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Emerging Risks in Asia

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Some economists believe that Asia is largely insulated from the ongoing economic crisis in Europe and North America, and that Asia's persistently high growth rates are evidence either of a decoupling of two parallel universes, or of the notion that much of developing Asia has in essence 'graduated' from reliance on the developed world for its economic well being. However, there are a number of trends and associated risks emerging in Asia at the present time that fundamentally challenge this assumption -- namely, heightened competitiveness, weakening economic fundamentals, rising economic nationalism, and an increasing orientation toward militarism.

One of the great benefits of much of Asia having achieved middle income status and greater levels of prosperity is that national industries have developed and become more competitive, along with the diversity and rising level of exports. Intra-Asian trade and investment has reached unprecedented highs, which has served to fuel regional growth while at the same time helping create property bubbles throughout greater Asia. This 'pan-Asian bubble' will of course eventually burst, as all bubbles do. We may be seeing the beginning of that, with growth rates in China and India -- the two 'engines' of Asian growth -- beginning to slow down dramatically. India's report last week that its quarterly GDP growth rate had slowed to a 9-year low of 5.3 percent is evidence of this. Taken together with the slowdown in global production and trade, and given that the Baltic Dry Index revisited its 2009 lows earlier this year, there are clearly storm clouds on the horizon, which cannot be ignored.

Coinciding with this is the rise of natural resource and economic nationalism, most clearly evident in Indonesia, but present elsewhere in the region. In an effort to enhance its sovereignty over the natural resource sector, the Indonesian government recently adopted new rules that will sharply increase the costs of doing business in the mining sector. Foreign mining companies must, within 10 years of commencing production, now cede majority control of their businesses to the government. Recent legislation will impose a 20 percent tax on scores of unprocessed minerals. These actions are clearly designed to increase government control over the sector, at the expense of foreign investors. Earlier this year, Australia passed a 30 percent tax on coal and iron ore mining companies, designed to promote infrastructure development in the country. These measures send a distinctly anti-foreign investment message, which will have long lasting negative impacts, whether they were designed to do so or not.

The other major area of concern is a rising propensity toward militarism -- both between regional powers, and on the grand global chess board between China and the U.S. The recent high profile conflict between China and the Philippines over the Scarborough Shoal -- and over the longer term between China and five other Asian nations over the Spratly Islands -- is evidence of this, as is competition for superior blue water military capabilities between China and India. The recent U.S. announcement of a 'pivot' toward Asia is clearly intended to counter China's indisputable rise as a regional and global power -- in spite of U.S. Defense Secretary's announcement last weekend in Singapore at the Shangri-La Dialogue that the U.S. welcomes China's peaceful rise as a military power. The stage is set for rising expenditures in support of superior military capabilities throughout the region, which will negatively impact already strained national budgets.

Taken together, these issues run counter to the current euphoria about Asia's short and medium-term growth prospects, and raise concerns about Asia's ability to sustain accelerated growth rates, attract foreign investment, and remain peaceful. The Great Recession has proven that Asia is not invulnerable to a global economic slowdown. The Asia Crisis proved that foreign investment can indeed disappear from the region. And numerous historical conflicts have demonstrated that Asia remains a tinderbox of potential conflict between neighbors, always simmering beneath the surface. To believe otherwise would be to delude oneself that Asia is immune to the plethora of ills that plague the global landscape. Traders, investors, and lenders should adopt a cautious approach to doing business in the region -- just as they should in any other part of the world.

There are naturally plenty of genuinely good business opportunities throughout Asia, but danger lurks in a variety of corners. The coming months will undoubtedly prove to be a litmus test as to whether Asia can sustain its high rates of growth in the face of sustained headwinds from the West. Given the manner in which events appear to be unfolding in Europe, it should not be too long before Asia faces that test.

Daniel Wagner is CEO of Country Risk Solutions, a cross-border risk consulting firm based in Connecticut (USA), and author of the new book "Managing Country Risk".