East Asia’s message to G-20

WASHINGTON — MUCH ATTENTION IS BEING GIVEN TO the April 2 Summit Meeting in London of the leaders of countries represented in the so-called Group of Twenty (G-20), who describe themselves as an informal grouping of finance ministers and central bank governors of “systemically important” industrialized and developing economies.

Taken together, its member countries — actually numbering 19, not 20 –account for 90 percent of global GNP, 80 percent of world trade, and two-thirds of the world’s population. Asia is represented by China, India, Indonesia, South Korea and Japan. Thailand has been invited to the London summit as well, in its capacity as chair of the Asean this year.

There are mixed expectations on what the meeting can accomplish. Many are hoping that it will reach firm agreement on a concerted and convincing response, and hence solution, to the ongoing global financial crisis and economic downturn. But others are skeptical that the meeting will amount to much more than a photo opportunity.

US-EU debate

A key reason many don’t expect much to come out of the summit is the much-publicized disagreement between the United States and Europe on the key approach to the global problem. The Europeans are not convinced that the world needs more fiscal stimulus at this point (translation: government spending to stimulate demand for goods and services, or tax cuts to spur more consumer and business spending). The United States and Japan are at the forefront of setting a clear target for a concerted fiscal stimulus, such as 2.0 percent of GNP.

But the Europeans believe they have spent enough, and are not comfortable going into even deeper debt to support additional stimulus. This, after all, is the implication of massive fiscal stimulus: It means trading off future spending by our children and grandchildren to be able to spend more today, and by doing so, hopefully revive the world economy from its worst slump in eight decades. But the exact gravity of the problem to be left to future generations is not well understood. We Filipinos know. The experience of the Philippines, weighed down in past decades by the overhang of Marcos-era debt, is illustrative of the burden to be left to future generations.

East Asia implications

The other worry is that the massive debt the United States is accumulating will have unwanted consequences even in the near future, not the least of which would be further collapse in the value of the US dollar and assets denominated in that currency. China, the single biggest holder of these assets, has particularly expressed alarm that US actuations could lead to massive Chinese losses from their holdings of US dollar assets. There are indeed trillions of dollars of US debt already held by East Asian countries from past years of America’s profligate spending.

On the other hand, it has also been argued that a large part of the coordinated stimulus need not be a burden to future generations if East Asia — particularly China and Japan — with their deep pockets of dollar reserves, would do much of the desired spending. They can also facilitate it for their less-endowed neighbors by lending them cheap money to fund their own fiscal stimulus packages. This was the message conveyed by star economist Jeffrey Sachs in a recent lecture at the Asian Development Bank (ADB).

Think tanks’ messages

Last week, the ADB Institute, the Tokyo-based research and training arm of the multilateral lender, assembled representatives of Asian think tanks to craft a message to the Asian leaders who will attend the G-20 Summit. It is hoped that they would, in turn, convey the region’s message to the rest of the G-20 leaders in London. I had the privilege of representing the Ateneo Center for Economic Research and Development in joining voices with the other economic think tanks to craft the message.

The group stressed that the current problem demands a collective response and solution, and individualistic and inward-looking solutions have no place in the required collective response. Thus, we warned against resurgent protectionism and competitive currency depreciations, which could only skew the recovery toward the larger countries at the expense of smaller developing economies like ours. In particular, the export-led economies of East Asia stand to be hardest hit by any protectionist moves by the United States and Europe. Even then, the group affirmed that East Asia must now rethink and rework the export-driven growth model that had propelled the region’s economies in recent decades. In the face of a likely long-term change in America’s consumption behavior, we can no longer rely on exports as the primary engine for growth in the future.

The group also expressed support for a coordinated stimulus effort that will ensure inclusive and sustainable growth, emphasizing infrastructure investment, environmental improvement and social sector protection. We also urged leaders to take concrete measures to ease shortages of foreign exchange, trade financing and credit to SMEs to ensure broad-based recovery. And the group called for fundamental reform of the international financial architecture, where East Asia must assume new prominence in the governance of international financial institutions commensurate to the region’s now widely acknowledged prominence in the global economy.

The world needs East Asia, and the coming G-20 summit is an opportunity for our region to claim the influence it deserves in shaping the world economy.–Cielito Habito, Philippine Daily Inquirer

Comments welcome at chabito@ateneo.edu.