Steps for Asia toward Economic Growth
June 10, 2013
The global financial crisis reinforced a sense that the world is "shifting East" -- to Asia. The essential story of modern Asia is its unprecedented expansion of economic freedom, enabled by market liberalization. Economic freedom, however, remains substantially repressed across the region, says Razeen Sally, an adjunct scholar at the Cato Institute.
Financial markets across Asia remain backward compared with the West, Latin America and Eastern Europe. They also lag behind dynamic parts of Asian economies, especially export-oriented manufacturing. Liberalization and global integration of trade and foreign direct investment have gone much further than financial liberalization in Asia.
Specific liberalization measures include the removal of interest rate controls; opening to new entrants; including foreigners; broadening bond and equity markets; ultimately opening the capital account.
There are three key policy challenges to expanding economic freedom in Asia today.
- Open up financial markets, which remain backward and repressed by command economy controls.
- Renew trade and foreign-investment liberalization, which has stalled since the Asian crisis of the late 1990s.
- Open up energy markets, which, even more than financial markets, are throttled by government interventions.
Asia's poorer economies should concentrate on getting the "basics right" for "catch-up" growth. These are first-generation reforms of macroeconomic stabilization and market liberalization.
- Asia's middle- and high-income economies need to focus also on "second-generation" reforms -- more complex structural and institutional reforms to boost competition and innovation.
- Diverse political systems can deliver catch up growth. But autocracies are badly fitted to deliver second-generation reforms for productivity- led growth. The latter demands a tighter link between political and economic freedoms.
The Asian miracle is not the product of superior technocratic minds who concocted successful industrial policies. Rather, freedom and prosperity bloomed on Asian soil because government interventions were curtailed and markets unleashed. Classical liberalism, however partially implemented, has worked in Asia. It is a system to which Asians should aspire.
Source: Razeen Sally, "Asia's Story of Growing Economic Freedom," Cato Institute, June 5, 2013.
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