The financial crisis gives Asia a chance to strategically position itself in the new international financial architecture. Will Asia seize the opportunity?
This article is an excerpt from a paper that was originally published by Caijing magazine in China in December 2008. It also includes excerpts from the third KB Lall Memorial Lecture, given by the author Feb. 7 at the Indian Council for Research on International Economic Relations in New Delhi.
Future historians will compare the 2008 Great Global Credit Crisis with the 1930s' Great Depression, which set in motion World War II and changed the financial landscape for nearly 80 years. Similarly, the current crisis is likely to cause major changes in economic theory, philosophical outlook, and institutional structure.
This essay looks at three possible scenarios where China and East Asia could position themselves in the next decade. Because the success of economies hinges on governance, it is the quality of Chinese and Asian governance that will be severely tested in the coming years.
A Historical Inflection Point
Clearly, 2007-2008 marked an important turning point in the global market economy. Therefore, 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% of world population, account for 25% of global GDP, and annually consume global resources (through the current account deficit) equivalent to 6% of GDP.
The sad fact is that global resources and the environment cannot support the American dream for the average Chinese and Indian, who together number 37% of world population. The problems of global resources and the environment were not constraints to emerging markets during the Great Depression, but today's fast-growing countries, such as China and India, must address global warming and environmental sustainability not only for their own health, but for the world as a whole. Environmental issues could easily change the geopolitical landscape in the next decade and throw all current projections out of line.
Second, if India and China are both growing at more than 8% per year, while the United States, Europe, and Japan are growing at less than 2% per year, will the relative power between the mature economies and the emerging markets change dramatically?
Angus Maddison1 has projected that by 2018 China will have overtaken the U.S. as the largest economy in the world, with India as No. 3. By 2030, he has estimated that Asia (including Japan) will have accounted for 53% of world GDP, whereas the U.S. and Europe will have only accounted for 33%. If this is the case, the global financial architecture will be significantly different in the future than it is today.