Asian Economies & Their Role in World Economic Growth

Submitted by:

Ankit Gupta

Rohit Nayyar

Vineet

Ghulam

Usman Ali Khan

ACKNOWLEDGEMENT

The fact that we have been able to prepare this project report is due to help and support of many sources. We could not have achieved anything without those sources.

First of all we would like to express our enormous gratitude to our Macroeconomics professor Mr. for his continuous encouragement and guidance throughout the project. His way of thinking and converting ideas into something concrete helped us a lot. He was always there to encourage us, whenever we were down and looking for some support. He helped us to think in right direction and gave us his precious time in spite of having very busy schedule. We thank him for his timely guidance and the pains he took to make us complete this project report.

We are also thankful to our parents who were a constant source of inspiration to us.

Thank you

IntroductionTwenty years ago, "Asian markets" was the label for countries that were just starting to interest a broader class of investors worldwide. These countries were perceived as having strong (but unrealized) prospects while being somewhat peripheral to the main functioning of the global economy. Ten years ago, many of these Asian emerging markets faced major crises. They had clearly become big enough to shake the financial world, at least in some disturbing moments in 1997–98. The label "Asian emerging markets" meant instability, or at least some form of volatility.

Today, Asian emerging markets—or, perhaps more descriptively, middle-income countries—have emerged as a major determinant of global prosperity. Over the past five years, these countries have accounted for between one-quarter and one-half of global growth (depending on how it is measured). They have also weathered the recent global financial disturbance well and, through growing financial and trade linkages, have helped keep advanced economies from slowing down. And, now, the way Asian emerging markets handle the latest round of inflation challenges will have profound effects on growth and inflation around the world.

Historical background:

Remember that there have always been a lot of people living outside what we call the developed countries. Of today’s roughly 6 and a half billion people, only about 1 billion live in relatively rich countries. But for a long time, for various reasons (related to colonialism, communism, and common policy mistakes) most of the world’s poor countries experienced relatively little economic growth.

This began to change in the 1960s as a range of developing countries put in place economic policies that produced growth, and the world economy experienced a sustained boom. Many fast-growing developing countries experienced serious bumps, or even the derailing of growth, in the 1970s and 1980s; in fact, this is when the IMF seriously entered the business of lending to Asian markets. Relatively few countries have sustained high rates of growth since the early 1960s—probably no more than a

dozen. But by the early to mid-1990s, many more governments had figured out how to run their economies with sustainable budget deficits (or even surpluses), moderate inflation, and avoid overvaluation of their exchange rates. Also, some countries moved to adopt better institutions, either bringing more political stability or a better environment for investment, or both.

This time there was a rapid bounce back, sound economic policies quickly prevailed, and existing debt levels turned out not to put a brake on growth. Again, emerging market policymakers learned some important lessons. Many of them took the view that their countries should carry more foreign exchange reserves, particularly as they opened up to financial flow of all kinds. It is increasingly hard to avoid substantial financial flows when things go well, and this was an understandable view to take.

Some policymakers also took the view that exchange rates should err more on the side of being undervalued. Whether this was ultimately such a good idea remains to be seen, but there is no question that it contributed to at least half a decade of strong growth across a wide range of Asian markets.

Role reversal

Asian markets have grown fast during the past 10 years. They have sustained this growth, in the face of substantial financial turbulence in advanced economies during the past 12 months, for three main reasons.

First, although Asian markets are highly connected to the world in terms of goods flows, they are not (yet) fully connected in terms of financial flows. The banks in Asian market countries perhaps became more cautious after the problems of the 1990s. Or perhaps they just had better opportunities at home. In any case, Asian markets were generally not exposed to any significant degree to the problems in U.S. subprime mortgages or associated financial instruments.

Second, emerging markets have continued to maintain sound economic polices. Unlike during some previous booms, they did not throw fiscal caution to the wind. And problematic behaviors, such as various forms of rent-seeking or corruption, seem to have been controlled much more effectively in this boom compared with past booms.

Third, global trade remains strong and so-called south-south trade (not involving advanced economies) has proved resilient. Countries understand that throwing up trade barriers should be avoided at all costs. The global trading rules have held up so far under considerable pressure. This has been of great benefit to Asian markets.

As a result, over the past year, it is Asian markets that have played a relatively stabilizing role, helping to offset repeated waves of financial concern (and even capital flight from entire classes of securities) in advanced economies. This is a reversal of the usual roles; it is also the first time in recorded history that Asian markets have played such a role.

