A New Asia for the Asian Century

September 19, 2011

www.btimes.com.my

by Dato’ Seri Nazir Razak (09-10-11)

…Thank you for inviting me to share my perspectives on a “New Asia for the Asian Century”. I will argue that we must not take the Asian century for granted and that a new Asia, differentiated by greater assertiveness on the global economic platform, stronger trust and collaboration among Asians and more agile political structures, is needed to secure our future.

There is overwhelming consensus that the economic centre of the world is irreversibly moving eastwards. Even before the Global Financial Crisis, the Asian region already had over half the world’s population, producing three tenths of global GDP (PPP), and consistently recording superior economic growth rates. With the West mired in economic uncertainty and political indecisiveness, the discourse has shifted – when China will become the world’s largest economy? How much more will Asian living standards improve compared to their Western counterparts?

Indeed, the prospects are mouthwatering. Larry Summers of Harvard, in comparing the impact of Asia’s ascension with that of the Industrial Revolution in the West 200 years ago, contextualises it quite well: “[Industrial Revolution caused] noticeable changes in standards of living in a human life span – changes of perhaps 50%. By comparison, however, at current rates of growth in Asia, standards of living may rise 100 fold, 10,000% within a human life span.”

On the face of it, there is good reason to be optimistic, with our strong economic fundamentals and young, productive and huge workforce, underpinned by the adoption of a number of Western values and practices such as free market economics, science and technology, meritocracy, pragmatism, culture of peace, rule of law and education as well-articulated by Kishore Mahbubani and others.

In my view however, over the next few years, Asia must first successfully navigate the current global economic turmoil, build a more robust intra-Asian economic base and adapt to new socio-political forces for change in order to secure the Asian century. In other words, the teenage years of the Asian century are going to be absolutely crucial for us. Extending this analogy is also useful at this point – teenagers have a tendency of over-confidence, over-zealousness that can cause fatal mistakes and derail future dreams.

The global economy is so intertwined and interdependent that Asia cannot be immune to a major downturn in the Western economies nor an upheaval in Western financial system. The fact is that over half of China’s foreign currency reserves of USD3 trillion are invested in US Government and corporate debt, and Western financial institutions remain dominant investors in Asian sovereign and corporate debt and financial markets at large. Furthermore, US consumers buy 5 times as much as Chinese and Indian consumers combined i.e. Asia cannot export to Mars and Asians don’t buy enough, yet.

Tan Sri Andrew Sheng, advisor to both CBRC and the Malaysian Government, aptly describes the global economy as being “up the creek without a paddle”. I would add that in this situation who knows what they will grab in order to stabilise the boat. What consequences, for instance, would severe protectionism bring to Asian economies? And we are often reminded that without sustained economic growth, even political support for economic models in Asia may also then be at risk.

In light of this huge risk, I question whether Asia is assertive enough on the global stage. I was very sorry to see how hopeless collective Asia was when the position of IMF Chief fell vacant recently. Despite much nice talk about the need to balance Western domination of global financial institutions, Asian governments failed to even unite behind one of many well-qualified Asian candidates like Mr. Liu Mingkang of CBRC or Tan Sri Zeti Aziz of Bank Negara.

If this is to be the Asian century, I think our governments need to ensure that Asia has a greater say on the global economic leadership stage and I fear that these next few years are so crucial that we are already late.

I was glad to hear about the recent establishment of a new think tank, the Fung Global Institute, by a leading business family in Hong Kong. I am told that it will be very well-funded and focused on “Global issues, Asian perspective”. On a smaller scale my own company has a not for profit organisation called the CIMB ASEAN Research Institute (CARI) focusing on ASEAN economic integration. Certainly, these types of organisations could not only supplement the voice of governments but also originate Asian views and drive multi-government collaboration on issues.

The global economic crisis has amplified the need for Asian countries to be more balanced in their dependencies for economic growth, in favor of domestic demand and intra-Asian trade and investments. Fueling the latter must start with a re-evaluation of trust levels between Asians economic agents – individuals, companies and institutions. Too many of our agents are still wearing Western spectacles and are too quick to be suspicious of other Asians or simply too enamoured with what comes in Western packages.

For instance, how much of China’s investments in the US actually comes back to Asia via Western financial intermediaries? I have huge frustrations competing for business in parts of Asia because even deals where CIMB has ample experience and credentials, we struggle to get invitations to tender; what more the job itself. It’s either preconceived prejudice notions of fellow Asians or deeply ingrained preferences for Western banks. And how much more evidence do we need before we believe that our own Asian banks are at least as safe?

Of course trust must also come alongside the need to enhance platforms to exercise that trust. Asia needs its own strengthened financial architecture to facilitate greater intra-regional investments. As our collective belief in our shared future grows, we must invest more in each other and do so directly, without the cost and risks arising from Western intermediation.

There are of course many instruments for investing across Asian borders and we are seeing a proliferation in credible Asian financial institutions, asset managers, private equity firms and so on that are ready to facilitate this flow.

