Frontier and Developing Asia: The Next Generation of Emerging Markets

Abstract

and Developing Asia: The Next Generation of Emerging Markets. Edited by Alfred Schipke. Washington, D.C.: International Monetary Fund, 2015. Pp. xv + 255. Amidst the backdrop of ongoing global financial and economic distress--which began in Europe and is now surfacing in China--the world is waking up to a serious contagion not seen since the 2007-08 Global Financial Crisis (GFC). Recent headliners, Greece and China, are troubling institutional investors, academics and the most astute of government policy-makers. There remains much to be learnt from the GFC about the failures in financial regulation and supervision. and Developing Asia is a timely collection of chapters by academics and policy practitioners and undertakes just that for the next generation of emerging markets, also known as the Frontier Economies (FE) of Asia. Nevertheless, some caution is needed because the views expressed in the volume are biased towards the policy prescriptions of the Washington Consensus. The introductory chapter presents an evidence-based framework and best practices that the FE and other low-income emerging markets could learn to adapt to their economic and financial development processes. Schipke provides a basic definition of FE as consisting of commodity-rich economies, manufacturing exporters, and dynamic low-income countries spanning from Africa to Asia ... that include the likes of Bangladesh, Cambodia, and Vietnam (p. 3). These FE have now become asset classes and are included in global investment indices. Chapter 8 of this book provides an excellent discussion in ways that these asset classes could advance their financial markets through better regulations and timelier disclosure of data, supported by appropriate institutional developments in the financial sector. Schipke notes that the rise of the FE is due to their efforts to overcome their poverty-traps and face up to the challenge of ensuring that growth becomes sustainable along with their ability to reallocate and diversify their resources and reduce economic volatility. In addition, growth needs to be inclusive; hence, the urgent need to increase investment in soft infrastructure. Growth has gone hand-in-hand with increased financial sector deepening, leading to the buildup of significant risks and misallocation of resources, which inevitably undermines the stability and growth potential of the FE (p. 7). This is because the FE are largely bank-based systems and, in a number of these economies, state-owned banks dominate the financial sector. Chapter 2 provides a good run-through of practical lessons that the FE can learn from the recent developments of Asia's emerging economies. They note that monetary policy needs to be considered as part of a broader strategy for development and reform. Instead of simply implementing policies that only best suit a particular period in time--such as printing money or manipulating interest rates--the FE require concerted institutional preparations, including central bank autonomy and a balanced fiscal policy adjustment to complement stated goals of economic, employment and equity growth. Policies need to be implemented in a flexible manner and macro prudential instruments are needed: to supplement the monetary policy tool kit for dealing with the inflow and outflow of capital; and for the stability of the financial system--especially exchange-rate policies--leading towards global financial integration (p. 48). Chapters 3 and 4 provide an econometric study of trade and the broader economy of the FE against other Asian economic groupings. They found that economic development critically involves diversification and structural transformations, where the Asian economies have particularly done well in. On average, progress occurred through diversification along the excessive margin -that is, through entry into completely new products (p. 71). Moreover, changes are not only in the type of diversification, but also on quality issues such as sustained industrial upgrading and maximizing their comparative advantages. …