No room for complacency Asia moves from resilience to resistance

Published by rudy Date posted on March 29, 2009

THREE global crises converged to threaten development in Asia and the Pacific in 2008: A Great Recession in developed countries, food and fuel price volatility and climate change calamities.

The converging crises could be turned into an opportunity to jump-start a regional reorientation toward a more inclusive and sustainable development path.

During the first part of the year, crude oil prices soared to historical record levels and food commodity prices increased to the highest le­vels in over 20 years, causing alarm across the region’s developing countries because of the disproportionate impact on the poor.

The impact was particularly severe where the price of main staple food, rice, increased by a staggering 150 percent in only four months.

As the second half of the year unfolded and commodity prices started to retreat from their peaks, financial turbulence that had remained largely confined to the United States subprime market took a dramatic turn for the worse, turning into a full-fledged global financial crisis and setting in motion the most severe economic downturn of the world economy in post-war history.

By early September, it was clear that, for the second time in a decade, the region would be hit by a financial crisis that would be particularly damaging because of the heavy reliance on exports to industrial countries for growth.

A total of 24 million people are in danger of losing their jobs, with women and youth—who make up a large share of the manufacturing workforce—disproportionately affected. This is aggravated by an increase in the number of undernourished to 583 million.

A worsening state of poverty and hunger in the region is now impossible to avoid.

In 2008, yet a third global crisis loomed—a stealthier but potentially more virulent one than the first two: Climate change calamities. Natural disasters, often associated with climate change stresses and lower tolerance to increased heat in lower latitudes of this region, struck with intensity.

Natural calamities claimed 232,500 lives in the region last year, accounting for a staggering 97.5 percent of such fatalities worldwide.

One of the deadliest storms ever to occur in the North Indian Ocean Basin, Cyclone Nargis, made landfall in Myanmar’s Ayeyarwady Delta in May and left a trail of death and destruction—84,500 people dead and 53,000 missing.

Australia’s worst drought in more than 100 years entered its seventh year with fires—believed to be the worst in its history—causing widespread devastation and hundreds of deaths.

Natural disasters tore apart communities at the opposite ends of the development spectrum, just as the origin of financial crises showed that they no longer fit into easy developed-versus developing-country classifications.

Remarkable resilience

Developing countries in the region have shown that they are better prepared for a financial crisis.

Over the past decade, their regulatory reforms in the financial sector, combined with cautious macroeconomic management policies, have improved current account balances and fiscal deficits and built a protective shield of foreign exchange reserves.

To a large extent, the region possesses the resilience to withstand the worst of the global financial system’s spiral downwards.

Export growth in 2008 remained strong until the third quarter, buoyed by weakening currencies and relatively robust external demand. Developing countries managed to maintain an average growth rate of 5.8 percent, as compared with -0.4 percent in Asia-Pacific developed economies.

In 2009, the region’s developing countries are expected to grow at 3.6 percent which—compared with growth of -2 percent in the world’s major developed countries—further highlights the region’s resilience.

This comparatively high growth, coupled with the large aggregate size of the region’s economies, could result in Asia-Pacific as the locus of any global growth that may take place this year.

Still, some countries have been more exposed than others to short-term financial flows, and their currencies have suffered from the retreat of those flows from the region in the last quarter of 2008.

Nevertheless, major developing countries in the region were in a stronger position, which presents them with an opportunity to renew partnerships among themselves and with developed countries to bridge equity divides and contribute to strengthened regional solidarity.

Vulnerabilities

Resilience notwithstanding, this is no time for complacency.

The crisis-prone nature of the region has brought to the fore vulnerabilities that need to be carefully tracked and for which forward planning and policy action will be essential.

Paradoxically, some of the region’s vulnerabilities are the very reasons for its success.

The fact that the region is more integrated through finance, trade, investment, technology, transport and knowledge with the rest of the world than with itself has allowed it to benefit for decades from export-led growth.

But these linkages are also channels through which global instabilities and economic recession are transmitted to the region. Trade—once the engine of growth in the region—moved from double-digit growth to double-digit declines in some economies during the fourth quarter of 2008, and fresh evidence indicates that the worst is yet to come.

As the economic outlook continues to darken at the global level, the tried and true recourse that mitigated the economic crisis in 1998—boosting exports—has lost its effectiveness.

Although intra-regional trade has grown dynamically over the last decade, its cushioning effects are stymied by the fact that it consisted largely of trade in parts and components in the manufacturing sector that are, in turn, linked to demand for consumer products in recession-hit developed countries.

Economies with enterprises that are most directly linked through vertically integrated production networks supplying the United States and European Union markets—such as China, the Republic of Korea, Singapore, Thailand, and Hong Kong, China—are those experiencing the strongest downward pressure on economic growth.

Another worrisome signal on the trade front is the growing protectionist pressure in recession-hit countries, where domestic sourcing of inputs is given preferential treatment over imports—often as conditions imposed on bailout packages. This could distort market-entry for exports from Asia-Pacific countries.

A further concern is that, when economic growth resumes its long-term trend, it could cause a return of the sharp increases in commodity prices experienced in recent years.

This is highly likely because imbalances between fast-rising demand and sluggish supply responses have yet to be resolved.

Crisis resistance

At the regional level, a largely neglected debate concerns the formulation of effective and coordinated macroeconomic policies to move the region from crisis-resilience to crisis-resistance.

The United Nations Economic and Social Commission for Asia and the Pacific (ESCAP) proposes a number of crisis-specific and comprehensive policy actions in which regional cooperation can be boosted.

Commensurate with its rising contribution to global economic prosperity, Asia and the Pacific should have an increasingly influential voice in shaping the future multilateral system of governance.

A world finance mechanism, either through reform of the current architecture, or through the creation of a new organization that balances efficient decision-making with global representation, is certainly needed.

A strengthening of the multilateral trading system is called for, as this system can offer the most stable, predictable and transparent environment in which to conduct global and regional trade for development.

Coordinated monetary and fiscal responses have greater credibility and help shore up confidence while enhancing regional and global multiplier effects.

Of equal concern for Asia and the Pacific is the need to establish a regional contingency plan to respond quickly to the liquidity and capitalization problems of domestic banks. This would require the accelerated establishment of a regional surveillance system that focuses on emerging risks.

The curtailment of trade has been exacerbated by the lack of trade credit. Somewhat anomalously for this trade-oriented region, it is the only one that does not have a regional institution specifically dedicated to export credit and export credit guarantees.

A regional trade financing facility would enable risk pooling across countries and scale economies, and would be more credible than isolated national initiatives, thus offering countries with special needs, in particular, greater access to international finance.

In order to reduce the likelihood that commodity price crises will occur in the future, it is important to promote energy efficiency and investment in renewable sources of energy.

The state of deprivation of smallholder farmers needs to be addressed in order to improve the food supply response, reduce poverty and make growth more inclusive. Increased public investments, particularly through the fiscal stimulus packages being designed or already under implementation, are needed.

Social protection should build strong social foundations that will make societies more crisis-resilient. And it makes for good economics.

By providing a basic level of income support, protection schemes make individuals feel more secure and less inclined to increase their savings to protect themselves from possible income losses in times of crisis, thereby contributing to domestic demand and macroeconomic stability.

Although policy attention is focused on fighting the economic crisis and political commitment on climate change may be fading, there is no contradiction between the two policy objectives.

Investing in the green economy can both generate millions of jobs and start addressing the challenges associated with reducing carbon dependency, protecting ecosystems and preserving water resources.

(Noeleen Heyzer is the Under-Secretary-General of the United Nations and Executive Secretary, UN Economic and Social Commission for Asia and the Pacific).

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