Interconnections

THE MANAGING Director of the International Monetary Fund (IMF), Ms. Christine Lagarde, visited Manila last week. The press conference on Nov. 16 and press release available on the IMF Web page covers the Managing Director’s views on the Philippines and discussions with the country’s leadership and senior government officials. She also had the opportunity to speak to students at the Asian Institute of Management on how the global crisis is really a crisis of interconnections. For those of you that missed the live streaming on the Internet, below is a summary of the Managing Director’s presentation with a focus on lessons from Asia. Future columns will cover other themes of the Managing Director’s visit.

The crisis provides many lessons, but there is one that stands out — the global community had too little appreciation for the true extent of economic interconnectedness between regions, between sectors, between peoples.

The global economy is more entwined than ever. Over the past three decades, the volume of world trade has increased fivefold. And Asia leads the way: over the past decade alone, trade within Asia tripled, and regional trade among emerging Asia grew even faster. It is the same with financial flows — by the time of the crisis, global capital flows were more than triple the level of 1995.

In this interconnected world, even the smallest economic drumbeat can be amplified, echoing and reverberating across the world, often in an instant, often in unpredictable tones and pitches. An electronic retailer going bust in London can disrupt manufacturing all across Asia. An earthquake in Japan can cause American auto dealers to run out of cars. A weak bank in Europe can cause cash shortages in Latin America.

In a very real sense, this crisis is a crisis of interconnections. You are seeing this across Asia today. Growth in emerging Asia has fallen to its lowest level since 2008. The connections with the rest of the world are simply too strong. Demand from Europe and the United States each accounts for about a third of emerging Asia’s net exports. Foreign participation in local government bond markets has risen substantially.

While every country and every region has a role to play, the Euro Area and the United States have a special responsibility — because their acts and omissions have such a global reach. Therefore, what can the west learn from Asia’s experience — both with crisis and with interconnectedness.

Asia was an “early adopter” in the interconnected world. It saw the opportunities, it grabbed them, and it is reaping the rewards. Over the course of three decades, its share of world GDP jumped from 10% to 30%, living standards rose sixfold, and an incredible half billion people have lifted themselves out of poverty. This is a remarkable achievement.

After the Asian crisis in the 1990s, Asia embraced change once again. It emerged stronger, less vulnerable, and more resilient-thanks to sound macroeconomic and structural policies. Both public and private sector finances have been managed well-less debt, less leverage, less vulnerability.

Asia also did not draw the wrong lesson from the crisis-hunkering down, pulling up drawbridges, or withdrawing from the world. Over the past decade, emerging Asia has proved its mettle-growing by more than 7½% a year. Here in the Philippines, growth rose to 5% over the past decade. In fact, it was Asia that kept the global economy afloat during the dark days of the financial crisis, providing about two-thirds of the global growth from 2007-2011.

A broader lesson is that the emerging markets have become more resilient in recent years-growing for longer in good times and bouncing back faster in bad times. IMF research suggests that better policies account for three-fifths of this improvement. This is a good lesson for the advanced economies in crisis today. The Philippines is an example of good policies and this resilience in action. -Jay Peiris, BUsinessworld

The author is the IMF Resident Representative for the Philippines. The views expressed herein are those of the author and should not be attributed to the IMF, its Executive Board, or its management.