The debate on the “secular stagnation” of mature economies is one manifestation of this. 2 Given the tendency of regression to the mean, even rapidly growing emerging economies may eventually face similar challenges. 3 In the light of these discussions, whether Asia can sustain its robust economic growth over the coming decades may not be a particularly comfortable question, but it is nonetheless a question worth asking. In the following presentation, I will first consider a number of stylized facts regarding economic growth in Asia. Then, I will move on to a discussion of how economic growth in Asia might be sustained. I. Three stylized facts  The first stylized fact that I want to consider is that Asia has grown almost constantly at a very rapid pace over a number of decades. Chart 1 shows per capita GDP by region. It is quite impressive that Asia, which was at the lowest level in 1950, has outperformed the other regions in terms of growth. In this long-term context, the Asian crisis of 1997–1998 seems to have been just a slight hiccup. The average growth rate over the last 60 years or so is about 4 percent per year. Thanks to the power of compound interest, this makes Asian per capita GDP now 12 times as large as that in 1950. No wonder Asian economies are often characterized as “dynamic Asia.”  1  Robert E. Lucas Jr., “On the Mechanics of Economic Development,” Journal of Monetary Economics, Vol. 22, No. 1, pp. 3–42, 1988.
But with more autonomous units, an internationally-active and  BIS Review 42/2004  1  complex bank has to expend more effort to identify, measure, and control the risks arising from its diverse and far-flung activities. Traditional rules of thumb used by management and supervisors to assess risks and to ensure the adequacy of capital to buffer risks are no longer adequate. And continuing financial success depends critically on how a bank responds to the risk management challenges. In response to these challenges, the successful banks have developed enhanced tools for measuring risks. These can be grouped into two broad categories. The first category of tools are those that give a bank the ability to discriminate among risks by differentiating the riskiness of customers, and of various banking facilities and products. The second category of tools includes those that give a bank an enhanced capability to quantify risks. The end of the road for Basel I In and of itself, the enhanced capability of institutions to differentiate and measure risks has been a welcome development. But, the increasing sophistication of institutions in risk management meant that the crude system of risk weights under Basel I became less meaningful in ensuring the adequate capitalisation of large, complex banking institutions. By the mid-1990s, less than five years from the official implementation of Basel I,1 it was apparent that Basel I was becoming less relevant for some banking institutions.