Asia markets seek reform in testing times

Senior economists have been proposing adjustments to the export-reliant economic models of developing countries after an address on the subject at the ongoing Boao Forum for Asia (BFA) 2014 Annual Conference.[Special coverage]

U.S. stimulus tapering has made life difficult for economies that have long been driven by exporting activity. There is agreement that many must now look elsewhere for growth, with the experts even suggesting that the withdrawal of global liquidity may help in pushing them along a path to country-specific reform agendas and regional partnerships.

Emerging markets (EMs) have been reeling since the beginning of 2014. The currencies and stock markets of countries including Argentina, South Africa and Turkey have fallen substantially, prompting their central banks to raise interest rates to stem capital outflows.

"The winding-down of QE may spell trouble for emerging countries with over-reliance on foreign capital and exports," said Li Xiangyang, head of the National Institute of International Strategy with the Chinese Academy of Social Sciences, on Wednesday at the BFA conference. "It should ring alarm bells for them to seek a way out through reform and cooperation."

Li's speech echoed a report released recently by the Boao Forum for Asia Institute, which pointed to EMs facing economic slowdown while developed countries such as the United States and Europe regain momentum.

MOMENTUM FROM WITHIN

The impact of the withdrawal of quantitative easing (QE) varies from country to country, but those with external imbalances or a reliance on external funding have been most vulnerable.

"The good old days of cheap labor, massive infrastructure investment and booming exports for Asian countries are gone amid the global economic downturn and financial fluctuation. They need to seek new growth engines," said Shan Weijian, chairman and CEO of the Pacific Alliance Group.

QE tapering is most likely to have a negative impact on countries that lack buffers such as hard currency reserves or policy tools such as a floating exchange rate, according to a Moody's report.

The World Bank predicted average GDP growth among Asian developing economies this year would drop from last year' s 7.1 percent.

It's time for them to instigate structural reforms to rely more on productivity and efficiency improvements, said Zhou Wenzhong, secretary general of the BFA.

"They should give the market more say in allocating resources to encourage new growth engines," Zhou added.

Merrill Lynch noted earlier this year that China, which is itself undergoing sweeping reforms, had generally remained immune to the stepped-up QE tapering, thanks to its sustained current-account surplus, low foreign debt, huge exchange reserves, high savings and capital controls.

Other Asian economies should follow China's lead and promote expansive reforms on the financial, education, medical and environmental protection fronts to avoid the middle-income trap, advised Stephen P. Groff, vice-president of the Asian Development Bank.

COMPETITIVENESS FROM OUTSIDE

If they are to achieve sustainable growth, emerging economies need to develop a bigger market. Closer trade and investment partnerships among Asian countries may better buffer against global economic jitters and also create momentum for the global market.

Asian economies should expand their cooperation from goods trading to service trading, investment and infrastructure connectivity and set more open rules to facilitate resource flows within the region, Zhou said.

Building the new Silk Road and Regional Comprehensive Economic Partnership (RCEP) can pave the way for a stronger Asia market, he added.

The fourth round of RCEP talks ended in south China's Guangxi early this month with little concrete progress compared with the past three sessions, an impasse attributable to the different economic development and trade liberalization stages and varying stances of its 16 members.

Economic and trade relations within Asia are mainly based on the trade web of intermediate goods -- in other words, a value chain, which means the RCEP can best represent their members' interests, according to a report released by a think tank with the BFA last month.

"Asian countries should work for further regional integration to strengthen economic and trade bonds. It is also key to remove barriers checking the free flow of goods and service," said Peter Mandelson, chairman of Global Counsel LLP.

In addition to trade integration, experts have pointed to the importance of more partnerships in the financial sector in protecting against volatility in global capital.

Asian economies' exchange rate risks and transaction costs can be reduced if they sign bilateral currency swap treaties and use regional currencies for pricing and settlement, Zhou said.