ABSTRACT: Asian economies went through significant transformation during the 2000s. They became part of global supply chains, major global commodity consumers and large capital exporters, and were also deeply involved in regional co-operation initiatives. These factors contributed to global disinflation in manufactured goods prices, abundant global liquidity and strong growth in commodity-exporting economies including Australia. (maybe because of 1997-1998 Asian financial crisis)

In the coming decade, Asian economies are likely to continue their ascendancy, albeit at a slower pace, which should eventually decouple Asia from the advanced economies. With increasing domestic cost pressures, Asia may also become a new source of global inflation. Asia’s exports of capital to advanced economies may shrink as the region rebalances and outflows should focus more on portfolio investment and foreign direct investment (FDI). In the coming decade, a potential crisis in a major Asian economy such as China could trigger the next global recession.
SUMMARY:
History: more than 1000 years before the industrial revolution, the combined share of China and India in the world economy was routinely greater than 50% (but whether they will assert influences on the world economy depends on assumption of sustainability)
1993: the East Asian miracle, HPAEs (world bank 1993), no China India
1997-1998 Asian financial crisis (triggered by the withdrawal of foreign capital from the region, however, excessive borrowing, overheating economies and declining investment returns in previous years had already laid the foundations)
1999, 2000: most Asian countries recovered
2008 GFC may accelerate the shift of global economic gravity toward Asia and probably reinforced the prediction of a new Asian century: during GFC, China &India stay 9% growth rate, and HK…. With negative rate, but smaller magnitudes than 1998
2009: GDP in emerging Asia greater than either uk or usa
2016: forecasted by IMF, China will take over US to become largest economy; and Asia could account for more than half of the world economy by the middle of the century
1998-2008: many changes occur to Asian countries, triggered by Asian financial crisis
PURPOSE of this paper: key transformation of the Asian economies during 1st decade of the 21st century -> provide the basis for an assessment of the challenges facing these economies -> important implications for the rest of the world
3 fundamental changes: (around 1998-2008, 1st decade of 21st centurya) 1. [formation of regional supply chains] Vertically integrated supply chains across the region and increasingly important role of the Asian economies as commodity consumers; 2. [changes in external accounts and capital flows] Large current account surpluses, accumulation of foreign exchange reserves, capital exports 3. Policy initiatives in promoting regional co-operation (still weak till now)

1- fundamental changes in Asia’s industrial structure and regional division of labour (China entered WTO in 2001, FDI grew dramatically, producers move final stages of production to China -> begin vertical integration of supply chains, facilitated by market-driven forces of cross-border trade, FDI and financial flows); shifting supply chain and growing regional interdependence are illustrated by the increasing share of intra-regional trade in Asia, intra-regional trade has been gaining importance since the Asian financial crisis (Asia’s growing share in China’s total imports, intermediate good + consumer goods, meaning China is a derived source of demand rather than an independent source of demand for the region and intra-regional trade relies heavily on extra-regional final demand, implying sino-us=aisa-us and it’s premature to say Asia has decoupled from US; eg, China factor is striking for Australia in share of ores and metals imports, the largest importer from 2009 instead of Japan)

2-
Before 1998 crisis (mid 1990s), Asian countries are capital importers with current account deficits -->during much of 1st decade of 21st century, current accounts remained in surplus, significant capital exporting --> important part of the growing global imbalances during the years leading up to the GFC (current account balances of some Asian economies saw dramatic turns from deficits to surplus around Asian financial crisis, which is the main reason)
Policy-makers made efforts: the collapse of investment in much of Asia
Another development was efforts to encourage more outward FDI; beat Latin America who dominated outward FDI in 1980s
Widening current account surpluses and rapid accumulation of foreign exchange reserves, so Asian region became a major exporter of capital, outflows mainly take the form of debts and securities in advanced economies (China and Japan are among the world’s largest investors in the US Treasury bond market; of China’s total foreign reserves, 70% was in US dollar-denominated assets)
It’s uncertain whether or not Asia’s capital exports which hold down the cost of capital will continue at current levels (coz developing countries are expected to import); US Treasury market, low return --> sovereign wealth funds

