Governments and monetary authorities in emerging East Asia need to cooperate more on exchange rates and other policies to turn the swift post-crisis recovery into more balanced, long-term growth.
"Regional exchange rate cooperation - if handled wisely - can ensure intra-regional exchange rate stability while allowing inter-regional flexibility; thus helping promote intra-regional trade and investment, and rebalance the region's sources of growth," says the special section of the latest edition of ADB's Asia Economic Monitor released early this week.
Emerging East Asia's large, long-standing trade surpluses against developed economies' increasing debt have raised tensions culminating in calls for emerging East Asia to allow its currencies to appreciate to match its growing economic strength. Asia's swift recovery from the recent global crisis is also drawing foreign investment to the region. Managing capital inflows to prevent asset price bubbles has also become a concern.
"Rapidly growing interdependence in trade and finance and the increasing importance of spillovers and contagion effects within the region make regional exchange rate cooperation essential," notes Iwan Azis, Head of ADB's Office of Regional Economic Integration that prepared the report. "At the same time, regional currency flexibility against major currencies outside the region would help emerging East Asia better manage capital flows and respond to external shocks."
The Asia Economic Monitor suggests the best way forward would be for East Asian economies to adopt informal monitoring zones for their exchange rates against an external reference currency or a basket of currencies. Any big shift outside those non-binding zones would prompt confidential discussions to reduce deviations. Over time these arrangements could become more formal.
The report assesses the outlook for emerging East Asia, which comprises the 10 economies of the Association of Southeast Asian Nations, plus the People's Republic of China (PRC); Hong Kong, China; Republic of Korea; and Taipei,China.
The report notes that the weaker outlook for the global economy coupled with the phasing out of fiscal and monetary stimulus within the region means economic growth in the region should moderate next year.
Average growth in emerging East Asia is likely to be 7.3% in 2011 after growing 8.8% in 2010. In its Asian Development Outlook 2010 Update, published in September, ADB had predicted growth of 8.4% for the region this year after a 5.2% expansion in 2009. The 2010 upgrade was in large part due to the faster-than-expected growth in the PRC which ADB now sees at 10.1% this year. That is higher than its previous forecast of 9.6% in September. ADB still expects the PRC economy to expand 9.1% in 2011.
In a separate special note reassessing the overall performance of developing Asia - that is, 45 developing economies of Central Asia, East Asia, South Asia, Southeast Asia and the Pacific - ADB upgraded its 2010 forecast to 8.6% from the 8.2% it forecast in September. The 2011 forecast for developing Asia is still 7.3%.
Growth in Central Asia is now forecast at 5.9% this year, against a previous forecast of 5.1%. ADB still expects the economies of South Asia to expand 7.8% in 2010, with the Indian economy set to grow 8.5%. Southeast Asia will grow 7.5% in 2010, up from the 7.4% forecast in September. The forecast for the economies of the Pacific remains the same at 4.3% in 2010.
The V-shaped recovery has run its course in emerging East Asia and the challenge for the region is to put in place national policies that will translate swift recovery into long-term growth," says Azis.
Risks to the outlook for the region are also higher than they were six months ago. Policy challenges stem from the relatively weak recovery in advanced economies, potentially destabilizing capital inflows, inflation and asset price bubbles in some countries, and protectionism.
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