No good deed goes unpunished, and the same is true for economic policies. It is precisely the resilience of Asian markets that now underpins high commodity prices, including for energy, food, and industrial inputs. This adds an inflationary shock to the mix facing all countries.

This inflationary shock comes at the same time as, and in spite of, a slowdown in the United States and in some other advanced economies. Again, this is a great reversal compared with the past 20 years, during which time low prices for manufactured goods helped keep down inflation in developed countries. Now the effect of Asian market prosperity is to increase prices in advanced economies, rather than decrease them. Also, energy intensity has declined, and food comprises a relatively small share of consumer expenditures in advanced economies.

Current Crisis

It was never meant to happen again, but the world economy is now mired in the most severe financial crisis since the Great Depression. In little over a year, the mid-2007 subprime mortgage debacle in the United States of America has developed into a global financial crisis and started to move the global economy into a recession. Aggressive monetary policy action in the United States and massive liquidity injections by the central banks of the major developed countries were unable to avert this crisis. Several major financial institutions in the United States and Europe have failed, and stock market and commodity prices have collapsed and become highly volatile. Interbank lending in most developed countries has come to a virtual standstill, and the spread between the interest rate on interbank loans and treasury bills has surged to the highest level in decades. Retail businesses and industrial firms, both large and small, are finding it increasingly difficult to obtain credit as banks have become reluctant to lend, even to long-time customers. In October2008, the financial crisis escalated further with sharp falls on stock markets in both developed and emerging economies. Many countries experienced their worst ever weekly selloff in equity markets.

Since early October, policymakers in the developed countries have come up with a number of more credible and internationally concerted emergency plans. Compared with the earlier piecemeal approach, which had failed to prevent the crisis from spreading, the latest plans are more comprehensive and better coordinated. The measures have reshaped the previously deregulated financial landscape; massive public funding was made available to recapitalize banks, with the Government taking partial or full ownership of failed financial institutions and providing blanket guarantees on bank deposits and other financial assets in order to restore confidence in financial markets and stave off complete systemic failure. Governments in both developed and developing countries have started to put together fiscal and monetary stimulus packages in order to prevent the global financial crisis from turning into another Great Depression.

Well, it is hard to predict, but doing nothing would almost certainly have further aggravated the downside risks and more likely than not pushed the world economy into a deeper crisis. It should be appreciated, however, that it will take time for most of these policy measures to take effect; the restoring of confidence among financial market agents and normalization of credit supplies will take months, if not years, if past crises can be seen as a guide. Furthermore, it typically takes some time before problems in financial markets are felt in the real economy. Consequently, it seems inevitable that the major economies will see significant economic contraction in the immediate period ahead and that recovery may not materialize any time soon, even if the bailout and stimulus packages succeed. Moreover, the immediate fiscal costs of the emergency measures will be huge, and it is uncertain how much of these can eventually be recovered from market agents or through economic recovery. This poses an additional macroeconomic challenge.

Most developed economies entered into recession during the second half of2008, and the economic slowdown has spread to developing countries and the economies In transition. According to the United Nations baseline forecast, world gross product (WGP) is expected to slow to a meager 1.0 per cent in 2009, a sharp deceleration from the 2.5 per cent growth estimated for 2008 and well below the more robust growth in previous Years. The baseline forecast assumes that it will take six to nine months for Financial markets in developed countries to return to normalcy, assuming central banks in the United States, Europe and Japan provide further monetary stimulus from the end of 2008 and on into 2009.Uncertainties surrounding this forecast are high, as shown by the confidence Interval around the baseline forecast. In a more pessimistic scenario, both the fire sale of financial assets and the credit crunch would last longer, while monetary stimulus

would prove ineffective in the short run and fiscal stimulus would turn out to be too little, too late. This would then lead to worldwide recession in 2009, with global output falling by 0.4 per cent, and postpone recovery to, at best, the following year. In a more optimistic scenario, a large-scale fiscal stimulus coordinated among major economies would stave off the worst of the crisis, yet—for the reasons indicated—it would not prevent a significant slowdown of the global economy in 2009.

The United States may have plunged the world into a sharp economic downturn, but it will take the combined efforts of China, India and other Asian nations to lead the global economy out of what is likely to be a long and painful recession. THE GLOBAL economic crisis should be viewed by Asia’s policymakers as an opportunity to expand investment in “desperately” needed public goods.

“This is the region of the world with the fastest urbanization, with the most dramatic need for pollution control, for cleaning up the energy sector, for cleaning up the rivers, for sustainable urban development, for accommodating the migration of hundreds of millions of people from rural areas to urban areas. So, this crisis is an opportunity for Asia given the chronic underinvestment in public goods. Public spending has a very high social return and also has a very high macroeconomic purpose right now."

