Emerging markets, and particularly Asia, look set to play a leading global role in the coming years. But the region must negotiate four significant hurdles if it is to do so, said Tony Tan Keng Yam, deputy chairman of the Government Investment Corporation, the bigger of Singapore's two sovereign wealth funds. Speaking yesterday at the Commonwealth Economic Forum in Taipei, he reiterated concerns he had raised previously.
Before turning specifically to Asia, Tan noted three main differences from the past in the worldwide post-crisis environment. First, the global economy will be far more reliant on policymakers for the next couple of years, following extensive government support for the financial sector. The big question, particularly in developed countries, is how to time the withdrawal of such support. Meanwhile, emerging economies will have to deal with rising inflation and likely asset price bubbles, without snuffing out growth, as others have noted.
The second major difference is the increasing importance of the emerging economies, anchored by Brazil, Russia, India and China (Bric). Over the next decade, we will hit a "tipping point", predicted Tan, where the influence of emerging markets will be "important, if not dominant". Emerging economies are expected to account for more than half the world's GDP growth over the next decade, and they will displace the G7 countries as the world's largest economies, even if their per capita incomes remain lower.
The shift in economic power is likely to increase geopolitical risks. For one thing, emerging economies, especially the Bric countries, will become key global powers and increasingly demand more say on world affairs. The US will remain militarily dominant, but will be heavily dependent on foreign countries, including key emerging geopolitical rivals, to finance its large public debt.
And the rise of emerging markets will mean they will attract a larger proportion of investment. Rather than being a risky and perhaps alternative part of a portfolio, he said, emerging markets will become a "core and unavoidable asset class", as well as a leading source of investment and credit.
The third aspect of the current environment Tan highlighted is that the recovery is likely to be a lot slower than after other crises, with developed economies potentially facing years of slow to modest growth. He cited factors such as increased regulation, weaker income prospects, high unemployment, weak house prices and the need for higher savings to maintain long-run consumption and repay debt.
All this has a number of implications for Asia, in the form of four broad challenges. One is to strike the right balance between private-sector development and public regulation, said Tan, "learning from the mistakes of the West". Clearly the belief that markets, especially financial and capital markets, can regulate themselves was misguided.
Asian countries have long recognised that markets are human institutions and can be imperfect, said Tan, and that government intervention and guidance might therefore be needed. He seemed to have overlooked the fact that governments, too, are "human institutions" and clearly have imperfections of their own, but it's clear what he was getting at.
The second challenge is for policymakers in Asia to respond flexibly to risks such as rising asset values, as the global economy recovers. While equity and real estate prices have not in general hit their previous peak and can be justified by positive fundamentals, there remains the danger of bubbles forming.
Thirdly, Asia needs to establish a more sustainable growth model, particularly in large economies such as China and India, by strengthening domestic consumption and building up service-related sectors. This in turn would help improve productivity, and more balanced growth could also help reduce income inequality and reduce pressure on the environment. A growth model that is heavily dependent on resources -- such as one that is manufacturing-focused -- will soon hit constraints given the amount of supply available.
The fourth challenge for Asia, said Tan, is for the region's financial institutions and markets to take advantage of an unusually open playing field, particularly for the next few years. Not only did Asian banks enter the crisis much healthier than their global counterparts, but Asian households, businesses and governments are relatively unleveraged with debt.
Hence, regulatory and development authorities in the financial sector need to cooperate as never before with each other and financial institutions to develop regional financial and capital markets.
If Asian economies surmount these obstacles, concludes Tan, the next decade could be a "golden age" for them.