Asia: illusion and reality

Asia: illusion and reality

This is a good time to be in Asia. Regional economies are bouncing back even as the major economies of the West struggle, as is evident from the grim tidings coming from the new consumer confidence data released by the US on Tuesday, or the small increase in US national output—compared with India or China—announced on Thursday. In contrast, the International Monetary Fund (IMF) noted on Thursday that the economies of India, China and Australia are recovering rapidly, which is in effect a subtle hint to start tightening their monetary policies.

The old hopes of decoupling are once again in the air and there have been redoubled attempts to forge an Asian economic bloc. Barely a week passes before some combination of Asian leaders meets. India has been invited to a few of these, even as it moves ahead with its proposed free trade agreement with the Association of Southeast Asian Nations and there is loose talk of a preferential trade deal with China.

There has been action elsewhere as well. The members of the Asian Development Bank (ADB) have agreed to triple its capital to $165 billion, a move that has not received as much attention as a similar move to increase the capital of IMF. The agreement to defend Asian currencies from 1997-style speculative attacks, through the currency swaps of the Chiang Mai Initiative, has also been strengthened.

These long-term moves are welcome, both for strategic reasons as well as for the signal they send out that Asia’s political leadership has more time to think of long-term issues rather than fighting fires, as the West is busy at.

But there are still many immediate issues to solve. ADB president Haruhiko Kuroda recently said East Asian countries should cooperate with each other on currency policy. There is a brewing trade war between India and China, even as the trade gap between the two countries is widening in China’s favour.

The other big issue is that Asian leaders should avoid overreach and start believing that the region can continue to prosper independent of the rest of the world. While inter-regional trade has grown over the decades, most of it is in inputs and intermediate goods that are transferred across borders as part of global supply chains. The final demand for finished goods is still heavily dependent on the US economy.

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