Asia has weathered this crisis well. As the financial crisis unfolded, there were widespread fears the region could suffer a similar catastrophe to the Asian crisis which ravaged economies in 1997/98.

This has not happened, although the collapse in world trade ensured the region was not isolated and that the economic hit was severe.

Thankfully, ahead of the crisis, we never shared the view that Asia was decoupled from the West. How could it be, given the export dependency of many of the economies? “Not decoupled but better insulated” was our mantra, and so it has proved.

The region learnt many policy lessons from the Asian crisis. Currency reserves had been built up, fiscal positions in most countries were in good shape and central banks had handled themselves well, keeping inflation in check. Of course, there are always exceptions but generally policy, the institutions that set it and the tools they used had left the region in better shape to cope with the external shock from the West.

The region, of course, was not decoupled and thus could not be isolated from the collapse in world trade in the autumn of 2008.

Yet the resilience of the region was not just explained by its policymakers. The corporate and household sector had also learned lessons — something the West needs to do now.

Asian households and companies had spent a decade consolidating their balance sheets, with debt low and savings high. While this helped the region in this crisis, it is also a central focus for future policy to reduce private sector savings as there is a need to see stronger domestic demand.

Asia also appeared to be spared high exposure to toxic assets that caused problems in the West. There were many reasons for this. Just as there were a number of banks in the West that avoided problems, a combination of conservative management by some of the region’s banks, a focus on the rapidly growing Asian region and also the caution of regulators in liberalising financial products all appeared to have combined to limit the exposure of, and damage to, Asian financial institutions.

When the trade and financial shock waves did hit, Asia was not spared a collapse in exports and confidence.

It was then that Asian governments provided a welcome shock absorber. They had the financial and institutional capacity to provide considerable support to their economies. The most welcome was the fiscal boost to both maintain jobs and improve the infrastructure.

In contrast to the Asian crisis, most currencies were remarkably stable. And this despite rate cuts and a repatriation of international bank lending by a number of US and European banks. Although South Korea suffered a large currency fall, this is now being reversed.

The message is that policy has ensured Asia suffered a far milder recession than the markets feared this time a year ago. Indeed, China, India, Indonesia and Vietnam even managed to maintain positive growth throughout 2009. While Singapore, which a year ago feared the worst, has shown a 2.1% contraction for the last year, less than the 2.4% reduction experienced during the dotcom bust.

Weighing all this up, Asian policymakers have done a good job in helping the region weather the Great Recession.
Now for the next stage. What to do next?

More importantly, Asia is now expected to lead the global economic recovery. This year we see Asian growth accelerating to 7% from 4.5% in 2009. An important aspect of good policymaking is to avoid downside risks, as well as trying to maximise upside potential.

I have argued strongly in recent years that the world is experiencing a shift in the balance of economic and financial power from the West to the East. This New World Order has profound implications. The West becomes relatively poor, Asia wealthier. Judging from recent weeks, more and more international investors now share this view.

However, it is important to stress that while the economic trend for Asia is up, not everything is a straight line. Too much of the present talk in financial markets ignores the reality that the business cycle does exist — even in China and India as well as across the rest of Asia. The trend may be up but there are cycles along that upward path.

Also, while the economic fundamentals in Asia are better than in the West, we should not overlook the reality that the West still accounts for about two-thirds of the US$61 trillion global economy. If the West is not booming, Asia will find it hard to boom. And the West is not going to boom!

Thus, Asia needs to focus even more on ensuring it deepens and develops its domestically driven growth. This is part and parcel of the need to rebalance both the Asian and the world economy. The West needs to spend less, save more. Asia needs to spend more and save less.

In this environment, Asian policymakers need to be pro-active to ensure a sustainable recovery.

The first risk is the possibility of future shocks. In the West, the policy cupboard is bare and there is a need for governments and central banks to embark upon exit strategies. This is fraught with danger. The big fear in the West is where growth will come from if policy is tightened. Hence, the genuine fear of a sluggish recovery at best, and double dip at worst in the West. Even though the US may grow strongly in the next few quarters, this is a legacy of previous policy easing, and not a sign of an imminent return to economic health. Expect Asian growth rates to be volatile in the quarters ahead.

Inflation risks need to be taken seriously across Asia, perhaps more so than elsewhere. Any spike in inflation could threaten the upturn. A potential spike in food or energy prices, or even both, is the main risk to inflation in the region. Demand-side inflation is likely to remain subdued, given spare capacity, the price sensitivity of consumers and competition among retailers.

Rising food and energy prices would also have a negative impact on Asian households, eating into their disposable incomes. Meanwhile, for countries with food and energy subsidy programmes, such as Indonesia, Malaysia and Vietnam, rising fuel prices will also increase government spending on subsidies.

Policymakers will need to tread cautiously in their response to surging capital inflows into the region as radical measures could also unsettle financial markets and derail the recovery. During the latest crisis, Asia showed that its financial sector has become much more resilient. This is likely to encourage more international investors to seek opportunities in the region.

Given the reluctance of Asian authorities to allow their currencies to appreciate, one possible option for policymakers would be to introduce capital controls and limit portfolio inflows. However, following the experiences of the Asian crisis of 1997/98 and the capital controls imposed by Thailand in 2006, most central banks are reluctant to take such drastic measures.

The spectre of protectionism is a threat to global recovery. High unemployment in the West and global imbalances could trigger protectionist sentiment against Asia in the US and Europe. While a full-scale trade war is in no one’s interest, and is hence unlikely, protectionist barriers have already been erected in some industries in recent months, examples being Chinese-made tyres and steel tubes in the US.

What does this mean for Malaysia? Think global, regional and local and ask where is Malaysia’s place in the New World Order? The 10th Malaysia Plan this June will provide the blueprint for positioning the economy in coming years. Already a reform agenda has been unveiled in key areas, such as services. Building on this in order to ensure future competitiveness is key.

Malaysia needs to be able to compete on quality as well as price. Moving the economy up the value curve is thus vital. It is important to further enhance Malaysia’s competitive edge in attracting global capital, both in terms of foreign direct investment and portfolio investment.

Malaysia’s leadership in commodity production puts it in a position of strength, especially when meeting the needs of large emerging economies, such as China and India. We expect Malaysia’s economy to expand by 4.2% in 2010, putting the country firmly back on its longer-term growth path.

Dr Gerard Lyons is chief economist at Standard Chartered Bank



This article appeared on the Capital page of The Edge Malaysia, Issue 788, Jan 11-17, 2010.