MANILA, Philippines—Christine Lagarde, managing director of the International Monetary Fund (IMF), believed that Asia was the early bird that caught the worm.
“Asia was an early adopter in the interconnected world,” she said during the Youth Talk forum recently held at the Asian Institute of Management (Makati City). “It saw the opportunities, it grabbed them, and it has really redeemed the rewards.”
As a result, emerging Asia’s share of the world gross domestic product (GDP) has jumped from 10 percent to 30 percent in three decades. And Lagarde thinks that the eurozone, which is currently experiencing an economic meltdown, can learn something from Asia-Pacific’s emerging economies, which include members of the Association of Southeast Asia Nations, as well as China.
Lagarde attributed Asia’s resilience in weathering the recent financial crisis to “sound macroeconomic policies and structural reforms that were implemented sometimes very forcefully and very quickly.”
She emphasized how the world is now interconnected, and that one small glitch can yield a global impact.
But while Asia is barely affected by the global economic slowdown brought on by the crisis in Europe, Lagarde said that it is “not immune from the consequences.”
“The connections (between regions) are intimate,” and would affect international trade, she said.
She went on to detail how interconnectedness could affect people’s lives anywhere.
“An electronic retailer going bust in London can actually disrupt manufacturing all across Asia. An earthquake in Japan can actually stop the manufacturing of cars in Detroit because of those interconnections,” Lagarde said. “A weak bank—even a remote, obscure bank—somewhere in Europe financially has massive repercussions in terms of available liquidity in Latin America.”
In spite of these threats, Lagarde said, nations must accept the concept of interconnectedness and try to benefit from it as early as possible.
While the negatives are inevitable, she said, there should be an “alert system” that must always be on.
Policymakers are now grappling with the challenges brought on by interconnectedness.
Lagarde said that, instead of just defining and talking about policies, policymakers need to act on them and must make sure that they are put in place.
They must also be aware that policies may have consequences—what Lagarde calls “spillover effects”—which must be anticipated and analyzed.
“This is a good lesson for the advanced economies in crisis today,” Lagarde said. “The good, sound macroeconomic policies that were adopted and the structural reforms that have transformed societies have made those economies—your economies—stronger, more resilient, with enough buffers to actually resist the consequential effects of crises happening elsewhere.”
Resilience in action
Lagarde cited the Philippines as an example of resilience in action.
The economy survives because of remittances from overseas Filipinos, which account for 10 percent of the country’s GDP.
Many people are fearful that economies’ interconnectedness may affect their cash flows, but there is hope yet, according to Lagarde.
“Policies are what can keep an economy afloat especially if they are focused on growth and financial stability,” she explained. “And they are not mutually exclusive. They are compatible.”
For Lagarde, Asia will play not just a role in the world economy, it will become a leading and guiding light.
It may experience a slowdown, but because of the policies in place, as well as the lessons it learned in the past financial crisis, “Asia will pull through,” she said.
Maybe not this year, she pointed out, but in two decades.
In this leading role, Asia’s average growth will be at least 2 percentage points higher than the rest of the world.
“If the trends that we observe today continue, Asia will have overtaken the United States and Europe’s combined GDP source of growth in two decades,” Lagarde said.
“The 21st century shall belong to you (Asia). It shall belong to all, but you will be the critical factors. You will be critical factors of that century.”