The Asian century is a foregone conclusion, but no-one has clarified whether it will be good or bad for Asia.
The region has 60 per cent of the world’s population and, according to Asian Development Bank estimates, will probably be responsible for half of global GDP and financial assets by 2050. Asia is too big to ignore and too diverse to be able to predict how it will shape this century.
Demographic patterns indicate that there will be at least three waves, each of over a billion Asians, attaining middle-income levels this century. The first wave will consist of 1.3 billion Chinese by mid-century, followed 10–15 years later by 1.3 billion Indians and then by 1 billion-plus in Muslim communities, stretching from Turkey to Indonesia. These groups will become extremely influential, as they will be in command of strategically important natural resources and, not least, nuclear weapons.
No one has yet thought through what these predicted rises in income and the accompanying consumption trajectory would mean for climate change and competition for water and energy resources.
Since finance is a derivative of the real sector and the two have a complex feedback interaction, it is not easy to project the financial architecture of Asia and the world. So it is necessary to sketch some scenarios of how the Asian and global real economy might develop.
There are numerous possible scenarios for related global currency and financial outcomes, but three can be singled out.
The first scenario is for a glorious Asian century, where everything goes well for Asian economies, and Asia and the rest of the world prosper together. By mid-century the Chinese renminbi (RMB) and Indian rupee would join the yen as three important international reserve currencies, alongside the US dollar and the euro.
This prosperous Asia may transform the International Monetary Fund’s Special Drawing Rights (SDR) into an important official central bank for clearing currency, so the leading central banks would hold their reserves with the IMF for the purpose of international clearing against each other. The IMF would become the central bank of central banks, with primary responsibility for monitoring global financial stability and helping deficit or crisis countries to adjust. The SDR would not become a trade or investment currency, even though there is nothing to stop private sector funds from issuing products denominated in SDRs.
The second is an Asian disaster scenario, where conflicts combined with climate change-induced natural disasters send the region into stagnation, and, at the same time, the West remains militarily and economically dominant. In this case, the dollar remains the dominant reserve currency as the United States retains its position as the leading global economy. The euro remains the second-most-important reserve currency after painful reform and recovery from the euro zone crisis. Under these circumstances, the IMF continues to be dominated by the West in shareholding activity, becomes more of a tough financial regulator and crisis manager than a central bank, and enforces the rules on emerging markets according to current norms.
The third scenario is of a world financial system just muddling through — the world goes into serious recession in the run-up to mid-century, despite quantitative easing, and emerging markets do not decouple from the advanced economies. As the advanced economies age, they become more inward-looking. Some go intohyperinflation because they cannot solve their debt burden. The result is a breakup of the euro zone and increasing protectionism, which also hurts the emerging markets’ capacity to export. Unfortunately, a number of emerging markets also make policy mistakes. Their fear of competition from other labour-intensive economies leads to global market fragmentation, partly in the name of macro-prudential regulation.
Under these circumstances, a strong IMF is needed as the international crisis manager. But since resources are constrained by a lack of leadership by the advanced and BRICS countries, the situation does not improve. In this scenario the dollar remains the dominant world currency, but its role is enhanced with the cooperation of one or two of the Asian surplus economies.
In all three scenarios, the RMB is a significant but not dominant reserve currency. There are at least two historical facts and one past lesson that support this view.
First, the US dollar took more than 70 years to supplant sterling. It did so by the United States becoming the dominant military power after World War II, and developing superior financial markets that deliver superior US-dollar liquidity to global investors.
Second, the privileged position of the US dollar lasted only 25 years, from 1945 to 1971, when the US left the gold standard. From 1971 to 2007, the Triffin Dilemma — high foreign demand for a reserve currency which forces its issuing country to run a current account deficit — became ultimately a national burden. This was especially the case because it was difficult to impose a hard budget constraint on Wall Street to keep on printing shadow credit at public expense.
History shows that the euro and the yen challenged the dollar for currency dominance with disastrous consequences for their domestic economies. This happened not because the dollar was strong but because of the competitors’ policy mistakes. For the RMB to attempt to do the same seems not wise.
In theory, the SDR may be the only logical choice for global reserve currency — by definition, the world as a whole cannot run by a net current account deficit. But this is not going to happen for reasons of national self-interest.
This may be the Asian century, but the dollar is likely to remain the pivotal reserve currency. Though the United States currency can lose its dominant position, other economies cannot gain it. Asia’s financial architecture will ultimately depend on which of these scenarios comes to prevail.
Andrew Sheng is President of the Fung Global Institute and Adjunct Professor at Tsinghua University and University of Malaya.