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In Tashkent, the Future of Asia

In early May, Tashkent will host the 43rd Annual Meeting of the Asian Development Bank (ADB), the first in Central Asia. In parallel, the ASEAN+3 Ministerial Meeting will also take place here (see Boxes). Essentially, the financial elite of East and South-East Asia – those who decide the financial policy in the world’s most dynamically developing economic region and the future centre of global economic development – will convene in Tashkent. Three thousand participants are expected to arrive, including government leaders, heads of central banks and finance ministers, as well as representatives from the private sector, academia and civil society.

 

ADB Teaches “How to Fish”

The Meeting agenda focuses on the progress achieved under the ADB Long-Term Strategic Framework adopted in 2008. At that time, ADB changed its strategy dramatically with respect to reducing poverty in the region; formerly, the predominant view was to focus on social protection and support for low-income populations. The current strategy has a different aim: “Reduction of poverty rates can only be achieved with increased productivity, balanced economic and environmental development, as well as growth and liberalization of domestic market by way of regional cooperation”.
When the strategy was still being adopted, it was strongly criticized. Its numerous critics pointed out that, instead of helping the poor, the Bank opted for supporting private sector and infrastructure projects. For instance, Isabel Ortiz and Anita Kelles-Viitanen in an article  in Project Syndicate noted:
If the ADB were serious about poverty reduction, it would put a significant share of its investments in social development, particularly on non-contributory universal social security schemes that can reduce poverty by 35 to 50 percent... ADB’s major goal, however, seems to be to scale up private-sector support from 15 to 50 percent of total bank operations. Several countries have expressed reservations about this.
Critics of the strategy turned out to be wrong, however. Recent reports produced by international organizations often increasingly observe that rapid economic growth in Asian countries assists them to better cope with poverty-related problems since it helps create many new jobs. It is precisely the private sector support and infrastructure development – increasingly the focus of ADB policy – that create a solid base for economic growth and greater competitiveness of the Asian countries’ domestic business. This in turn leads to the emergence of new jobs and a growing income for the population, and increases government capacity to provide social protection and support for the most vulnerable population groups. The Bank acts in the spirit of a famous saying: “It is better to teach a hungry man how to fish, than to feed him fish”. One can likely expect that during the Annual Meeting in Tashkent, the pursued strategy will be rated positively, and data will be provided, which characterize its impact  on poverty reduction.

 

The Tashkent Option of Global Architecture

The agenda also includes other important and relevant issues of today, which, in fact, focus less on Asia and more on the global dimension, such as the reform of the global financial system, the post-crisis development of Asian countries and issues regarding climate change. Discussions on these matters may prove interesting and productive, leading to rather unexpected conclusions, due to complex and critical geo-economic changes of the recent decade, now greatly accelerated as the global economic crisis unfolds.
Perhaps, the critical moment in the development of the global economy began with the advent of sailing ships and manufacturing in Europe. From then on, the global economy has revolved around Europe, and later, the United States of America. Developing economies were essentially the peripheral sectors of the Western economy, dependent on its demand, technology, trading rules and economic policy. Export orientation, be it in commodities or manufacturing, is just as dependent on Western markets and the macroeconomic and monetary policies of Western countries as it is on their technologies. In addition, over this time, the issues concerning global economy management have remained the prerogative of Western countries and the financial institutions they created, such as the International Monetary Fund (IMF) and the World Bank.
The current financial crisis has already altered the situation significantly. Although it has spread throughout world from the United States, the epicentre of the global economy, it has nevertheless been largely conditioned by global imbalances, when consumer demand in the United States and Europe continued to be the primary stimulus for developing economies. In addition, the use of the U.S. dollar as reserve currency worldwide resulted in a growing imbalance in savings and consumption between developed and developing countries. At the same time, the impact of the United States economy on the global economic structure has been consistently declining, whereas the impact of developing economies, which were only indirectly influenced by Western regulators, has been gradually increasing. This has resulted in a situation where the economic regulators in the United States, followed by those in Europe, could no longer cope with their regulatory functions because their economies were deeply integrated into the global economy and, on the macroeconomic level, closely linked to developing economies. Thus, in principle, the regulatory mechanisms are no longer as effective as they were before, due to a corroded monopolarity of global economic system.
This was clearly understood as early as in the autumn of 2008, at the Washington Summit, with the contribution of some successful developing economies towards solving global financial problems and the emergence of a new forum to address them, the Group of Twenty (G-20), called on “to reform global financial architecture” in order to prevent such crises in the future. Since then, two additional summits of the G-20 have been held – in London, UK, and Pittsburg, United States; however, no major decisions have yet been taken to amend the global financial system and its regulation. Therefore, the question remains open, debates continue, and it is expected that the participants of the Tashkent meeting will take the opportunity, at least partially, to consolidate the positions of Asian countries in reforming the global financial system.

