David H McCormick, under secretary for international affairs at the US Department of Treasury, said on Tuesday that in an era of global trade and investment both the US and Asia need each other to maintain strong economic growth.
McCormick was speaking at the Asia Society on 'US-Asia Economic Relations -- the Next Chapter,'.
The current financial crisis makes it 'painfully clear' that the economies and prosperities of the regions on both sides of the Pacific are inextricably linked, McCormick said.
"In order to maintain strong economic growth in America, we need a strong, growing Asia, just as Asia's success depends on a thriving US. This reality puts a premium on our ability to cooperate fully to restore confidence in global financial markets and return to robust growth," he said.
He noted that the slowing global economic demand poses daunting challenges for many Asian economies, especially those more dependent on export-led growth.
While most Asian countries have had relatively limited direct exposure to mortgage-related assets, deleveraging by foreign investors and slowing external demand have simultaneously created tighter credit conditions and lower expectations for growth, he said.
This, he said, led to heightened volatility in equity, money, and debt markets. 'These developments put to rest the notion of 'decoupling,' which is the idea that the economic growth of emerging markets in Asia, or other parts of the world, is independent from that of the developed world,' McCormick said.
He briefly talked about five lessons that are coming into focus from the crisis and which must be heeded to by all, including the Asian countries.
The first of this, he said, is that the openness to international trade and investment has been and will continue to be the linchpin of economic growth for the global economy.
"The United States and Asia now are more dependent on one another for growth and prosperity than at any time in their respective histories. In the current climate of anxiety and uncertainty, policymakers must ensure strong communication and coordination, avoid beggar-thy-neighbor policies, and guard against protectionism," he said.
Second, he believed that as the crisis has spread to emerging markets, developed countries must act rapidly to minimise the impact on the still vulnerable populations in these countries.
"Both Asia and the US must stay focused on addressing the fundamental macroeconomic policy challenges that contributed to the crisis. Some of these challenges have been discussed for many years with policymakers voicing concern about the buildup of global imbalances," he said.
"As a result of the turmoil, we are seeing a gradual rebalancing as the US current account deficit begins to contract and emerging markets take steps to boost domestic demand.
"But we must guard against the re-emergence of significant imbalances as the world economy recovers," McCormick said.
In response to a question from Charles Chip Kaye, co-president, Warburg Pincus LLC who moderated the session, McCormick said there is a whole set of lessons regarding oversight about institutions and products that countries, including the US, need to learn.
Asked how developing countries can balance the push for financial reform and liberalisation while undertaking better risk management to avoid contagion in future, he said the economies that have been successful in bringing wealth for a wide section of their population, are the ones that have been most vibrant.
"I think liberalisation, and by that I mean participation in their markets by global firms, allows them to better develop those markets through innovation, infrastructure and technology. Liberalisation, therefore, will also allow the economies to grow in a much more accelerated way.
"That is the argument for financial liberalisation in my view," McCormick said.
He, however, agreed that it is a 'fair point to raise' in terms of developing countries' ability to balance liberalisation and manage risks and vulnerabilities.
"I think it is true. But we are trying to address those vulnerabilities. These countries have the benefit of taking the lessons that we are learning in terms of how they think about exposures and risks," he said.
"I think you can protect yourselves against some of those concerning elements that we have seen in the last 12 months in the US and yet can get the benefit of opening your markets," McCormick said.
The undersecretary ended his address on an optimistic note.
He said the next year is going to be an extraordinary one as policymakers around the world continue to act to stabilise the global financial system and economy while implementing the necessary reforms to address the root causes of this crisis.
Noting that many of these important steps will be achieved through the G-20 leaders process, he said there is an urgent need to to include and work collaboratively with countries not represented in the forum.
"It is clear that the G-20 leaders take their charge of comprehensive change seriously, and they are committed to significant reforms in the months leading up to the next Summit hosted by the United Kingdom in April," he said.
McCormick said at the centre of any effective multilateral policy action will be the US and Asia.
"We must look for ways to enhance our cooperation and leverage our regional, multilateral, and bilateral dialogues and relationships to ensure the integrity and efficacy of these efforts," he said.
"The road ahead will not be an easy one, but the US-Asia economic partnership will be at the heart of our recovery. And our economic relationship will no doubt emerge even stronger as a consequence of weathering this storm together," McCormick said.