First of all, thanks to Mr. Chairman forthe kind words of introduction, and thanks also for the invitation from Fudan.As a student of Fudan it’s a great honour for me to come back, and also to havethis opportunity to say a few words to these absolutely distinguished guests.
This is a conference about the strategiesfor Asia in the next ten years. This is Asia in a changing world. The world is really changing. Icannot go through the whole thing – but I will show through a few studies howthe world is changing and how Asia fits intothis changing world. We have experienced a very dramatic and strong economicgrowth over the past forty years. In the past forty years, we have observedvery strong GDP growth rates, particularly since the year 2000. This is innormative terms, and in real terms GDP has increase fourfold for the wholeworld.
But that’s not the whole story. If you’relooking for trade, trade has been much stronger over the past 40 years, growingroughly ten times. Trade in terms of the global GDP ratio has increased from11% of 40 years ago to 23% at present – more than double. But that’s still notthe full story. In terms of the financial sector, there has been a fourteen-foldgrowth, with accelerating growth after the year 2000, since the same time fortyyears ago. All these activities have been supported by a strong monetarysupply, propping up the whole system. The money supply also increasedfourteen-fold globally over the past 40 years.
The world interlinked through trade and financialchannels. Across this dramatic change, we have had to literally redraw theglobal map. [Indicating map on screen] this is a map we see every day, and onethat coheres to geographic sense. Now – we may this new map by GDP. Look howthe map changes – most noticeably how Russia becomes very small. America is still there – number one – and then China – number two, and Japan is big, as is Korea. This I call the ‘globaleconomic map’. If we weigh the map again, this time by trade, we notice morechanges. You see how Americabecomes smaller, Chinabecomes bigger, and Europe becomes muchbigger. If we take trade between European countries out, they become muchsmaller. Korearemains large. Russiais still small.
If we observe how the ‘financial world’operates, we again notice changes. Chinasuddenly becomes small, Russiasmaller, but the European nations become huge. Hong Kongis noticeable. Japanis big. Anybody notice this place? – it’s Luxembourg. So the map againchanges. But more important, if we observe these three maps, we can seecountries growing in different directions. There is a strongly linked economicand financial world today, so when we see our world map, we have the think ofthese other maps. But that’s not the whole story – we have to be able toobserve how these countries link to each – other. Back to the normal map, wecan see how all countries observed their links change dramatically over thepast 20 years. They move, and today the whole world forms three major clusters,as I call them. The first cluster is that of the advanced economies, alwayslinked to one another. The second cluster is the Asian – or Pan-Asian group. Asia is forming a vertical linked supply chain, bringingin more and more countries. You would not believe this – but Brazil and Chilebelong to the Asia group, as to Tanzania,South Africa and Gabon. But moreand more of these countries are joining Asiato become a globally integrated vertical supply chain. The third cluster is theoil cluster. You see how different these countries are – Nigeria, Sudan,Kuwait, Russia, Kazakhstan, all in differentgeographic areas, but they share the same features, and most importantly theyshare the same business cycle. They are linked together.
I will return to this map. This is the worldtoday – how are we to understand how these three clusters link to each other?Consider Europe before the Euro. From 1984 to1999, before the Euro, there were two centres, one in the South in France and Italy. And the other in the North,but not in Germany, but inthe UK.With the arrival of the Euro, these countries all moved closer together, andtoday they are very strongly linked together. This is the tremendous role thatthe Euro has played in bringing European countries together.
We still have to try and see how clusterslink to each other. We can see the whole world’s clusters as core areas with ‘gatekeepers’.Let me show you a picture, with the global structure of the three clusters. China really belongs in the core, close to theadvanced economies of the US,UK, Germany, but not of Japan. This whole area represents avertical supply chain, with Chinaleading the whole region in manufacturing. Japanis not in this core area, though China’dominant core overlaps with Europe.
This map represents the machinery trade.The core of this area is represented by China,the United States and Germany. Thecore expands out into all areas – Chinain Asia and Africa. These cores penetrate tocountries across the world, as well as growing closer together across time.
