RIETI Report January 2013

Entering the Uncharted Territory

Asia is an irony. Following the Asian financial crisis, it went from a region of excess investment to one of excess savings, yet it is facing huge deficits in social and physical infrastructure. Furthermore, although Asia has shown its resilience to external shocks as well as experiencing strong economic growth and a much improved macro environment, in many of its countries, the socio-economic and ecological conditions have deteriorated. In the January issue of the RIETI Report, we present "Entering the Uncharted Territory" written by Iwan J. Azis, Head of the Office of Regional Economic Integration (OREI), Asian Development Bank (ADB) and a professor at Cornell University.

Professor Azis looks at the gross capital flows within Asia, showing that the rising volatility of capital flows in the region has not been uniform, and bank-led flows have occurred most frequently. This poses difficult challenges to maintain financial and macro stability, and he gives three implications resulting from this situation, all of which are worrisome and should cause concern to Asian policy makers. There is a growing strain in the global financial markets, and in an interdependent global system, one should never underestimate the power of financial contagion. Capital flows and volatility in the financial sector are hardly gradual, but once they start, the intensity and effects can be amplified rapidly. He warns Asia to realize the danger of entering the uncharted territory.

This month's featured article

Entering the Uncharted Territory

Iwan J. AZIS Head, Office of Regional Economic Integration (OREI), Asian Development Bank (ADB), and Professor, Cornell University

Asia is an irony. It has gone through a dramatic turnaround from excess investment during the pre-1997 Asian financial crisis (AFC) to excess savings during the post AFC, including the rise of foreign reserve accumulation. Yet, the region is having huge deficits in social and physical infrastructure.

The good thing is that Asia has become more resilient to external shocks as shown during the U.S. crisis following the collapse of Lehman Brothers in the Fall of 2008 and the subsequent eurozone crisis. The bad thing is that despite having a strong economic growth and much improved macro environment, the socio-economic and ecological conditions in many countries remain poor or have worsened: inequality increases, society has become more polarized, employment elasticity decreases, pollution and resource depletion and other environmental conditions deteriorate. Indeed, Asia is still far behind in adopting the so-called "triple bottom line" approach to human well-being.

To read the full text
http://www.rieti.go.jp/en/special/p_a_w/023.html

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