of foreign exchange reserves and resorted to floating their currencies, accumulating significant foreign debt, as well as faced devalued stock markets and assets. Sound financial systems have since been put in place, which have placed Asia on a firmer footing. Singapore had, in 1999, embarked on a five-year plan to liberalise the banking system while Vietnam had came up with a six-pronged reform programme to strengthen domestic banks by 2010. To date, most Asian banks are well capitalised. The recent announcement on the new Basel III rule which will now require banks to raise the level of top-quality capital they hold to 7 percent will have minimal impact on the majority of Asian banks as they have comfortably met that requirement. Chairman of the Basel Committee on Banking Supervision, Nout Wellink, too said that Asian banks were “on balance well capitalized”.

Asia has also strengthened as a region. Whereas much of their trade used to be with the G3 economies, there has been considerable concerted effort to boost intra-Asia and intra-ASEAN links in the past few years. Take a look at intra-ASEAN trade. In terms of investment numbers, total bilateral trade between China and ASEAN 5 grew at an average rate of 18% per annum from 1991 to 2009, from about US$8 billion to more than US$154 billion last year. The intra-Asian economy is now a driver in its own right. This is not just a short term phenomenon, but a longer term shift that reflects the growing importance of the Asian consumer. It also reflects the growing integration of the Asian economies, the integration of production structures.

This rapid integration within Asia has been brought upon by several factors. First, Asia has moved rapidly over the past few years to consolidate through a strong framework of bilateral and multilateral Free Trade Agreements. ASEAN has signed Free Trade Agreements with China, India, Japan, the Republic of Korea, as well as Australia and New Zealand. ASEAN also maintains good economic relations with other trading partners such as Canada, US and the EU. Such a network of FTAs and trade linkages has strengthened ASEAN’s position in the global economy.

On the financial front, several initiatives under the ASEAN+3 framework have been established to promote regional financial cooperation and to prevent resurgence of a crisis. The Chiang Mai Initiative Multilateralisation (CMIM) for instance, is the first currency swap facility created for ASEAN+3 to provide financial support to countries with short term liquidity needs. The CMIM underwent an enlarged US$120 billion swap arrangement earlier this year, and a ASEAN+3 Macroeconomic Research Office (AMRO), an independent regional monitoring and surveillance unit, will also be established here in Singapore early next year to support its implementation.

Third, the continued strengths of China and India will offer opportunities and challenges not just to Asia, but to the world economy as well. IMF forecasts the Chinese economy to grow by 10.5 per cent this year and 9.6 per cent next year, and the India economy to grow by 9.4 per cent and 8.4 per cent respectively. China and India are altering global patterns of trade, investment, production and travel and will likely power Asia’s growth over the next few decades.

Risks and Challenges in Asia

At the same time, Asia still faces several risks and challenges. Emerging markets are not yet decoupled from advanced economies; and emerging markets cannot replace developed markets in the near term. Europe and many parts of the world are still deleveraging and experiencing fiscal consolidation. This will inevitably exert a significant drag on global growth, not just over the short term but over the medium term – in the next five years or possibly longer.

Asia must take heed of this, and reduce their reliance on external demand, strengthen domestic consumption as well as explore new markets as an engine of growth so as to ensure a more resilient source of growth going forward.

Another challenge has to do with managing capital flows into Asia and the risks of asset bubbles across the Asian economies. With the shift in the weight of the global economy towards Asia, the scale of the shift in capital towards Asia may well overwhelm the policy tools that we have and raise the risks of inflation, and cause asset price booms and busts. Policy makers will have to assess the situation and react accordingly in a timely fashion while managing the risk of volatility.

In its recent report, the ADB had also highlighted the need for Asia to implement structural reforms to sustain its robust recovery and to ensure long-term growth. Per capita income of developing economies in Asia still falls below the global average, and we can catch up via stepping up on trade facilitation, investing in human capital through education reforms and developing sound infrastructure. We also need to expand the scope of the role of Asian financial systems. This goes beyond boosting the quantity of investment to enhancing the efficiency of investment. Asia has already started work on these. Several stimulus measures passed in Asia in the last two years include spending on infrastructure investment, which is a major creator of employment and domestic income. The Chinese government has earmarked a substantial portion of its RMB 4 trillion budget to develop the transport infrastructure in inland provinces, with plans to upgrade the airports of the capital cities and extend the railway network system. Asia has also seen an increased focus on improving productivity so as to boost domestic wages and sustain growth. Countries like Japan and Singapore have increased R&D spending as part of their stimulus measures.

Role of ASEAN

With China and India increasingly shaping global economic growth, ASEAN too, needs to respond, and respond strategically. ASEAN has to become more integrated and move faster towards a single market and manufacturing base to businesses and investors. It has to be more engaged with the global economy, as well as nimble in responding to the developments in the world. In line with this, ASEAN is committed towards the formation of the ASEAN Economic Community (AEC) in 2015 which strives to establish ASEAN as a single market and production base by 2015.

In addition, ASEAN is positioning itself to ride on the growth of China and India. ASEAN’s total trade with China and India has grown significantly over the past decade, and in 2009 amounted to US$176 billion and US$41 billion respectively. There is tremendous potential and synergies in the Asian market comprising ASEAN, China, and India, with the combined population of close to three billion people. That is why ASEAN has engaged and established strong economic linkages through FTAs with key dialogue partners (China, India, Japan, Korea, Australia and New Zealand) in order to exploit the potential of the huge market.

ASEAN has also done well in attracting investments. In 2008, ASEAN had attracted US$60 billion of investments, compared to just US$23 billion in 2000. Thus, it is only through encouraging our SMEs and ASEAN enterprises to invest in each other’s economies that we can achieve economic integration and become one market.

Growth Opportunities in Singapore

In Singapore, companies are well-placed to expand into the region, but we only have a short window of opportunity to create a strong presence before emerging markets catch up. As interest in Asia grows, Singapore can seize the growth opportunities in Asia, to be the Global-Asia hub, for both global players and Asian enterprises expanding beyond their home markets.

To do so, we have to enhance our position as a launch pad into the region for businesses. Our strengths include our pro-business environment, excellent connectivity to other regions of the world, and an open and inclusive culture that is welcoming to talent. We have to build upon these strengths as well as our location in the heart of Asia to offer companies a Global-Asia value proposition. Singapore can be a pan-Asia integrator and serve as a base for businesses to manage and control their business activities across the entire Asian region.

In the medium term, we are also encouraging our companies to invest and raise their productivity, so as to lay the basis for sustainable growth in the future. For example, as part of the recommendations by the Economic Strategies Committee (ESC), Singapore has heightened its focus on improving productivity by making a collective and sustained effort to upskill our workforce through continuing education and training. There will also be further efforts to restructure the economy to provide more room for vibrant enterprise growth and development.

Conclusion

In closing, the financial crisis has brought about a new reality of the markets. While we see a gradual shift in the centre of gravity in the global economy towards Asia, we have to continue to work harder on long term goals to attract investment into Asia while keeping in mind that markets can turn at any point through contagion from risks elsewhere. We must be ever prepared to deal with the challenges.

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A photo essay of the 3rd ASEAN & Asia Forum can be found at New Asia Republic’s facebook. The photo essay includes the summaries of speech made at each session / dialogue. The forum consisted of 4 sessions and 2 dialogues addressing the issues such as the post-crisis global economy, policy challenges faced by ASEAN & member states, energy & environment, the prospects of conducting business in Southeast Asia for the next decade.