 

Asia’s Post-Crisis Risks

Closely related to the previous issue on the agenda is Asia’s post-crisis development. Dynamically developing Asian countries have been much less affected by the crisis than some developed economies. Whereas the developed countries have experienced economic decline, many Asian countries have experienced only a slowdown of economic growth, and recovery in Asia has been more energetic. To date, the full-fledged assistance extended to the advanced economies has resulted in changing the economic growth dynamics from negative to positive; in a number of Asian countries, primarily in China, economic growth rate is now close to the pre-crisis level. As a result of the above, numerous observers may argue that the centre of the world’s economic development is surely shifting to Asia: thus, the economic situation is returning to the original position that it occupied prior to the era of great geographic exploration. Since this phenomenon has not been observed in the past 500 years, it is difficult to find support in any analogies or make a development projection, especially for formulating a longer-term economic policy.
The main issue today is how painlessly the export-oriented Asian economies would be able to decrease their dependence on demand in Western markets. Reaching the pre-crisis level of economic growth and consumption in the United States and Europe is expected to be relatively slow, while the high birth rate in Asia requires that the high economic growth rate be maintained to avoid a rise in social tension. Still, living standards in most Asian countries are much lower than in developed economies, and Asian consumer demand cannot yet become a valid alternative to that of the West as the primary stimulus for economic development. In this respect, positive signals come from China where anti-crisis measures, including those aimed at encouraging domestic demand, have already resulted in a substantial increase in domestic consumption. This does not apply to all Asian economies, however; many of them are now increasingly driven by demand in China, rather than at home.
Moreover, many analysts fear that the attained relative stability in Western economies may again be put to serious test when governments start reducing their anti-crisis incentives and withdraw the infusions of public funds from the markets, which were made available during the most acute period of crisis. All of this may bring about another reduction in the global aggregate demand and thus undermine Asian countries’ ability to maintain an export-driven economic growth rate that is acceptable to them. Also, with low domestic demand, many Asian countries observe a high savings rate, both in public and private sectors, as well as at the household level. Further, China’s anti-crisis experience shows that these savings can be used effectively to encourage domestic demand with the aim of sustaining economic growth in the event of declining export revenues.
The re-orientation of economies towards domestic demand also requires significant changes, both in macro-economic regulation and in monetary policy. Typically, economies with developed domestic markets, such as the European Union and the United States, have a strong convertible currency, which, on the one hand, strengthens domestic demand, but on the other hand, can also undermine product competitiveness in the foreign markets. In addition, many Asian countries presently tend to have their national currencies pegged to the dollar. How would a new approach towards encouraging domestic demand affect foreign exchange policy and currencies of Asian countries, as well as the competitiveness of their products in the foreign markets? Against the background of uncertain prospects for the dollar due to the excessive deficit in the United States, and for the euro due to growing debt in a number of European countries, Asian countries are aspiring for a shift to national currencies in trade. But can it be justified, and what kind of risks can this bring?
All of these questions are equally important for all Asian countries, and there are still no clear answers. Yet, they would be able to determine the best options for economic policy in Asian countries – a policy to protect the countries from crises and improve people’s wellbeing in the region. Therefore, these questions are likely to become the subject of extensive discussion during ADB’s Tashkent meeting, but it is unlikely that exhaustive answers will be given. Discussions will, rather, be a starting point for further work.

 

