Should Asia continue to grow by an average annual rate of 7% over the next ten years, it is estimated that Asia’s share of the global GDP will increase to 40%. Let me further elaborate on these two developments, namely the strengthening of domestic demand in Asia and the intensification of regional economic and financial integration, that are mutually reinforcing in sustaining Asia’s economic growth prospects. A more recent phenomenon supporting this trend is the strengthening of regional financial cooperation not only to preserve regional financial stability but also to enhance the prospects of the region. Strengthening domestic demand The strengthening of domestic demand is part of the structural changes taking place in Asia to diversify its sources of growth. Growth in most of the Asian economies was previously export-led. While several measures have been taken to promote domestic demand, the favourable demographic structure, the low levels of unemployment, the relatively low level of household debt and the policy flexibility to implement supporting monetary and fiscal policies have contributed to higher consumption. Other measures initiated are the social safety nets in the form of schemes and programmes for unemployment benefits, healthcare, education and retirement that have been put in place to reduce the need for high savings. The consequent increase in consumption demand has not only resulted in a significant expansion of the retail trade sector but Asia is also increasingly becoming an important consumer in the global economy.

While regional financial integration will further facilitate the already strong trade and investment linkages in the region, a more important aspect of the increased financial integration in Asia is the more efficient intermediation of funds in Asia. This includes the recycling of some part of the sizeable savings in Asia to productive investments in the region. The average savings rate in Asia is 35% of GDP and Asia as a group has a total of USD 4.8 trillion in foreign reserves. With greater liberalisation of the financial sector and the capital account, and the increased linkage of the national payments systems in Asia, there are increased financial flows within the region. This trend is reinforced by the increased presence of regional institutions in the individual domestic financial systems and Asia’s favourable economic prospects and more developed financial markets. This has already resulted in volatile capital flows to the Asian region. Going forward, papers issued out of Asia will also likely assume greater importance as an asset class. It will serve to facilitate the further diversification of risks and thus, contribute to stability of the international financial system. It will also expand the options for investors and borrowers and thus, contribute to more efficient allocation of financial resources across borders. Asia’s economic and financial integration, however, extends beyond its own region to the traditional markets in the developed economies, and more recently to other emerging economies in other parts of the world. Today, the economic and financial linkages between the emerging economies have also gained significance.