SINGAPORE (MarketWatch) — There’s been a lot of persuasive talk about the 21st century being Asia’s, notably in a new book — “The Great Convergence” — by Kishore Mahbubani, the ever-productive dean of Lee Kwan Yew School of Public Policy at the National University of Singapore. Yet the century still has 86 years to go.
In the meantime, Asian countries are undergoing a spell of hopefully short-lived jitters as a result of latest signs of a Chinese slowdown, doubts about the true strength of the U.S. recovery and persistent malaise in Europe.
Policy makers, economists and financial market participants in Asia are less optimistic about the near-term outlook than many outsiders might expect (or hope).
Despite efforts to promote more intra-regional trade and step up financial market integration within the main Asian countries, Asia is heavily dependent on the rest of the world for economic growth, particularly in view of its embedment in complex and sometimes volatile international supply chains. So Asia has a long way to go before it can be a self-contained force for economic expansion.
The high-level view from Southeast Asia is that the U.S. is at a more uncertain stage in economic recovery than popularly believed. The Federal Reserve may remain trapped for some time to come in a fundamentally unhealthy position of presiding over an excessive degree of monetary accommodation, as shown by persistent will-he-won’t-he? speculation about whether Fed Chairman Ben Bernanke really will be able to cut back on the Fed’s liquidity injections through quantitative easing as and when U.S. unemployment falls.
One senior observer, dwelling also on uncertainties in Japan and Europe, said the world faced a difficult mixture of cyclical and structural problems that could take a long time to resolve. Economic stagnation might be the result in the short term, he said.
Persistent signs are emerging that China is headed for a sharp slowdown in growth in coming years, perhaps to substantially below the 6% level previously regarded as an acceptable floor. This is a result of the authorities’ wish to curb excessive debts of regional and local governments and to rebalance the economy with a big increase in private consumption , which will automatically shift growth away from the traditional generators of expansion, exports and investment.
Other dampening effects for Asia are likely to stem from a new era of cheaper energy in the U.S. based on the shale gas revolution, which could affect the commodity and raw material cycle that has been favorable to countries such as Malaysia in recent years.
A further nagging concern is the slow pace of integration of Asian financial markets, which makes the region still unjustifiably dependent on financing conditions in Western markets, and particularly the dollar, in spite of widespread efforts to boost use of Asian currencies in trade and investment.
Professor Mahbubani of Singapore cites dependence on the dollar as one factor holding back Asia’s progress toward greater economic self-sufficiency. Sluggish institutional reform in governance of bodies such as the International Monetary Fund and the World Bank is preventing Asia from playing a role on the world stage commensurate with underlying shifts in economic performance, he says.
“This huge and growing gap will lead to progressive delegitimization of the IMF and World Bank. Developing countries will seek closer financial cooperation with rising new powers, such as China and India. Proposals like a BRICS bank will take some time to be realized, but political support will grow if the IMF and World Bank remain mired in the past.”
A further contradiction, Mahbubani says, is between the rising market integration of the Asian economies and the slow institutional integration of Asian countries. “In some ways, it was wise for Asians to take the opposite approach from the Europeans, where institutional integration facilitated trade integration. In Asia, trade integration is leading to pressures for institutional integration, but traditional Asian caution is hindering steady institutional integration.”
The Asian economy meanwhile is sending out mixed signals, but these seem to indicate fluctuating month-to-month fortunes rather than underlying strength.
Singapore’s economy grew in the second quarter by a much-larger-than-expected 3.7% over the same period last year. This was much higher than the 0.2% growth in the first quarter, although it was driven mainly by a rebound in services and manufacturing that economists say is unlikely to carry through to the second half of the year.
On a more sobering note, Indonesia has had to raise its key interest rate by more than expected to 6.5% from 6%, contrasting with most expectations of a 0.25 percentage point rise, in the face of capital outflows and a weakening rupiah caused partly by anticipation of tighter U.S. credit.
Like other large emerging-market economies such as Brazil and Turkey, Indonesia has been hard hit by the financial market’s shift in the last few weeks away from emerging markets toward core investment havens. All this is probably no more than a hiatus in Asia’s long-term growth trail, but there may be a few wobbles before Asia gets back on track.