Asia: Achieving Its Potential

AuthorChangyong Rhee
Positionthe Director of the IMF’s Asia and Pacific Department.

Asia has led global growth for the past several decades, with an average rate of close to 6 percent since 1990. If the current trend continues, Asia’s economy will be larger than that of the United States and the European Union combined in less than two decades.

While Asia’s future appears bright, its success is not guaranteed. It depends crucially on choosing the right policy mix to contain risks and secure growth.

In the near term, the region faces some emerging vulnerabilities and may continue to be buffeted by volatility in global markets.

And over the medium term, all parts of this diverse region must confront challenges:

• Asia still has close to 700 million poor people—65 percent of the world’s poor, defined as an income of less than $1.25 a day—and income inequality is growing.

• The region’s emerging markets face the task of moving beyond middle-income status and joining the ranks of advanced economies.

• Several of Asia’s industrial economies have embarked on the difficult process of transforming their growth model.

Resilience and growth

The year 2013 witnessed several spells of global financial volatility, leading to a pullback in capital flows from emerging markets, including in Asia. But Asia has remained broadly resilient to global risk, even as some of its economies’ buffers have been tested by the retreat of external funding. Swift actions taken to address vulnerabilities are starting to bear fruit, and the growth momentum is set to continue.

Asia is projected to grow at 5.5 percent in 2014 and 5.6 percent in 2015, retaining its global growth leadership. Exports will pick up as the recovery continues in advanced economies, while domestic demand across the region will be supported by healthy labor markets and strong credit growth.

With continued tightening of global liquidity as tapering of the U.S. fiscal stimulus proceeds, Asia will face somewhat higher interest rates and bouts of capital flow and asset price volatility, but overall financial conditions should remain broadly supportive.

There are, as always, risks to this prognosis. Further tightening of global financial conditions remains a threat. And the impact of higher global interest rates could be amplified by rising household and corporate debt in some parts of the region.

If things slow down in China more than expected, other countries in the region will pay the price (see “Sino Shift” in this issue of F&D). In Japan, there is a risk that Abenomics-related measures—based on Prime Minster Shinzo Abe’s “three arrows” economic plan—will be less...

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