Integrating Asia

The topic of the Governors’ Seminar  this year is “Integration in Asia and Global Growth”, and in light of the above, the issue is far from abstract. It is regional integration that helps participating states develop domestic markets, increase their competitive advantage, and eventually, secure stable and dynamic economic development. Essentially, what is now referred to as “the Western economy”, the nucleus of the global economy, is the world’s two largest free trade areas – the North American Free Trade Agreement (NAFTA) and the European Union – interconnected by close, reciprocal economic links.
Asia is also moving in a similar direction. Starting in January this year, free trade areas between China and The Association of Southeast Asian Nations (ASEAN), and between the Republic of Korean and ASEAN began to operate. A similar agreement between Japan and ASEAN will become effective in 2012.
Specifically, from 1 January 2010 in the China-ASEAN free trade area, customs duties for 90 percent of goods traded between China and the six most advanced ASEAN countries have been completely abolished; for the four less developed ASEAN countries, this will apply in 2015. Whereas ASEAN is the world’s largest free trade area in terms of the population of the participating countries, it only ranks third after the European Union and NAFTA in terms of the magnitude of economy. In parallel, political interaction is also developing. Two Republic of Korea-China-Japan tripartite summits have already taken place. In the most recent one in Beijing, the parties discussed the idea of creating an East Asian Community. In the northern direction, economic cooperation is developing in the framework of the Shanghai Cooperation Organization (SCO), the Eurasian Economic Community (EurAsEC) and the Customs Union. There are also regional integration processes in the southern and south-western parts of Asia.
As the crisis unfolds, interesting trends in economic interactions can be observed. Global trade has dropped significantly due to decreased capacity of the Western markets and reduced exports from Asia entering these markets. Economic conflicts in the Western economies have deepened. In NAFTA, Canada gave a cold reception to the United States’ policy urging people to “Buy American”. Further, European countries are not satisfied with each other’s anti-crisis policies. For instance, critics of Germany have claimed that its export interferes with the efforts of other European economies to cope with the crisis. In addition, there are trade disputes and disagreements over market regulation between the United States and Europe. At present, there is no major news about “trade wars” between Asian countries from the region. Moreover, observers note that trade of most of Asian countries is shifting to China as a result of the crisis. Trade and investment among the PRC, Japan and the Republic of Korea is also on the rise: the expansion of trade among Asian countries is compensating for the reduction of trade and economic cooperation between Asian countries and the United States and Europe due to the crisis.
The main threat to sustainable and progressive economic development in Asian countries – the reduction and slow recovery of demand for Asian products in Western economies – can be neutralized by expanding economic cooperation among Asian countries; i.e. by developing economic integration in Asia. Indeed, the declared subject of the Governors’ Seminar this year, “Integration in Asia and Global Growth”, can help formulate an optimal policy on the main economic challenges facing Asian countries. It is precisely the development of economic integration that will make it possible to optimally stimulate regional demand and increase the capacity of regional markets. This will also facilitate growth in domestic demand in Asian countries, thus reducing the risk of dependence on Western economies. As a result, this will ultimately help Asian countries offset the strong dependence of their export-driven economies on Western markets and their regulators, which will essentially involve a new pole in global economic development and a transition towards real polycentricity of the global economy.

ADB’s Northern Vector

Central Asia is situated in northernmost frontier of ADB operations. It is positioned between the historical centre of contemporary economic development model, Europe, and the evolving new centre, South-East Asia, where the current Western economic model is undergoing certain adjustment. In the countries of Central Asia, ADB provides assistance in combating poverty, supporting small and medium business and developing infrastructure. Recently, support to transport infrastructure development projects has been given special attention in Central Asian countries: indeed, this is the necessary but insufficient condition.
Historically, following maritime connections, the central vector of economic development was first connected with the Atlantic Ocean, and later spread across the Pacific. Asia’s current transport, trade and financial infrastructure is therefore tied to maritime transport and concentrated predominantly in coastal areas. In the mainland Asia, including the vast expanses of the former Soviet Union, its quality is poor, especially when compared to the United States and Europe. Yet, the formation of a new pole of economic development in Asia, comparable to that of Europe and North America, also creates the need to expand continental economic links – and, accordingly, to develop trade and transport infrastructure—both with the post-Soviet space  and Europe.
The modern inland transport corridors that significantly reduce transportation time compared to seaways is in the interest of both South-East Asia and its important trading partners such as Europe. Integrating the Central Asian economic segment into the matrix of trade  and economic relations between Asia and Europe will help Central Asian countries to better integrate into main global economic hubs – not necessarily today, but in the future. Above all, this can also become a primary incentive for their economic development and modernization of their economies.
In this light, the choice of the city of Tashkent for holding ADB’s Annual Meeting and the meeting of the ASEAN+3 Finance Ministers is symbolic, since it is at the centre of the continent, the crossroads of western and eastern cultures and civilizations. It is also at the centre  of a country that shapes its own policy and development model, whose effectiveness has stood the test of crisis. Further, the post-crisis economic development on the continent will largely depend on the results of the Tashkent forum.

Victor Abaturov, Natalya Perevozkina

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