Changes taking place in the world economy are likely to catapult the Asia-Pacific region as the centre of gravity of the world economy with China, India and Indonesia emerging as the growth poles for not only the region, but also the entire world.

However, there are some important challenges on the way for this transformation to take place. Focusing on inclusive development and deepening regional cooperation will be critical in overcoming the barriers while leading to a more balanced and sustainable pattern of development.

The Asia-Pacific region has recovered strongly from the depths of crisis in 2010 with a solid 8.8 percent growth achieved by developing economies of the region. ESCAP's (Economic and Social Survey of Asia and the Pacific) latest survey expects the growth rate of  developing Asia-Pacific economies in 2011 to moderate to 7.3 percent, partly due to a high base effect in 2010 and due partly to the tighter money policies unleashed by the region’s central banks. Growth in 2011 will continue to be led by China growing at over 9 percent, India at over 8 percent and Indonesia at 6.5 percent. With these growth rates, Asia-Pacific region is the fastest growing region in the world and a growth pole of the world economy, assisting the recovery of other regions.

While this assessment appears to be highly promising, one should not underestimate the downside risks and policy challenges that the region faces in sustaining its dynamism that is so critical for closing the development gaps and catching up with the advanced  countries. Let me touch upon three key challenges.

Firstly, the region’s recovery has come under pressure in recent months from increasing price pressures, driven by dramatic increases in global food and energy prices. This has been spurred by a major expansion of liquidity in the advanced economies. ESCAP has estimated that high oil prices could lead to a reduction in growth of up to 1 percentage point for some developing ESCAP economies in 2011. Impact will vary from country to country depending upon their dependence on oil imports worst affected countries in the region include Singapore, Philippines, India and Thailand. High food prices will have the greatest direct impact on livelihoods of the poor in developing economies. ESCAP has estimated that high food and energy prices in 2011 may lead to as many as 42 million additional people in the region living in poverty in addition to 19 million already affected in 2010.

There is need for an urgent response at various levels. At the national level, food and energy price rises should be combated with targeted measures to directly impact prices and reduce the burden on the poor. Besides reducing prices through lowering tariffs and taxes, buffer stocks of food should be established and utilized in a countercyclical manner, social protection measures should be undertaken in the form of food vouchers, targeted income transfers and school feeding programmes. A lasting solution to the food crisis lies in delivering a supply response through enhancing agricultural productivity by reversing the neglect of agriculture in public policy to foster a second green revolution based on sustainable agriculture. Indeed this is the vision of President Susilo Bambang Yudhyono for Indonesia and the region.

The second policy challenge concerns management of volatile capital inflows. The emerging economies of the region have been highly exposed to volatile capital flows, which are leading to asset price bubbles, exchange rate volatility, and risk of macroeconomic instability due to their reversal. Indonesia has been among the countries that have been affected by these capital flows. Again monetary expansion in developed economies is to be blamed for this as the enhanced liquidity finds its way to seek higher returns in emerging markets in Asia and the Pacific. Here capital controls should be seen as important elements of the policy tool kit for reducing the volatility of the capital flows, as recommended by ESCAP last year. Some economies in the region, including Indonesia, have imposed capital controls over the past year, an approach which is now supported even by the IMF.

The third and the most fundamental challenge for the Asia-Pacific economies in the medium term will be to significantly bolster alternative local and regional sources of demand to mitigate in some measure the potential loss of demand from developed economies in the coming years. This process is sometimes referred to as rebalancing of growth. ESCAP’s analysis shows that consumption has failed to keep pace with growth in East Asian countries while investment has failed to keep up in ASEAN countries including Indonesia. There is need to pay attention on enhancing investment rates in this part of the region.

These challenges provide a historic opportunity to rebalance the region’s economic structure in favour of itself to sustain its dynamism with strengthened connectivity and balanced regional development to make the twenty-first century a truly Asia-Pacific one.