Asia Needs to Restore Fiscal and Monetary Prudence, Says ADB

Tashkent, Uzbekistan (UzDaily.com) -- As the global crisis recedes, developing Asia should exit expansionary monetary and fiscal policies appropriately and reaffirm its commitment to the sound and responsible policies that have fostered macroeconomic stability and sustained growth.

The Asian Development Outlook 2010 (ADO 2010), released today, notes that Asia’s decisive fiscal and monetary response to the crisis laid the foundation for the region’s speedy and robust recovery. The report emphasizes that the long-standing tradition of fiscal and monetary discipline gave the region the resources and credibility to unleash its decisive response to the crisis.

Nevertheless, within this broader direction of prudence and discipline, ADO 2010 recognizes that there is plenty of scope for improving and strengthening Asia’s monetary, exchange rate, and fiscal policies.

“Beyond the crisis, Asia’s governments face the challenge of adjusting their monetary, exchange rate, and fiscal policies to better prepare their countries for the changing environment in the post-crisis period,” says Asian Development Bank (ADB) Chief Economist Jong-Wha Lee.

The post-crisis global environment will throw up many difficult structural challenges for Asia. Above all, the region needs to rebalance its growth toward domestic sources in light of the prospective unwinding of global imbalances.

The report sets forth a number of specific adjustments to monetary, exchange rate, and fiscal policies to help the region better adapt to the post-crisis world. These include:

• Financial regulation should be strengthened and coordinated more closely with monetary policy to prevent disruptive asset bubbles.
• Excessive foreign exchange market intervention should be reduced and greater exchange rate flexibility promoted to put them in line with fundamentals.
• Carefully designed capital controls can help guard against disruptive short-term capital flows and prevent extreme volatility in exchange rates.
• Although safeguarding fiscal sustainability remains paramount, a wide range of fiscal measures can remove structural impediments which constrain domestic demand.
• Closer and more systematic coordination of monetary, exchange rate, and fiscal policies is required for effectively addressing structural challenges such as rebalancing.
• Similarly, greater intra-regional policy coordination will facilitate the exit from current expansionary policies as well as the transition to more flexible exchange rates.

“Intra-regional exchange rate policy coordination among developing Asian countries can also help promote greater exchange rate flexibility in the region, with less concern over losing export competitiveness vis-à-vis neighboring economies,” says Mr. Lee.

Those adjustments call for a closer coordination of monetary, exchange rate, and fiscal policies both within countries and across the region’s countries.