3-
After Asian financial crisis, there was an important change in this unilateral approach and policy-makers made efforts to promote regional co-operation (2 factors driving this change: deeper integration and stronger competition; problem revealed by Asian financial crisis: individual economies not strong enough to protect themselves)
Formation of bilateral FTA (free trade agreements), noodle bowl syndrome, Asia in ahead of the Americas in terms of FTAs per country;
Idea of establishing Asian Monetary Fund, which was immediately killed;
A more concrete step for regional liquidity arrangements was the CMI, at the core of which was a series of bilateral swap arrangements (BSAs), providing liquidity to Asian countries;
To develop regional capital markets, an Asian Bond Fund (ABF) was created in 2003, ABF2 in 2006; The GFC acted as a catalyst on the form of CMI multilateralisation CMIM in 2009; the progress, from a bilateral network CMI to a common institution CMIM is a significant change in regional politics.
These regional liquidity arrangements and regional capital market developments are yet to bear fruit.
Policy-makers started to work on potential currency integration, the importance of which was further highlighted by the risks associated with the US dollar being the dominant reserve currency. Widening of the US current account deficit conflicted with global investors’ long-term confidence in the US dollar as a reserve asset.
Balance of payment risks revealed by the Asian financial crisis and potential dollar problems highlighted by the GFC prompted economies to explore the appropriateness for Asia to form an optimal currency area. To date, this idea has not gone very far.

PROSPECTS
1. SUSTAINABILITY
China has been the most successful economy, risks have also increase siginificantly: the current growth model is ‘uncoordinated, unbalanced, inefficient and unsustainable’; need to rebalance the economy and improve the quality of growth --> depends on reform of the incentive structure for both the government and companies: improved by de-emphasising GDP growth, needs to remove the widespread distortions in the factor markets in order to correct the incentives for producers, investors and exporters
India’s biggest challenge is how to let the general public benefit from economic growth. While India’s rapid growth has been mainly service- and large machinery-orientated, it remains a serious challenge for it to develop labour-intensive manufacturing industries. More rapid and sustainable growth probably requires the participation of unskilled workers.
South-east Asian economies still suffer from the consequences of the collapse in investment during the Asian financial crisis. It’s a challenge for them to overcome the ‘middle-income trap’ by improving innovation capability, upgrading industrial structure.
Generally speaking, Asia will maintain strong economic growth.
2. ECONOMIC STRUCTURAL REBALANCING
Global economic forums have place great emphasis on global rebalancing following the GFC. For some Asian countries, reduce current account surpluses. For most Asian economies, large current account surpluses are, at least partly, policy driven -> it would be ideal to fully utilise the exchange rate mechanism for external sector adjustment but so far Asian policy-makers remain cautious, eg, Chinese policy-makers always put growth and inflation ahead of rebalancing.
Chinese policy-makers may shift toward a freely floating exchange rate regime and even basic convertibility under the capital account, but it is likely to be a gradual process taking three to five years. The first step would be for the central bank to stop intervening in the foreign exchange market.
3. PROGRESS OF REGIONAL INTERGRATION
Real achievements have been limited, might because political commitments to regional co-operation are still weak or lacking, bring China, India and Japan will be extremely difficult.
Initiatives were either not creative enough or not large enough to have an impact.
By the end of the 2nd decade of 21st century, Asia’s share of global GDP will be greater than double that of the US and the EU, expecting true ‘decoupling’ of the Asian economies from the US.
Except policy co-ordination, market forces could continue to drive economic integration in the region, which hasn’t been well accepted across the region. If currency integration is beneficial then it could happen without political coordination. Some argue rmb could be a potential candidate to be one of the 3 global reserve currencies.

With rising costs at home, China and India could become a new source of global inflationary pressures in the coming decade. Due to the rapid shift to extremely low-cost production locations.
If Asian policy-makers struggle with the structural issues, it might be difficult to completely avoid a crisis in the coming decade, which could start off the world’s next recession.--> quite possible that Asia or China will experience a new financial crisis in the coming decade or 2.