Crisis in the West: The impact on Asia

REPUBLIC SERVICE
Last of Two Parts

WHAT will be the impact of the economic and financial crises in America and Europe on Asia? For the region outside Japan, Morgan Stanley analysts see “No Escape from Weaker Growth in the Developed World”, as their Hong Kong report predicts.

The investment bank slightly cut developing Asia’s growth forecasts to 7.6 percent this year and 7.3 percent for the next, with export-driven economies like South Korea, Malaysia, Singapore, and Thailand likely to slow down more than domestic-oriented China, India and Indonesia. The Philippines straddles both groups, with consumer spending being the main growth driver and with high reliance on service exports.

Morgan Stanley’s outlooks for China, India, and Korea warn of dampening impact due to the West’s downturn. So too for Asean and Taiwan, although fiscal strength in Southeast Asia and robust consumption in Taiwan should sustain growth.

The Washington-based Corporate Executive Board (CEB), which groups or advises 5,300 organizations worldwide, said in its third-quarter Asia Business Barometer that 83 percent of respondents from among CEB’s 225,000 member-executives expect higher Asia revenues in the coming 12 months. That’s a significant 10-point drop from 93 percent in the previous quarter.

Moreover, just over half of respondents believe that consumer spending would increase, down from about seven out of ten in the past three quarters. And while more than 60 percent expect higher economic growth, they also see increasing costs, competition, and interest rates.

Besides global economic uncertainties, tempering the continued optimism are rising prices and monetary tightening, with headline inflation pushing real interest rates below zero in most of the region’s major economies. That could point to more measures to restrain money supply growth and curb inflationary pressures, further dampening spending and growth. And amid investor anxieties, stock valuations have fallen below the historic average in Asian markets outside Japan.

However, the real global problem lies in the West. Both America and Europe are mired in unemployment, fiscal debt and indecisive, self-serving leadership—the very malaise blamed by scholars for Japan’s economic stagnation for the past two decades.

Many economists are now asking whether the US would follow the same moribund path and what lessons it should learn in order to avoid its own decades-old decline. The same questions apply to Europe, where economic policymaking is further complicated by having several governments tussling over issues.

Reflecting widely espoused views among economists, New York University professor Nouriel Roubini—he earned renown in recent years for predicting the 2007-08 US financial crisis—spells out in his article “Is Capitalism Doomed?” the sweeping measures needed for recovery: “We need to return to the right balance between markets and provision of public goods. That means moving away from both the Anglo-Saxon model of laissez-faire and voodoo economics and the continental European model of deficit-driven welfare states. Both are broken.”

His policy wishlist: more job-generating infrastructure spending, higher taxes on the well-off, immediate pump-priming spending combined with long-term fiscal discipline, and help and safety nets for debt-ridden families and other distressed sectors. While pushing for continued lender-of-last-resort support to prevent bank runs, he urges “stricter supervision and regulation of a financial system run amok; breaking up too-big-to-fail banks and oligopolistic trusts.”

Failure to act, Roubini warns, would lead to “unending stagnation, depression, currency and trade wars, capital controls, financial crisis, sovereign insolvencies, and massive social and political instability.”

As the West strives to sort out its economic and financial problems, Asia seems well positioned to continue setting the pace for global growth. Lessons from the 1997 Asian financial crisis have steeled the region against currency contagion and enhanced its resilience in the face of global economic turbulence.

In their draft paper, “From the Asian Miracle to an Asian Century”, which was finished last month in a research jointly conducted by Beijing University and Australia National University, Yiping Huang and Bijun Wang presented several major trends: While slowing from the miracle years, growth would still give Asia 40 percent of global economic output, based on purchasing power parity, by 2020.

The region would help address global trade and financial imbalances by currency appreciation and structural reforms like more domestic consumption, Huang and Wang said. But their paper warns that financial crises may still strike, hence the need for international coordination and cooperation to head off destabilizing forces.

The crucial dialogue is between America and China, currently the world’s largest economies. The economic talks in Beijing last week between visiting US Vice President Joseph Biden and his Chinese counterpart Xi Jinping should be reprised regularly to forge consensus on policies and initiatives that prevent crises.

In their seminal 2009 paper “The End of Chimerica”, economists Niall Ferguson and Moritz Schularick warned that the decades-old relationship which enabled China to grow rapidly by exporting to America, would need to change or else it would lead to unsustainable economic imbalances.

Two years after that Harvard Business School report, the skewed money and trade flows have now spawned full-blown crises. Now, it’s time for the world to recast its creaking economic paradigm.

That difficult and painful rebalancing, like the Chinese characters for crisis, presents both the threat of global dislocation, and the vehicle toward a new and better world order.

The first part was published on Wednesday. –Ricardo Saludo, Manila Times

Ricardo Saludo heads the Center for Strategy, Enterprise & Intelligence ( ric.saludo@censeisolutions.com), which publishes The CenSEI Report. For copies of the full study, please email report@censeisolutions.com.