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The economics of the Asian challenge

The rapid economic growth of Asia has changed the world economy and will continue to influence the international division of labour, trade patterns and capital flows.  It will increase economic wealth but also require economic adjustments in the wider world. Furthermore, it will have an impact on income distribution both in Asia and in the rest of the world and thereby create economic situations, which might be difficult to handle politically. The contours of these trends and changes are – to a certain degree known - but a deeper understanding of the dynamics of the Asian economies will require a concerted research effort across a range of sub-disciplines.

Standard tools of economics and the lessons from economic history can be applied to the analysis of the Asian economic transformation. Growth theory suggests that the astonishing high growth rates are transitory phenomena and at some point growth rates will stabilise at a level similar to that of more mature economies. However, a precondition for this conclusion would be that Asian economies develop an appropriate set of political, economic and financial institutions that cannot be taken for granted. Also environmental and social policies may play a significant role in framing the conditions for sustainable growth in the region.

In the 1980s, the “Asian Miracle” was at the core of intense debates about appropriate development strategies and policies. The devastating “Asian financial crisis” followed in the late 1990s. The crisis revealed a range of short run macroeconomic/ financial weaknesses as well as deeper longer-term structural challenges. More recently, exactly a decade after the financial crisis, it is Asia’s revival and phenomenal growth performance that is catching attention. The Asian region is after the turn of the millennium also undergoing dramatic economic, political, technological, social and environmental changes, which remain under-researched in a comparative economic perspective.

Economic history provides us with the insight that emerging economies tends to experience skills shortages, which will lead to increasing income inequality. Again history suggests that these inequalities need not be persistent if the educational system responds in an appropriate way. However, economic inequality is a potential growth inhibiting, factor because it fosters social instability. Income distribution and the social ramifications is therefore an important research topic related to Asia.

New trade patterns developing as a consequence of the rise of Asian economies have led to a free trade backlash, in some parts of Europe and in the United States. This has revealed that the victims of globalisation in mature economies are mainly unskilled labour. This illustrates an insight from trade theory to the effect that although there are net gains from trade there are losers and winners within trading nations. To identify the net gains, as well as adjustment costs from the inclusion of the Asian economies in world economy is also an important research mission..