So – when the world moves, how does it finditself linking to itself? We can observe easily how over past years the levelof connection between people of similar asset classes has increaseddramatically across geographical contexts, from fifty percent to over eightypercent. The correlation across asset classes and across regions has increasedramatically. Let me illustrate with a detailed case. The green line representsthe Latin American market, and the red line represents the Asian market. The co-movementsof these two markets were at 42% ten years ago. Now it is 81%. Can you believeit? The Asian emerging economies and the Latin American economies are soclosely interrelated. We cannot think about this – because Latin America is notin the supply line of Asia.
External shocks play a more and moreimportant role in the present day. Before the economic crisis, only 30% ofshocks to production could be explained by external factors, but after thecrisis we measured this susceptibility to shocks at 60%. We are all exposed tomany more external shocks, not only the emerging market, but also the advancedeconomies.
I would say, with these forty years ofeconomic growth, the world has really changed. And it continues to change. Itis obviously changing today, as we speak, now. We are much more interconnected,and the world forms three major clusters in the advanced economies, thePan-Asian supply chain, and the energy group.
Now let me come to the issue – the strategyformation in Asia over the next ten years. Thefirst question we ask is, is the Asian cluster formation complete? The answeris ‘not yet’. Asia’s supply chain continues toexpand, grabbing more and more countries to join its supply chains. The map ofthe world has changed due to this change. It has created huge opportunities forthe entire Asian region. Obviously, with Asiaforming more supply chains, it exposes a greater risk to external shock. We allremember the impact Asia-wide and world-wide of the Japanese earthquake, buteven the floods in Thailandhad a tremendous impact on the supply chain across Asiaand the whole world. Asia is exposed as wellto the global risks of financial assets. People in Korea complain to me about thegreat volatility of their own currency, even compared with the Japanese Yen,over the course of the last ten years, because of capital moving in and movingout.
What will happen over the next ten years? Inthe next ten years we can probably expect to see in the Asian region firstly anincrease in the supply chain. It will be more vertically integrated and moveforward, it will push the advanced economies further up the value chain andfurther into the service areas. This will cause a global restructuring inglobal manufacturing. We have observed particularly dramatic globalrestructuring in manufacturing over the past five years. We expect to see it tomove even faster in the next five to ten years, with Asialeading the way.
The second issue is – Asiais going to experience a dramatic financial sector reform, and take on morefinancial capital, with this year being absolutely critical. The emergingmiddle-income countries are forecast to account for over 50% of world G.D.P. bythe end of this year. This is a first in modern world history. This is changingthe entire global demand equation. Yet while these countries account for 50% ofglobal G.D.P., they still only account for 9% of global financial assets. Moneywe expect to move away from advanced economies, and towards these regions, in abig way. But the financial market in this region is not yet big enough, so weexpect a great degree of volatility. We have already seen signs of this in 2008and 2009 with dramatic changes of over 20% in the Korean currency, and dramaticchanges in the Indiarupee as well. This capital flow is good news, since it can be used to supportinfrastructure reform and financial reform and investment – but you need amarket and a system. This is the regulatory framework that Asiarequires, and the enhancing of government transparency likewise. That is thenext big move.
The third big move is the service sector. WithAsia fixed on an export oriented economy modelin recent history, it faces the need to grow a greater level of internaldemand. You need a more open service sector, and a more open service model, sothat people can find more jobs and find more ways to spend their money. Theservice sector lags behind, especially in terms of productivity, from the levelit should be at. In fact, worldwide levels in the trade sector continue to bemuch higher than the service sectors, with advanced economies boasting greatnumbers of service sectors. These countries wish to open up service sectors indeveloping regions that enhance trade between their own nations and thedeveloping economies. Service sector globalization is the next big thing in theAsian region. Obviously, the most important thing for the region is to ensurethe inclusiveness of the growth. Create more jobs, and distribute income moreequally, so that people can fairly share the fruits of growth. I think this isan issue more important than ever today, for Asia and China.
My time is up. To conclude, I would saythat over the past forty years, we have seen dramatic growth in financialsectors and services and change. The world has really changed. Still, when welook at the map, we have to think of economic change, financial change, and thetrade map. We are interconnected, in three major clusters, with the Pan-Asianvertically integrated supply chains still growing, still expanding. There arehuge opportunities for manufacturing restructuring, service sector expansion.These are the most important challenges we anticipate over the next ten yearsfor the emerging economies of Asia.
