And as recently as 1970, that share was just under 10 per cent. But today, in the space of just 40 years, developing Asia’s share of world GDP has nearly tripled to 27 per cent. Projections are that developing Asia will again account for half of world GDP by 2050. Will it happen? 5. There are many things that can potentially stop the Asian juggernaut. International conflicts, domestic upheavals, wrong economic policies, even climate change, have been cited as wild cards that can throw these projections off course. Top of my list is old-fashioned misallocation of resources. Asia’s strength – its high savings and investment rates – can become its weakness. 6. The Asian growth story is essentially an investment story, fuelled by high rates of domestic savings and relative openness to foreign capital. Gross fixed capital formation in emerging Asia during 1980–2000 was about 35 per cent of GDP, compared to 21 per cent in Latin America and 25 per cent in Eastern Europe. High rates of investment and high rates of economic growth created a virtuous cycle of development in emerging Asia during the last 40 years, unmatched in history. 7. But there are growing concerns whether this is too much of a good thing. The investment-to-GDP ratio in developing Asia has gone up further, from 30 per cent in 2000 to 38 per cent last year. The ratio of gross capital inflows to GDP has doubled over the same period, from 8 per cent to 17 per cent.
Several Asian economies have been raising policy interest rates, though real interest rates still remain rather low. There has also been a fair amount of exchange rate appreciation. Since mid-2009, most regional currencies have appreciated by about 5 to 6 per cent in real effective terms. Monetary policy in Asia is likely to remain tight in the months ahead. This should help to get the price of capital right, tame asset price inflation, and reduce the risk of misallocated resources. 15. Indeed, as emerging Asia continues to grow, allowing the exchange rate to steadily appreciate over the medium term is vital to ensuring that capital inflows are moderated and capital is allocated to productive investments. 16. But interest rates and exchange rates cannot take the burden of adjustment entirely, especially over the short term, given the scale and pace of capital inflows. Therefore,  2  BIS central bankers’ speeches  macroeconomic policy adjustments have been complemented in some Asian countries by macroprudential measures, like reductions in banks’ loan-to-value ratios and debt-to-income ratios. In exceptional cases, resort to capital flow management measures may be necessary to bring the situation under control. Strengthen infrastructure for allocating capital 17. Next, emerging Asia must strengthen its infrastructure for allocating capital. Banks are still the principal channel for allocating capital in Asia, and post-Asian financial crisis, many Asian authorities have taken steps to strengthen their banks. Banking systems were cleaned up of their non-performing loans, recapitalised, and strengthened.