Picture This: Asia’s Role in the World Economy

International Monetary Fund. External Relations Dept.

doi:10.5089/9781451922479.022.A005

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Picture This: Asia’s Role in the World Economy

Author: International Monetary Fund. External Relations Dept.

Publication Date:: 06 Jun 2006

eISBN:: 9781451922479

Language:: English

Keywords:: FD; F&D; market; Asia; IMF staff calculation; net oil exporter; economy; Asia's share; share of world; potential GDP growth; world GDP; Purchasing power parity; Current account surpluses; Aging; Exchange rates; Asia and Pacific

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Asia Rising -- explores Asia's role in the world economy, the challenges faced from globalization, the quest for greater regional financial integration, the problem of lagging investment, and why East Asia performed so much better than Latin America. It also looks at the recovery of Japan and the rise of India and China. The economies of the ASEAN-4 come under the microscope in Country Focus. Other articles examine financial sector reform in Africa and the remaining hurdles to financial integration in the European Union. People in Economics profiles Paul Krugman, Back to Basics focuses on hedge funds, and the Straight Talk column looks at the problem of underdevelopment.

Abstract

ASIA has become a key part of the global economy, boasting three of the ten largest economies (China, Japan, and India) and accounting for more than 35 percent of world GDP.

Asia’s share of world GDP is rising, thanks to its economic dynamism. Indeed, the region’s economy, having fully recovered from the 1997–98 financial crisis, is now the fastest growing in the world, contributing close to 50 percent of world growth.

Asia’s vitality largely reflects its successful integration into the world economy. Apart from a brief dip after the collapse of the 2001 information technology boom, its share of world exports has increased steadily and now stands at 27 percent. Intraregional trade is also growing as countries position themselves at different stages of a regional supply chain. The rise in exports, coupled with generally sluggish domestic demand, has translated into sizable current account surpluses. But if China is excluded, Asia’s surplus is now decreasing under the weight of growing oil import bills and, in some cases, a domestic demand recovery. In contrast, China’s current account surplus more than doubled in 2005 on the back of strong export growth, reaching 7 percent of GDP.

Asia has also integrated into global capital markets, capturing about 40 percent of net private capital flows going to emerging markets. Two-thirds of private equity flowing into the region is in the form of direct investment. These capital inflows, combined with the region’s current account surplus, have led to a large accumulation of foreign exchange reserves.

Exchange rate flexibility has increased significantly in most of the region (outside China, Hong Kong SAR, and Malaysia). While the strong wave of capital inflows in 2003 led to a large accumulation of reserves, more recent waves have led to less reserve accumulation and greater exchange rate movement.

In the years ahead, the region is expected to account for a rising share of the world economy, thanks in large part to fast-growing India and China. The challenge will be to strengthen domestic demand by reviving investment in emerging Asia and consumption in China.

In Asia, the proportion of old people is expected to increase, as it is in other regions. This is particularly true in Japan, where the overall population is already shrinking. Aging populations will reduce potential GDP growth and strain fiscal positions, as pension and health care expenditures increase.

Unless otherwise indicated, the source for all charts is IMF, World Economic Outlook database.

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