It was hard not to note the irony of an Asian security summit taking place in Europe. The host city of the third summit of the Conference on Interaction and Confidence Building Measures in Asia (Cica), Istanbul, of course straddles Europe and Asia?with the two halves of the sprawling city divided by the Bosphorus strait. But, interestingly enough, the summit was hosted in the European part of the city, and not the Asian one.
The reason is straightforward enough?the European part of the city, like the rest of Europe, is evidently more prosperous, more bustling and has better hotels and conference venues than the Asian half, which like the rest of Asia, at least to a casual observer like your correspondent who has visited both parts of the city during the conference, is still ?emerging?.
The irony is more acute given the severe economic crisis that Europe is going through, with all hopes of a quick global recovery now firmly placed on the momentum provided by emerging Asia (excluding Japan, of course). Cica is a group of 22 Asian countries, almost all of them emerging economies, including India, China, Russia, Turkey, Iran, Pakistan, Thailand and Vietnam. The irony is also sobering for the emerging economies of Asia?Europe, for all its flaws, still remains
at a place where much of Asia still aspires to reach, in terms of prosperity.
The irony is surely not lost on Turkey either, which for years has aspired to membership of that elite club called the European Union. Ten years ago, the Turkish economy was in a shambles and there were too many zeros in the local currency for it to have much meaning. Now, after a period of reform, the Turkish economy is strong enough to be able to offer economic assistance to its bitter rival Greece. Greece is hardly the only European country in need of assistance. Spain is facing mass protests over what are necessary cuts in public expenditure. Britain is going to have to make serious spending cuts and even Germany, the strongest economy in Europe, is undertaking cuts up to 80 billion euros, a serious sum for sure. A little more than 10 years ago, it was emerging Asia that was doing the cutting, in the aftermath of the East Asian crisis in 1997. The tables have clearly been turned in the last decade.
But for emerging Asia, there is still a long way to go before it closes the prosperity gap with Europe. Cica members may together have a one-third share of the global GDP but they also house two-thirds of the world?s poor, a point powerfully made by the Chinese state councillor Dai Bingguo at the Cica summit. Still, this must be viewed as an opportunity, for speeding up growth even more, and not as an obstacle. On the way, there are important lessons to be drawn from both Europe?s decline and Asia?s rise over the last decade.
Europe?s problems are now obvious to all. It is simply not possible to sustain high-spending welfare states unless there is sufficiently fast growth to finance the government spending in a sustainable manner. But not only did much of Europe overextend the welfare state into a system of populist freebies, it also ran highly interventionist policies that killed the proper functioning of the free market and free entrepreneurship and, therefore, growth. Perhaps the most important, but by no means exclusive, form of the wrong kind of policies has been the excessive intervention in labour markets. Overgenerous unemployment benefits that made people unwilling to work, limitations on working hours, abnormally high minimum wages that deter hiring of labour, restrictive immigration policies that are set, perversely and to Europe?s detriment, become even more stringent?all these have taken a heavy toll on long-term economic performance. Of course, heavy state spending requires the imposition of higher taxes, something that deters entrepreneurs from setting up shop in Europe?investment simply goes elsewhere, probably to emerging Asia. Needless to say distortions in labour markets and product markets also deter free enterprise.
Given Europe?s current state of political economy?look at the mass protests on spending cuts that are unavoidable?it may take a long time to change course. But emerging Asia should avoid treading down the same path.
There is, of course, every reason to hope that much of emerging Asia (leave aside outliers like Iran) has already chanced upon the right path. Many countries in East Asia, Turkey and, a decade before them, India learnt some harsh lessons from crises of their own, shrugging off their own misguided obsession with excessive state intervention in free markets. The emergence of first rate entrepreneurship in India, China and beyond has really been the story of Asia?s strong rise and indeed resilience in the last decade. The emerging Asian economies have also learnt the importance of sound macroeconomic policies that, more than anything else, help safeguard countries from the outbreak of potential crisis. It is hardly surprising, therefore, that there has been no significant Asian casualty of the worst global economic crisis in seven decades.
The real challenge for emerging Asia from here on is to facilitate growth using the immense potential of free markets and enterprise. Of course, there will be a need for the state to spend and redistribute in countries that are still poor, but this should be done in the least distortionary manner possible (direct cash transfers are best), while keeping growth and sound macroeconomic management intact.
And then there will be every reason to believe that sometime in the not too distant future, Europe will want to organise an important summit on the Asian side of Istanbul.
dhiraj.nayyar@expressindia.com