State of the Region 2010-2011

Yuen Pau Woo
President and CEO
Asia Pacific Foundation of Canada

State of the Region Report
State of the Region 2010-2011

The world economy has been on a roller coaster ride since the collapse of Lehman Brothers in September 2008. A deep plunge in economic output through the greater part of 2009 was followed by a sharp upturn, only to settle now into what can be described as a period of great uncertainty. Recovery in the US and Europe has been spotty, and the risk of another financial crisis remains present. Contrasting policy responses across the Atlantic further complicate the outlook, and underscore the differences among leading nations not only in prognosis but also in the type and degree of international coordination that is needed for sustained recovery.

The Asia-Pacific region faces a similar challenge. Even though Asian economies were less affected by the downturn and have largely recovered, the savings-investment imbalances which were at the root of the 2008-09 economic crisis have yet to be resolved, and an international consensus on how to address this problem remains elusive. In the meantime, businesses and workers most severely affected by the crisis are clamoring for their governments to take punitive action against other economies — leading to the specter of currency and trade wars.

Hence, if there is a single message from this year’s State of the Region report, it is that the spirit of regional economic cooperation that led to the integration of Asia-Pacific economies over the last 20 years is again sorely needed. Major surplus and deficit economies in the region are key to solving the problem that has come to be known as “global rebalancing”. In the last weeks of 2010, they will have not one, but two opportunities to face up to this challenge – first at the G20 Summit, then at the APEC Leaders’ Meeting.

While much has been made of the distinction – even competition – between the two organizations, the practical reality is that both APEC and G20 have a contribution to make in reducing international economic tensions. As a fledgling group that is still finding its niche in international economic governance, the G20 has an important declaratory role in signaling the willingness of major surplus and deficit economies to redress global imbalances. APEC, with its longer tradition of economic cooperation and more recent focus on structural reform, can lead the way with a program of regional cooperation on the very reforms that are needed to rebalance growth and to make it more sustainable.

There is great uncertainty in the region about the durability of the recovery. The risk of another economic downturn stems less from a renewed bout of financial sector problems than from a failure of international economic cooperation.

The underlying problem of global savings-investment imbalances have not been resolved, and that these imbalances continue to weigh heavily on the world economy. To achieve a more sustainable growth path, the report stresses that the extraordinary fiscal interventions during the economic crisis of 2008 have to be unwound, and surplus countries have to rely less on exports for growth. This will require structural reforms in both deficit and surplus countries, and a high degree of international cooperation.

Financial regulatory reform in the advanced economies at the epicenter of the crisis is an ongoing priority. To achieve sustainable growth, financial institutions must also be willing to resume lending. A troublesome aspect of the recovery is the uncertainty around financial sector reforms, both because of pushback from powerful vested interests and the need to get the reforms right. In the troubled advanced economies the extraordinary support for the financial sector during the crisis has to be unwound and banks’ bad assets removed from their balance sheets. Risks of future instability also need to be reduced and ways found to tackle future financial crises without taxpayer support.

APEC has an opportunity to make a unique contribution to global rebalancing by showing regional leadership on structural reform. APEC leaders could commit to deliverables appropriate to surplus and deficit economies in such areas as regulatory reform of services sectors, the financing and provision of infrastructure, development of a low carbon economy, and capital market reforms to allocate capital resources more efficiently. Collective action in a number of these areas have the potential to be new growth engines for the region.

Across the Asia-Pacific region, opinion leaders are less optimistic about the prospects for growth over the next year than they were in last year’s State of the Region survey. Respondents were mixed in their expectations for growth over the next 12 months. Thirty-six percent of respondents expected global growth to be stronger over the next 12 months compared to 26 percent who thought it would be weaker. The biggest risk to growth was identified as weakness in the US economy.

Opinion leaders thought that the top five priorities for APEC leaders when they meet in Yokohama were: i) a post-crisis strategy for the region; ii) a free trade area of the Asia-Pacific; iii) the WTO Doha Development Round; iv) financial sector regulatory reform, and v) the region’s response to climate change.

Our survey highlights the importance of strengthened financial regulations across the world to achieve sustained growth as well as the rebalancing growth towards greater emphasis on domestic demand in East Asia.

On trade issues, our survey underscores the need for more focus on behind the border issues such as intellectual property rights, standards and regulatory issues. These items were rated as the top 3 challenges to doing business in the region.

The update to the index of regional economic integration shows that while overall economic integration has increased, there are growing divergences in key development indicators such as real GDP per capita, education expenditure, and life expectancy. The growing divergence in these other areas, both among economies and within economies, threatens support for further liberalization of trade and investment in the region as well as the appetite for precisely the kind of international cooperation that is needed today to avert global economic conflict.

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