NEW YORK — In recent years, emerging-market countries, including those in Asia, have made impressive strides in strengthening their fundamentals, accelerating their economic growth and cushioning themselves against external shocks. Nevertheless, as the events of recent months have shown, emerging markets are not immune from the current bout of global financial turmoil.
In particular, slowing global economic demand poses daunting challenges for many Asian economies, especially those that are more dependent on export-led growth. While most Asian countries have had relatively limited direct exposure to mortgage-related assets, deleveraging by foreign investors and slowing external demand have simultaneously created tighter credit conditions and lower expectations for growth. This has led to heightened volatility in equity, money, and debt markets.
These developments put to rest the notion of “decoupling,” the idea that economic growth in emerging markets, whether in Asia or elsewhere, is independent from that of the developed world. As the current crisis makes painfully clear, in this era of global trade and investment, our economies — and our prosperity — are inextricably linked. In order to maintain strong economic growth in America, we need a strong, growing Asia, just as Asia’s success depends on a thriving US.
The US-Asia economic partnership can be strengthened if we heed the lessons that we have already learned from the ongoing turmoil. Undoubtedly, much of the current situation will be best understood with the benefit of time, but five lessons are already coming into focus, and we should consider their implications for the choices policymakers will make in the future.
First, openness to international trade and investment has been and will continue to be the linchpin of economic growth for the global economy. The US and Asia are more mutually dependent than ever for their economic growth and prosperity. In the current climate of anxiety and uncertainty, policymakers must ensure strong communication and coordination, avoid beggar-thy-neighbor policies, and guard against protectionism.
Fortunately, as the crisis has worsened, global policymakers have responded with coordinated policy action. The G-7 action plan aims to restore the flow of credit by securing interbank lending, and coordinated central bank actions have provided unprecedented levels of liquidity to the market. Bilaterally, the Strategic Economic Dialogue (SED), which has been an invaluable forum for building US-China economic relations, has been especially important in strengthening our lines of communication and cooperation during the crisis. And many policymakers around the world have reaffirmed their commitment to completing a successful Doha trade round and refraining from raising new barriers to trade and investment.
Second, it is also clear that developed countries must act rapidly and in concert to minimize the impact of the crisis on emerging markets. As is always the case, however, resources alone cannot solve problems rooted in weak policies. Before we provide financial assistance, whether bilaterally or through the international financial institutions (IFIs), we must determine the underlying cause of economic vulnerability and ensure necessary corrective action. Lending large sums before assessing root causes and determining appropriate policy responses can undermine the IFIs’ credibility and reduce the capital available to assist other countries in need.
When resources are needed, however, the IFIs are a logical place to turn, and they must show flexibility and adaptability to help their member countries. Both the International Monetary Fund and the World Bank have taken encouraging steps to develop new programs and approaches and quickly increase their commitments. The IMF recently established the Short-Term Liquidity Facility to help strong-performing members facing temporary liquidity problems. The World Bank and the multilateral development banks are also developing innovative ways to strengthen country financial sectors and address potential shortfalls in trade finance.
Third, as the IFIs play an even more crucial role, further delay in reforming them to include major emerging-market economies will only harm their effectiveness and legitimacy. But greater representation is not a one-way street: with greater voice and influence, emerging-market countries must assume greater leadership responsibilities and act as constructive partners in these institutions.
Fourth, governments and the IFIs cannot solve this crisis alone, and they cannot and should not crowd out the private sector. In situations where government intervention is necessary, we must consider specific ways in which the private sector can assist in the recovery. For example, the US has helped promote financial-sector stability with direct capital injections, but ultimately it is the banks that must resume responsible lending to consumers and businesses. Moreover, the US Treasury has structured its Capital Purchase Program with disincentives for long-term government ownership.
Finally, both Asia and the US must remain focused on addressing the fundamental macroeconomic policy challenges that contributed to the crisis. Some of these challenges, such as the buildup of global imbalances, have been discussed for many years. The turmoil has led to a gradual rebalancing, with the US current-account deficit beginning to narrow and emerging markets taking steps to boost domestic demand. But we must guard against the re-emergence of significant imbalances, which means, in part, assuring the exchange-rate flexibility that must play a critical role in allowing needed economic adjustments to occur.
The road ahead will not be easy, but the US-Asia economic partnership will be at the heart of our recovery. And our economic relationship will no doubt emerge even stronger as a consequence of weathering this storm together.
David H. McCormick is Under-Secretary of the US Treasury for International Affairs.
