Landfall logo

Landfall

Global macro & geopolitics from a small economy perspective

Globalisation with Asian characteristics

David Skilling
2 March 2012

The global economic order is changing in disruptive ways, raising questions about the future shape and functioning of the global economy. The powerful process of globalisation is likely to continue, but it will change and evolve to reflect the growing influence of Asia. Although there is no one ‘Asian approach’ to globalisation, there are some generally shared features. So this week’s Observer offers some thoughts on what globalisation with Asian characteristics might look like, and the transition issues that will need to be managed.

The same, just different
Asia has benefited substantially from globalisation over the past several decades. Strong export growth and substantial inbound investment have been key drivers of the rapid development of many Asian countries. Asia has a clear interest in globalisation continuing in order to sustain this process of development (indeed, resistance to globalisation seems more likely to come from advanced economies). But this interest in globalisation does not mean accepting all the existing rules and approaches. Just as the US, and the UK before it, pushed globalisation in a direction that suited them, so Asia will push to have its perspectives and interests better reflected. Although Asian countries have an interest in a rules-based global system, this does not mean they will simply be a ‘responsible stakeholder’ in the current system.

For example, many Asian countries have different perspectives and interests on issues such as external imbalances, the global reserve currency system, the governance of the multilateral institutions, the emphasis in global trade and climate change negotiations, and so on. On many of these dimensions, the global economy may operate quite differently within a decade. The effects of this increasingly shared leadership of the global system can already be seen in the establishment and operation of the G20 as well as the way that institutions like the WTO are functioning. This does not fundamentally threaten globalisation, but managing this transition will be challenging after several decades of a primarily US-led system – and Western dominance for 200 years. Changing power relations may be uncomfortable for some Western economies; even the Bretton Woods negotiations were a (relatively polite) wrestling match between Britain and the US. Although there may be agreement on general direction, differences in specific interests will likely cause tension. History cautions that this transition process needs to be thoughtfully managed. A rigid attachment to the current system may make globalisation more fragile.

Hands-on engagement
One feature of global economic engagement by many Asian countries is a deliberate role for government in managing risk exposures and positioning their countries to compete. To promote economic stability, many Asian countries have managed exchange rates, use capital controls, and have accumulated substantial foreign exchange reserves as a form of self-insurance against shocks (initially motivated by the Asian financial crisis). The deliberate management of exposures to global markets is common across Asia, in order to provide a more stable environment for business and society. In a global economic environment that is more turbulent and connected, this more deliberate approach to risk management is likely to become more common elsewhere. Recent examples include the exchange rate interventions in Switzerland and Japan. More generally, a shift is likely towards a more managed global system, perhaps reminiscent of Bretton Woods, with space for countries to manage material risk exposures that they face (capital flows, food and energy security).

In addition, many Asian countries use active industry policy – and sometimes state capitalism – in order to position their economies to compete. There is a greater tendency to view countries as competing with each other to attract factors of production, and to grow into global markets. For the most part, this is consistent with open, global markets – although it can be done in less positive ways as well. Asian approaches to economic policy will not be appropriate for everyone, but other countries will need to adjust to a more prominent government role in economic relationships that are increasingly important. This is likely to require governments from other countries to also get more involved in their economies. Tensions and frictions will arise as countries pursue their economic and commercial interests, as we can already see, and this process will need to be managed carefully. But there is a need to accept that there are different possible approaches to the standard approaches that Western economies have become used to.

A regional global economy
A new economic geography is emerging as Asia’s global GDP share continues to increase. But in addition to the obvious shift in the centre of gravity, the geographic shape of globalisation is also changing. Specifically, many Asian economies will rebalance towards economic growth models driven to a greater extent by domestic consumption and investment. Asia won’t just be the world’s saver and factory, but also a major consumer. This rebalancing, reinforced by aging populations in countries like China and Japan, will reduce the size of the current account surpluses – what capital Asia does accumulate is more likely to be deployed in Asia (rather than buying US Treasuries). And other dynamics, such as near-shoring of production by multinationals (because of higher labour and transport costs, and the desire to reduce supply chain risks), is likely to mean that production and consumption will be increasingly co-located in Asia.

Globalisation will continue, but it will have an increasingly regional flavour. Growth in intra-regional trade and investment has grown more rapidly than the global numbers, and this is likely to continue. This does not mean decoupling; Asia will remain heavily exposed to US and European markets for some time. But regionalism will be an increasingly important feature of the global economy – both for the economic reasons mentioned above, and because of the absence of effective global institutions. Increasingly progress on trade and other issues is being made at regional level, particularly in Asia but also elsewhere. There is no necessary tension between globalisation and these regional arrangements. The challenge is to manage this process so that regional arrangements are open rather than closed, allowing for ongoing global engagement.