It has around $4 trillion in foreign exchange reserves, large current account surpluses and low inflation, Asia is well placed to expand public spending.

“Asia can continue to have robust growth even as the exports decline,” The substantial reserves of Asia's two largest economies - Japan and China - would be a key to a quick recovery.

Japan, with $1 trillion in reserves, adopt a more expansionary stance on monetary

policy, and making long term yen credit lines more readily available in the region — particularly in South Korea and ASEAN —to help boost growth. Meanwhile, China’s “main role should be to keep the Chinese economy growing and keep buying from the rest of the region.”

With the region's macroeconomic strengths, the crisis should be viewed as an opportunity to rebalance public and private sectors, and short-term macroeconomic with long-term investment interests.

China alone may be only 6 percent of the world economy.”But together with India, Brazil and other big Asian nations, they represent about 30 percent of global GDP. The Asian countries are the solution to the overall global slump."

The Chinese & Indian economies, for all their success since emerging from economic isolation in the 1980s, was at a major turning point that would require a fundamental adjustment in its approach to development.

From the above data it can be easily concluded that it’s Economies in transition and developing countries which are contributing most to the Growth of world output from last 5 years and it can also be seen easily that in the coming years these are economies in taransition and developing economies which will dictate the future prospects of global economy or which will become the citadels of growth in the future.

In the baseline scenario, income per capita for the world as whole is expected to decline in 2009. This will be the case not only in the developed economies but also in many developing countries, where per capita income growth will be negative or well below what is needed to address poverty reduction.

The vast majority of countries are experiencing a sharp reversal in the robust Growth registered during the period 2002-2007. For example, among the 160 economies in the world for which data is collected, the number of economies that had an annual growth in gross domestic product (GDP) per capita of 3 per cent or higher is estimated to have dropped from 106 in 2007 to 83 in 2008, and this is expected to decline further, to 52, in 2009. Among the 107 developing countries, this number is estimated to have dropped from 70 in 2007 to 57 in 2008, and to decline significantly further in 2009 to 29.

Above figure consolidates data from 160 economies around the world. It shows the real per capita GDP growth in developed and developing countries from 2003-2009. It can be easily find out through the analysis of the above figure that its developing economies which are the major players and which will become the citadels tommorow. Asian economies are growing at a robust rate today, despite of american crisis the asian economies will come out with flying colors.

An insight of Asian Economies

Asian countries have opened their economies to foreign trade and investment and have aggressively integrated with the global economy. They have generally done well in this process and Asia has the best record of economic development and poverty reduction compared with any other region. This has given Asian Economies confidence to think of deeper economic integration among ourselves. Regional integration is taking place in Europe and in North America in parallel with the steps to achieve multi-lateral liberalization. The concept of Asian economic integration is therefore a logical development as a means of promoting the common prosperity and well-being of the people of Asia.

In other parts of the world, successful regional integration has been driven by prior political closeness. Asia is different in this respect because it includes a much greater diversity of countries at very different levels of development and also with very different political systems. However, commonality of economic interests is also a powerful driver and there are strong economic forces which justify greater integration. In the case of Asia, unlike Europe, it is possible that economics will lead in the integration process and politics will follow.

India has long admired the remarkable economic performance of many Asian countries, which led people all over the world to view Asia as a success story in development. In fact, when India embarked on a process of economic reforms in the 1980s, the move was in part stimulated by the demonstrably superior performance of East Asian countries such as South Korea, the Taiwan province of China and later China itself and the countries of South-East Asia, all of which demonstrated that market oriented policies, with a particular focus on exports, could be a recipe for rapid economic growth and poverty reduction.

A much quoted recent study by Goldman Sachs has identified Brazil, Russia, India and China as the set of large emerging markets projected to grow rapidly over the next thirty years. Within the group, India's potential growth rate has been projected to be the fastest - around eight percent per year - faster even than China, which is currently, and has been for many years, the fastest growing economy, but is expected to slow down in future. According to this study, by 2040, India will become the third largest economy after the USA and China. This projection has been adopted by the US National Intelligence Council's 2020 report "Mapping the Global Future".

One of our major priorities is to upgrade infrastructure, including especially roads, electric power, ports, railways and irrigation. In all these areas, the objective is to bridge the gap between our infrastructure and the standard of infrastructure in East Asia. Large investments needed in the health sector and in education, particularly in rural areas, to make up the gaps which exist in social indicators. These indicate the scope of growth in Asian economies.

