With both Europe and the US struggling to bounce back from the deep recession triggered by the financial crisis, the world is again looking towards Asia as the engine of growth. However, Asia is also at a crossroads. It needs to shift from its current “old industrial” export-driven model towards a new economic model – one that is focused on domestic consumption and is more socially just and environmentally sustainable.
The Asian financial sector will need to facilitate this transformation in the real economy. Alas, it is currently ill-suited to playing this role. The Asian financial sector is dominated by short-term bank lending; it suffers from shallow capital markets and a paucity of “real money” long-term investors, such as insurers and pension funds; and it lacks the financial data, credit expertise and incentives required to lend to small firms or innovative start-ups.
In short, the Asian financial system is adapted to the “old industrial” real economy it has been serving. For Asian economies to modernize, the financial system must modernize too. This joint report with the Fung Global Institute describes the shortcomings of the current financial system and makes recommendations for Asian policy makers. Among other things, they should co-ordinate their policies to create an efficient and better integrated financial sector and ensure the “Asian voice” is heard at the global table, increase transparency to reduce information asymmetries and facilitate the transition towards an increasingly mobile world by ensuring safety, security and efficiency of local retail payment systems. We also argue for Asian central bank to create targeted financing back-stop facilities to support SMEs and trade as well as tax incentives to further encourage equity and other long-term funding.