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POLITICAL ECONOMY
ADB flags danger of Asia 'asset bubbles'
by Staff Writers
New Delhi (AFP) May 3, 2013


Emerging Asia needs to be on guard against "asset bubbles" as central banks globally loosen monetary policy, the Asia Development Bank's managing director warned on Friday.

Last month, Japan's central bank announced it would pump $1.4 trillion into the economy over the next two years, administering unprecedented financial shock treatment to end two decades of stagnation through bold monetary expansion.

The US Federal Reserve and the Bank of England have also embarked on more limited forms of "quantitative easing" or increasing money supply to revive their economies.

"The positive thing of quantitative easing out of Japan and other economies is that they will start to grow, but we have to be wary of building asset bubbles" and economic overheating, said ADB managing director Rajat Nag.

Nag noted inflationary pressures were already "on the uptick" in many countries in Asia as economies reach full manufacturing capacity.

"The robust growth we have seen in Asia so far has eliminated slack productive capacity, so price pressures will begin to mount," he told reporters ahead of the ADB's annual meeting of the board of governors this weekend in New Delhi.

Emerging Asian economies, such as India, China, Indonesia, and Thailand -- but not Japan -- were on track for solid growth of around 6.6 percent this year, driven by domestic and regional demand and receding reliance on developed nations.

The concern now, he added, was not so much about the rate of growth but about "its quality", amid deepening worries over economic inclusiveness, governance issues and environmental sustainability, Nag said.

He did not comment directly on the string of graft scandals that have beset host nation India and are blamed for eroding investor confidence and contributing to a sharp slowdown in the economy.

But without good governance, nations could land in a "middle income trap" and the Asian growth story may not "unfold in the way it should", he said. The "middle income trap" refers to risk of economies not achieving their full growth potential.

On risks posed by climate change, he said: "We in Asia definitely 'get it'.

"Of the top 20 cities that would be submerged by climate change, 15 would be in Asia," he noted, adding that developing nations and advanced economies must tackle global warming together.

"Unfortunately, we are not proceeding very well," he said.

On the global economy, he said "we're not out of the woods yet", but added that sentiment was more bullish with the US economy picking up, Japan expected to show some growth and the eurozone's fortunes seen improving next year.

Nag said the ADB welcomed the development bank planned by the BRICS group of major emerging economies -- Brazil, Russia, India, China and South Africa -- as help in meeting huge infrastructure funding needs in the region.

The planned bank, seen by some as a challenge to global financial institutions such as the International Monetary Fund and World Bank, is part of the "rebalancing" of a global economy "that is becoming multi-polar" he said.

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