Asian community would release enormous creative energies of Asian people. One cannot but be captivated by the vision of an integrated market, spanning the distance from the Himalayas to the Pacific Ocean, linked by efficient road, rail, air and shipping services. This community of nations would constitute an "arc of advantage" across which there would be large scale movement of people, capital, ideas and creativity. Such a community would be roughly the size of the European Union in terms of income, and bigger than NAFTA in terms of trade. It would account for half the world's

population, and it would hold foreign exchange reserves exceeding those of the EU and NAFTA put together.

We appreciate that it will take a great deal of time, energy and perseverance to translate this vision into reality. But we should at least start thinking about the idea and develop the roadmap for its realization.

Some initiatives towards Asian regional cooperation have already gained momentum. Developments such as the Chiang Mai Initiative, the creation of an Asian Bond market, the proposal for an Asian Exim Bank, are examples which highlight the emergence of a distinct Asian consciousness. Their reach could be expanded. Another encouraging development which would point to a cooperative architecture in Asia is the East Asia Summit to be held in Malaysia towards the end of this year, with the participation of ASEAN, Japan, China, South Korea and India. This could prove to be the beginning of a more permanent forum, leading to the creation of an East Asian Community.

Asia has emerged as one of the world’s fastest growing regions since the late 1990s and has shown notable development potential. This is significant for a region comprising largely of small landlocked economies with no access to the sea for trade. Among the advantages, of the region are its high- priced commodities (oil, gas, cotton and gold), reasonable infrastructure and human capital as legacies of Soviet rule; and a strategic location. Furthermore, many Asian Republics have embarked on market-oriented economic reforms to boost economic performance and private sector competitiveness.

Asia’s Economy: Mapping Future Prospects considers the region’s economic prospects to 2025. It charts recent economic performance, highlighting the economic revival. It also synthesizes recent forecasts and constructs scenarios for future economic variables against a constant global background. Projections include, among others, gross domestic product (GDP), manufactured exports per head, GDP per capita and poverty. A special theme chapter develops a manufacturing competitiveness index to compare the CARs with other transition economies and explores the impact of economic reform and supply side factors (e.g. foreign investment and human capital) on industrial performance.

Recent Economic Revival

Following a prolonged period of slow and negative growth, the region (Azerbaijan, Kazakhstan, Kyrgyz Republic, Tajikistan, Turkmenistan, and Uzbekistan) seems to have turned the corner during the last few years and an economic recovery seems under way. Some features include:

Asia’s situation

Global Indicators

Current and forward looking Indicators

The future ahead

Studies by a leading Indian think-tank show that economic integration within the East Asian Community has the potential to generate welfare gains of up to US$ 210 billion. Another recent joint study by Asian Development Bank, World Bank and the Japan Bank for International Cooperation concludes that developing countries in Asia need to spend more than a trillion dollars over the next five years on roads, water, communications, power and other infrastructure to cope with the rapidly expanding cities, increasing populations, and the growing demands of the private sector. Monetary and financial cooperation in Asia, designed to mobilize the huge foreign exchange reserves of Asian countries for development of regional commons and regional infrastructure, could have the potential of creating hundreds of billions of dollars of additional output to overcome these constraints.

The major countries of Asia are already engaged in developing preferential trading arrangements between themselves. This should continue, but we must also keep in mind that the larger East Asian Community offers the opportunity to build a broader regional trade and investment architecture which can overcome the sub-optimal benefits of bilateral arrangements and build stronger synergies and deeper complementarities for greater mutual advantage.

Cooperation for ensuring energy security can be another highly lucrative collective Endeavour for the East Asian Community as many of its members are amongst the largest consumers and importers of energy in the world. Two possible areas of such Asian energy cooperation could be building an Asian Strategic Petroleum Reserve and creating an Asian Emergency Response System. The cooperation could also extend to cover the joint patrolling of the sea-lanes through which pass the bulk of the oil and gas supplies for the region. The possibility of building an Asian gas or oil pipeline is also promising through collaborative efforts.

Cooperation in the development of transport infrastructure and connectivity is another area of promise for the East Asian Community. In addition, collective venture in core technologies for addressing the digital divide and nutritional and health related issues also presents opportunities for fruitful cooperation especially in fighting the common challenges of poverty and underdevelopment in the region.

The possibilities are indeed enormous today; Asia stands at the cusp of exciting times, which hold a bright promise for our future collective endeavors. It shares the responsibility to shape collaboration to liberate the creative energies of the entire region. We must put in place a political and economic architecture which is conducive to Asia's emergence as a pre-eminent region of stability and prosperity. This can make the 21st century the Asian century in the truest sense.