As the global economy transforms from a developed country-centric to a more developing-focused model in the post-crisis world, Asia is emerging as a new economic powerhouse. Its policy choices are important for the continent's own sake, and also for the global economy as a whole. Dominique Strauss-Kahn, Managing Director of the IMF, noted this shift in a recent speech in Shanghai. Edited excerpts follow:
The 19th century belonged to Europe; the 20th century to the United States. The 21st century, as we are coming to realize, can be the Asian century. But with that comes great responsibility—to lead, to guide, and to take ownership of the collaborative agenda. Asia is now a major economic region, and being at the center means being responsible for the whole. Asia has an important voice in world affairs through the G20, and also through the IMF, which is in the process of giving more influence to dynamic emerging markets.
Asia's economic performance over the past few decades has been nothing short of remarkable. Driven by rapid and steady growth, the region now accounts for about one third of the global economy, up from just under one fifth in 1980. If current trends continue, Asia's economy could be as large as the United States and the EU—combined—by 2015.
Of course, growth must benefit everybody. And Asia has made tremendous progress with poverty reduction, with China alone pulling hundreds of millions of people out of poverty over the past few decades. Such a feat has never before been accomplished in the history of human civilization.
And when the global financial crisis hit, Asia proved remarkably resilient, bouncing back stronger and faster than anywhere else. Asia didn't make the mistakes of other countries by piling up debt or using complex financial engineering that magnified risk. Banks had built sizeable capital cushions, followed prudent lending practices, and had limited exposure to toxic assets. Policymakers had internalized the lessons of the past, embracing sound macroeconomic and prudential policies.
Thanks to solid foundations and a quick and forceful policy response, Asia has become the launching pad of the global economic recovery. But this comes with challenges of its own.
Cooperation is really the great legacy of this crisis, and is the main reason why the Great Recession did not become a second Great Depression.
This spirit of cooperation must be maintained. Without it, the recovery is in peril. Today, the risk is that the single chorus that tamed the financial crisis will dissolve into a cacophony of discordant voices, as countries increasingly go it alone. This will surely make everybody worse off.
The great challenges of today all require a cooperative solution—especially if we are to achieve strong, sustainable, and balanced global growth in the years ahead.
We must make the financial sector safer and more stable, and put the banks back in the service of the real economy. Many of these problems emanate in the advanced countries beyond Asia, and these countries need to take the lead in fixing these problems.
Much progress has been made on the regulatory front, especially with the Basel III rules on the quantity and quality of bank capital. But these rules only apply to a subset of the financial system. Reforms must deal with risks in all financial institutions, not just banks—we learned this lesson the hard way during the crisis.