But is it just greater trust and we will see more flows between us? I think that there are also inherent biases in the present global financial architecture that we have to overcome. A case in point is in the credit ratings sphere where Western agencies dominate the world.

We need a pan-Asian rating agency for a balanced view of Asian credits. Despite the recent waves of downgrades across the West, I still find it difficult to understand how China (AA-) can be rated lower than Spain (AA) or how India (BBB-) can be rated lower than Ireland (BBB+) (S&P Ratings). The implications of this ratings disadvantage are pervasive especially since sovereign ratings will typically limit ratings of corporates and banks in Asia. Asian nations and their corporates find it more expensive to raise capital because of the higher perceived risk, reducing their competitiveness. Asian banks’ competitiveness is also undermined because of the lower credit marks accorded to Asian assets and also monies placed with other Asian banks.

At CIMB we have “put our money where our mouth is” as it were. We became the first ASEAN company to be rated by Dagong Global Credit Rating Co. We believe Dagong is the agency that is currently most likely to succeed to be Asia’s ratings voice and we are happy to show our support.

Trade among Asian nations can grow with greater economic integration among Asian countries. Our region here, ASEAN, for instance intends to becomes an ASEAN Economic Community by 2015 which will give businesses the opportunity to operate as if in single production base country when operating anywhere in the region. ASEAN already has a free trade agreement with China.

I am a great supporter of AEC and my concerns all centre on pace and realities of execution. For instance, let us look at ASEAN equity markets. At present ASEAN is just trying to tie-up some form of cross border trading platform between our stock exchanges. Such a plan is facing resistance from incumbent stockbrokers in each country and would only have limited impact.

I have called for a new ASEAN exchange which lists ASEAN’s largest companies as a first step towards creating competitive scale for our equity markets. This will make ASEAN equities far more compelling for investors, from the rest of Asia and beyond. Ironically, because my idea does not depend on support of incumbents it probably has a better chance of success.

Obviously, the big challenge to this ASEAN exchange idea, and AEC in general, is political. Nationalism is such an easy sentiment to exploit, and increasingly as AEC gets closer, it will become more pronounced. Indeed today, ASEAN countries are competing for FDI, yet if AEC is around the corner shouldn’t ASEAN countries be marketing together? Only yesterday we heard of the suggestion by an Indonesian politician of sanctions against foreign investors who choose export to Indonesia from neighboring ASEAN countries instead of setting up in Indonesia.

Indeed, across Asia I fear that politicians will put self versus national and regional interests in the very ways that are undermining efforts to revive economies in the West.

The world as we know it today is in an extraordinary state of transition – alongside the Great Rebalancing of economic power eastwards and the global economic crisis, we are also witnessing profound changes in its political landscape. Across the Middle East and Northern Africa, long-standing bastions of authoritarianism are being dismantled, unfortunately in rather traumatic and economically painful ways.

At the heart of this political reform is Information Technology and social media networks. In catalysing the unfettered exchange of information, views and values, the social media revolution is creating platforms for shaping opinions, galvanising public reaction and mobilising people with profound consequences.

Faced with such an awesome game-changer, governments, especially in the East find that they can no longer operate under the hierarchal paradigms of the past, where decisions are made behind closed doors and executed with unquestioning public support. Governments here will have to adopt greater openness, more debate and increased transparency. Such transitions will have to be managed carefully to avoid the kind of upheavals that bring at least massive temporary, if not permanent, economic hardships. At the extreme, political upheavals could derail the Asian century.

The Western political system, on the other hand, is facing a very different set of challenges. Western governments’ responses to the Global Financial Crisis have been hamstrung by heavily encrusted political systems in which layers of deliberation originally intended as checks and balances have been captured by special interests. The executive powers of western governments seem neither quickfooted enough to address immediate financial crises nor far-sighted enough to address fundamental reforms needed for the long term.

Public support has become increasingly fickle and political opponents correspondingly Machiavellian. In the words of Financial Times columnist Martin Wolf: “[Obama] faces an opposition that would prefer their country to fail than their president to succeed.” In contrast to their Asian counterparts, the Western challenge is to bring more focality, or power for executive action in the nation’s best interest, back to their government structures.

The world seems to be converging towards a political and governmental model with a new equilibrium between checks and balances and exercise of executive power in government. East is meeting West as it were, and I hope that where they meet, politicians have to place country ahead of self, long-term ahead of short-term interest. I hope that there will also be a place where Asian governments can work together better to secure the Asian century.

If we look at Asia’s remarkable journey through the passage of time, we find that “The Rise of Asia” is nothing novel – we should be calling it “The Return of Asia” to be more accurate. The past 200 years of Western dominance is in fact a small aberration in Asia’s long history of economic ascendancy; akin to one having a bad day in an otherwise stellar week.

I believe that Asia’s best days are ahead of it but for Asia to get there, we need greater camaraderie amongst Asians, reflected in our collective voice on the world stage and greater trust, trade and investments between us. We will also need to adeptly navigate what, the potent combination of socio-political changes brought about by economic development, and the recent revolution in social media, demands of our political systems and leaders of today.