Asian growth: How fast can Asia grow? The International Monetary Fund’s projection of 7 per cent for 2011 looks optimistic. Oil, inflation and a possible retreat by dollar-based investors pose threats. Slowing growth needn’t be a disaster though. If policymakers tighten proactively, they can put the region on a more sustainable course.
Rising oil prices pose a particular challenge. Asia’s rapid economic growth has been increasingly fuelled by Arab crude. Extra demand from Japan, which needs to replace lost nuclear power, will raise prices for energy-intensive neighbours China, India and Indonesia. That may slow economic activity. Cheap US dollars are another threat: private capital inflows into Asia have soared to 15-year highs. But hot money is notoriously fickle. Inflation is the biggest worry. Policymakers have dithered on raising rates, and now rising prices have become entrenched. Economies like India and China have negative real rates. China and Vietnam have runaway credit growth too. Soaring prices can lead to overinvestment, and asset price bubbles — when they pop, the economy tends to suffer.
This may not be so bad. Asia’s growth is high, but the benefits haven’t been spread equally. India and China have well-publicised income gaps between urban rich and rural poor. But affluent Singapore too has accepted inequality in return for high growth.
A more sustainable rate of growth may be lower — say 6.25 per cent. That may sound like only a small adjustment, but it would cut global growth by roughly half a percentage point. Policymakers can make this adjustment on their own terms if they start now. Higher rates and stronger currencies would help. India, which raised the benchmark rate by 50 basis points this week, may be getting the message. China’s yuan and South Korea’s won both ought to be stronger. These moves should be accompanied by macroprudential measures, for example restricting offshore borrowing, that insulate economies from speculative capital inflows. In the longer term, capital allocation must become efficient and equitable. More developed bond markets are one way. Less heavy investment, and bigger social safety nets to discourage excess savings are another. Rapid growth has carried Asia far, but slower and steadier may be the way forward. A percentage point of growth is a price worth paying.
