Introduction: Sources of strengths, remaining vulnerabilities and new policy challenges for Asia

Abstract

Currently much of Asia is growing at an impressive rate, thus allowing for a very significant reduction in poverty and contribution to meeting the MDGs. One of the potential risks that could undermine continued rapid growth and poverty reduction in Asia is a financial crisis, especially if it spread through contagion from one country to another and/or if it occurred in a major country. This article summarises the strengths and potential financial vulnerabilities in Asia, which are the focus of this IDS Bulletin. One potential vulnerability is linked to a source of strength: the region's high levels of international reserves. This has contributed to excessive liquidity, which has been a major factor behind bubbles in the stock markets of several Asian countries. The article also highlights new policy challenges, such as the risk of an abrupt unravelling of global imbalances, which may drastically change the prospect for developing countries and Asia in particular. Another challenge is the explosive growth of derivatives worldwide, and increasingly in Asia; this can pose new risks for the stability of the whole financial system and may have destabilising and pro-cyclical effects on key macroeconomic variables and thereby economic growth. © Institute of Development Studies.