Dr Ashfaque H Khan
In my last article (on Nov 2) I discussed the agenda of the forthcoming G20 Summit in Seoul. In this article, I will be discussing the views of the Asia-Pacific region for the Summit. The Republic of South Korea, the host country, took the initiative to invite ESCAP and other regional commissions of the United Nations to convey the perspectives of non-G20 countries on the Summit agenda.
Asia-Pacific has emerged as the growth-pole of the world economy. After growing strongly for a decade, this region was hit hard by events for which it was not responsible. Consequently, the region paid a heavy price in terms of loss of incomes and human suffering. Notwithstanding the shockwaves, the Asia-Pacific region continued to perform robustly even in the midst of crisis. Rebalancing global growth will dominate the G-20 Summit in Seoul. The region will be asked to rely heavily on domestic demand, particularly on consumption. Does this region consist of homogenous countries?
Like global imbalances, such imbalances also persist in the region, notably between the economies of the East and the South-East and those of South Asia. The region itself has large socio-economic and development gaps. Although the region has grown strongly on a sustained basis and succeeded in bringing millions of people out of poverty, it is still home to over 950 million people living below the poverty line ($1.25 per day). Development has also been uneven across sub-regions and between countries. This is also reflected in progress towards achieving Millennium Development Goals (MDGs) where South-East Asia leads the way while South Asian economies lag behind. Similar gaps are also witnessed in infrastructure development.
Thus, this region itself needs a rebalancing of growth and the bridging of gaps in socio-economic and infrastructural development.
The current crisis has provided some food for thought and there are lessons to be learnt in order to avoid such a crisis in the future. One such lesson centres on the need for the promotion of new sources of growth that will compensate for the weak demand from the developed world. This requires a rebalancing of the region's economies in favour of domestic consumption and exploiting of the potential regional demand. With over $5 trillion of foreign exchange reserves, the region now has the ability to foster a major programme of investing in itself.
Over the past decade, many countries in the region have accumulated large foreign exchange reserves, providing some self-insurance against external shocks. The tendency to accumulate large reserves has its roots in more fundamental deficiencies of the international monetary and reserve system. The need for self-insurance can be reduced with a more effective mechanism for liquidity provisioning and reserve management at regional and international levels.
The dynamism of the Asian-Pacific economies requires that the region devise comprehensive regional financial cooperation arrangements. The recent crisis highlighted the lack of financial tools at the regional level, over and above those in the hands of national governments. While some countries have built up sufficient reserves to protect themselves, others have experienced challenges as they had no recourse to regional resources for assistance. A regional financial architecture, performing the role of lender of first recourse, is the need of the hour.
The region now has a window of opportunity to press forward with a truly effective regional financial institution to foster monetary and financial cooperation. Let this institution be known as the Asian Monetary Fund (AMF). The Asian Development Bank is working side by side with the World Bank and supplementing its effort as a development partner. The AMF can work side by side with the IMF in promoting regional and global financial stability.
Additional food for thought arises from the region's excessive dependence on the dollar as reserve currency. Many countries in the region witnessed loss in the value of the dollar because of its depreciation against the major currencies. Within the ambit of the Asian financial cooperation, a regional currency arrangement could serve as a building block for an additional global reserve currency.
Many countries around the world believe that the dollar-based monetary system is not in their interest and are calling for reform. Let the Asian Drawing Rights (ADR) or Asian Currency Unit (ACU) with major Asian currencies like Chinese Yuan, Japanese Yen and Korean Won serve as regional reserve currency along with dollar and euro.
As stated earlier, there exist large gaps in the levels of infrastructure development in the region. To bridge the gap as well as to sustain strong, balanced and 'inclusive growth', investment in infrastructure will go a long way in regional development. Given its nearly $5 trillion of reserves, the region can establish an Infrastructure Development Fund managed by a regional institution. The pooling of reserves could help the region meet its infrastructural needs.
The Asia-Pacific region is still home to close to a billion poor. Lifting them out of poverty is a collective responsibility of the richer countries of the region. With close to $5 trillion in reserves, the region can take an initiative in establishing a Microfinance Bank, through which the income of the poor could be increased. This would help the poor come out of poverty, improve their nutrition level and educate their children. Thus, a Regional Microfinance Bank is the need of the hour as the poor are excluded from the formal financial sector and from the services of commercial banks.
Enhanced regional cooperation in financial system should not be seen as demeaning the importance of existing international financial institutions. Rather it should be seen as complementing the efforts of existing international financial institutions. This would also help in coordinating policy and providing the perspective of the Asia-Pacific region on global economic issues at different forums like the G-20.