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A historical inflexion point

By Andrew Sheng (chinadaily.com.cn)
Updated: 2008-11-17 10:27

Special Coverage Exclusive: An Asian view of the global financial crisis

Contents:  Preface  A historical inflexion point  The macro question  The micro origins  Lessons for China and Asia  Back to basics  One world, three paths  Status quo  The rise of regional markets  Romance of the three regions  Conclusion

From the perspective of history, 2007/2008 clearly marked an important turning point in the global market economy. We must pose three significant questions. First, does this mark the peak of global capitalism?

One thing at least is certain – the crisis put a question mark on the American dream - that every individual, through his own labor and creativity can have all that he wants. This could be true for individual Americans, who number less than 5 percent of world population, account for 25 percent of global GDP and is able to consume annually global resources equivalent to 6 percent of GDP.

Unfortunately, the global resource environment cannot support that American dream for the average Chinese and Indians, who together number 37 percent of world population. The problem of global resources and the environment were not constraints to emerging markets during the Great Depression, but fast growing countries like China and India must address Global Warming and Environmental Sustainability not only for their own health, but for mankind as a whole.

The environmental issue could easily change the geopolitical landscape in the next decade and throw all current projections out of line.

The second macro-history trend is that if India and China are both growing at more than 8 percent per year, whilst G-3, US, Europe and Japan are growing at less than 2 percent per year, the relative power between the mature economies and the emerging markets will change dramatically.

Angus Maddison has projected that by 2018, China would overtake the US as the largest economy in the world, with India as number 3. By 2030, he estimates that Asia (including Japan) would account for 53 percent of world GDP, whereas the US and Europe would only account for 33 percent. If this were the case, the global financial architecture would be significantly different from the present.

Already by 2007, Asia accounted for 66.8 percent of world official reserves, 55 percent of world population, 24.5 percent of world GDP, but only 16 percent of IMF quotas, equivalent to its voting power in the Bretton Wood institutions.

My own crude calculations suggest that Asian financial markets will be the largest in the world within the next 10 years, assuming that financial deepening in Asia continues to improve and Asian currencies appreciate relative to the US dollar and Euro. This means that either one Asian currency or Asian currencies as a group will very likely play a role as a global reserve currency by that time.

Is Asia ready to play that role? Not by far. In the past, emerging markets were dependent on the advanced economies for markets and financing. Asia's surplus role has been too recent for the fact to sink in.

Asia had to put its excess savings in the West precisely because its own financial system is not ready to intermediate such savings. Its regulatory structure is still evolving and Asian bureaucrats are neither internationally minded nor prepared psychologically to act in the international monetary order.

In the last 10 years, the number of Asian bureaucrats in the Bretton Wood institutions has declined not just because of better career prospects at home, but also because they see little future for themselves in these institutions. There are hardly any think-tanks in Asia dedicated to thinking about the international financial order.

The third trend drawn from the present crisis reflects this parochialism. So far, national responses to the crisis have been faster than regional or global responses. A major defect of the current international financial architecture is that even within Europe, initial reaction to the crisis was at the national level, rather than the global level.

Everyone cared for their own banks. There was also insufficient coordination between the US and Europe on the appropriate response on rescue efforts. This implies that we must strengthen domestic crisis management and response policies before we even begin to think about global policies.

Based on this, is there a future for the international financial architecture? The answers will have to be dissected at the macro and micro levels.

To be continued...

The author is chief advisor at the China Banking Regulatory Commission and former chairman of the Hong Kong Securities and Futures Commission.