Key Economic Developments and Prospects in the Asia-Pacific Region 2008

By now the report by the United Nations’ Economic and Social Commission for Asia and the Pacific (UNESCAP) has made the news, mostly through its pessimism regarding the US economy – but it has far more within! You can read the entire report here.

Specifically, and as per the IHT link above, it mentions the growth rates of Asian economies (the “AP” in ESCAP):

ESCAP Table 1

ESCAP Figure 1

Eco 1 students! This returns us to the principle of Catch-Up:

Hubbard and O'Brien

Short version: emerging/developing economies, assuming that they have adequate policies in place, will exhibit higher rates of economic growth than developed countries, eventually “catching up”. Compare, in Table 1 of the UN ESCAP report above, the developing/developed economies numbers. That is catch-up. It is also why the bourses of emerging markets will usually out-perform those of developed exchanges.

Another section of interest in the report is Sovereign Wealth Funds, to wit:

Buoyant reserve accumulation by countries in the region is adding to the stock of capital for existing wealth funds. Reserves are increasingly being accumulated not for prudence in times of crisis but as a result of managing currency appreciation. Therefore, there is no limit to the level of reserve accumulation.

It has become increasingly important for Governments to consider setting up sovereign funds as a strategy to obtain a reasonable level of return on their burgeoning capital. In addition, such funds serve to reduce risk by diversifying the assets in which foreign reserves are invested. Existing sovereign funds are also allocating more of their capital to riskier assets. For instance, the Russian Federation uses its stabilization fund partly to meet emergency budget shortfalls and partly for investment purposes.

Sovereign wealth funds have a major potential impact on movements in international financial markets. The volume of capital under their management is at least twice as much as that of hedge funds. Estimates put the current size of the world’s 25 sovereign funds at about $2.5 trillion, with a rise of $450 billion in 2007. It has been forecast that the resources at the disposal of sovereign funds could rise to $12 trillion by 2015. The region’s major established funds are the Government Investment Corporation of Singapore, with holdings of $330 billion; the stabilization fund of the Russian Federation, with assets of about $100 billion; and the Investment Agency of Brunei Darussalam with $30 billion. The Republic of Korea also began its own fund, the Korea Investment Corporation, in 2006 with capital of $20 billion.

The desire to obtain healthy returns on their bulging reserves is also leading other countries in the region to consider setting up their own wealth funds. The year 2007 saw the formation by China of a sovereign wealth fund to invest $200 billion of its foreign reserves in other investments. Investments by the country’s new State Foreign Exchange Investment Corporation will be in financial and strategic assets around the world.

Sovereign wealth funds present a number of challenges for their owners. One is that they are prone to protectionist sentiment from investment-receiving countries because the funds are government entities. In this context, the extent to which investment in a company by a sovereign wealth fund results in voting rights or management control is important. A reasonable amount of information on the investment strategy and portfolio holdings of sovereign wealth funds would also help to reduce concerns from investment-receiving countries.

Currently, most funds are opaque about internal checks and balances, investment strategy and commercial goals.

Surprisingly (for me) was the extent to which the Russian Federation had expanded its holdings of foreign reserves, in 2007:

ESCAP Figure 7

Although that could just mean I’ve been here too long (I’m forever trying to argue with colleagues here in the US about the latent strength of Russia. The mindset here is that they were soundly defeated and will never be a problem – very English thinking on the issue, frankly).

The report’s discussion of inflation (pinning no small amount of the same on the Money Supplies in Asian and Pacific economies) is very good also. The report is well worth the time of students of economics to read.

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