Asia in Need of a New Way

GG 2020 - 27th May 2010

By Ting Xu

The Global Governance 2020 program has three central pillars: Germany, the US and China. That triangular relationship, to me, should be expanded to encompass the much larger regional picture at the center of numerous global affairs these days: the EU, the US and Asia. While these three regions are the main driving forces of the world's economy, each has faced unique challenges in promoting economic growth and stability in the post-war period. Today, Asia in particular is at a transitional point in its development and needs to find a new way forward. 

In the decades following World War II, the US drove the global economy with its dominating share of global GDP. Then other parts of the world started to emerge from the debris of the war, starting with Western Europe’s dramatic recovery. By the time the European Union was formed in 1993 and the euro went into force in 1999, a new age of global economic integration was at hand. The trans-Atlantic economy’s strong performance, in turn, fueled much of the growth in other regions. The Euro-American market system became the one that these regions would seek to emulate. Asian countries were no exception.

Asian countries have taken great advantage of the industrialized world’s economic transformation, serving as manufacturers to supply insatiable demand. Japan emerged first, followed by the "Four Asian Dragons" (Singapore, Korea, Taiwan and Hong Kong), which were then followed by the "Four Asian Tigers" (Malaysia, Thailand, Indonesia and the Philippines). China and India have shown the most dramatic growth more recently, leading over a third of the world's population from third-world status to two of the world’s largest economies. By 2005, Asia comprised more than 35 percent of the world's GDP, compared to about 20 percent for the EU and US, and it defined up to 50 percent of world growth.

Most of Asia’s growth is a result of the West’s enormous market, which drives demand for Asian products. But the fact that Asia’s strong economic performance is so closely tied to the Western market has taught many hard lessons.

On one hand, because the US dollar has been the dominant currency for global trade, it has helped to stabilize and increase export demand, which has strengthened the region’s economy. But in the process, Asian countries have become prone to attacks from large hedging institutions, who directly exacerbated the Asian financial crisis in the 1990s.

After the devastating Asian financial crisis, Asian countries started looking toward the European experience. The euro’s impressive progress made the idea of a common Asian currency seem possible. The Chiang Mai Initiative, which currently has a reserve pool of US $120 billion, marked a new attempt by Asian countries to further build and strengthen a currency safety net. 

The region has come a long way since it recovered from its financial crisis. Asia has steadily increased its share of the world’s exports, which now stands at about a third. Along with this trend, Asia has seen a fast increase in its holdings of current account surplus and foreign exchange reserves. Eleven key Asian central banks alone now hold more than the equivalent of US $2.7 trillion, most of which is in US dollars. 

But this progress is a double-edged sword. While it’s contributed to stunning development in the Asian economy, it’s also made the economy highly dependent on demand from the US and Europe, hindering the growth of domestic consumption. And without that core support of domestic consumption, Asia has fallen victim to the current world financial crisis. In 2008, despite the initial optimism of many , including the Asian Development Bank, that predicted Asia’s exposure would be limited, the decline in demand from the US and Europe led to sweeping job losses across many Asian countries. Large foreign reserves helped shield the region from currency speculation attacks, but they also exposed a dilemma that Chinese Banking Regulatory Chief Luo Ping bluntly described when he spoke of the massive US stimulus program: “Once you start issuing $1 trillion to $2 trillion, … we know the dollar is going to depreciate, so we hate you guys, but there is nothing much we can do except buy more US treasury [bonds], which is the only safe option in a crisis.” 

The strength of the euro was thought to be able to lead the world out of its fetish with the US dollar, but the euro is now in even bigger trouble than its American counterpart. The profligate fiscal policies of several countries in the euro zone have called into question how a regional currency can be sustainable when it’s shared with partners with vastly different economic policies and degrees of wealth.

In Greece’s case, the €750 billion agreement recently reached in Europe was only a temporary fix to calm the market, not a permanent rescue for Greece. The negotiation process, and Germany’s sudden move to ban naked short selling, have shown just how hard and unpredictable it is for European countries to take a united step toward reform.

Asia, meanwhile, is at a crossroads. The path toward continued export demand is unsustainable; the path toward greater foreign-exchange reserves doesn’t provide the best return, and the long-term dream of creating a regional Asian currency seems to be unrealizable. The only option left, however undefined it may be, is to find a new way. 

The good news is that Asia has carved an essential role in the world’s economy. According to the International Monetary Fund’s April Regional Economic Outlook,, most Asian economies recovered to pre-crisis levels by the end of 2009, and the continent is now slowly leading the rest of the world toward recovery. Asia’s role in this respect presents several opportunities. For one, it could boost domestic consumption, particularly in newer industries such as green power initiatives. By building a future Asian economy around these newer industries, it could effectively move away from simply acting as the world’s manufacturer. Asia could also boost regional trade among its countries, and make those transactions based on a set of local currencies.

 One thing is certain: Asia cannot and should not continue to live off making asphalt for others; it needs to build its own roads.

 Ting Xu (ting.xu@bertelsmann-foundation.org) is a Senior Project Manager at Bertelsmann Foundation North America