Global Trends by
Monday, 12 September 2011
needs to confront new global crisis
The renewed global
economic slowdown is putting pressure on Asian countries to review their
export-based growth model and their vulnerabilities to the inflows and
outflows of capital.
Amid more and more
signs that the global economy is slowing, possibly towards a new recession,
Asian countries facing the adverse effects will have to consider their
Last week, finance ministry and central bank officials and economic
experts from Asian countries gathered in Manila
for a workshop on Asia and the global
crisis. It was organized by the UN Economic and Social Commission for
Asia-Pacific and hosted by the Philippines Central Bank.
It was a timely meeting, especially since the near-term economic prospects
in the United States,
Europe and Japan
have worsened so significantly in recent weeks.
In the 2008-2009 “great recession”, the region was affected by a sharp
drop in exports which caused a dip in the Gross National Product.
But the economic stimulus policies in the advanced developed countries
and many Asian countries (including Malaysia,
China and India) led to a quick recovery.
A switch in policies from fiscal stimulus to austerity in the developed
countries is a major reason for the recent slowdown, which is likely
to last longer.
Asia is vulnerable to a new downturn,
because of its high reliance on exports. A South Centre paper estimates
that exports contribute about 50% of China’s recent
pre-crisis growth. China is already preparing for reduced
export and GNP growth.
The shared wisdom is that China
has to increase domestic consumer spending as its future growth engine.
But that is easier said than done.
In recent years the share of consumption in GDP has gone down from 55%
in late 1990s to 36% in 2008. A main reason is that wage increases
lagged behind productivity increases. As a result the share of wages
in GDP fell to about 40% at present from 50-55% in the 1990s.
is now taking measures to raise workers’ wages, which can then spur
domestic demand. But there is also a fear that higher wage rates may
make Chinese firms uncompetitive as they have low profit margins.
Many other Asian countries
are even more export dependent. In Indonesia,
Korea, Taiwan and Thailand
exports contributed over 60% to growth, compared to 40-50% in China. The export
dependence of Malaysia, Singapore
is even higher.
They are very vulnerable to a slowdown in exports to developed countries
as well as to China. For every $100 worth
of processed manufacturing exports of China
to the US
and EU, about $35-$40 go to East Asian developing countries. They export
a lot of the components that China
uses to make its exported products.
Thus a slowdown of Chinese exports to the US and EU will also have a strong
impact on Asian countries.
In many Southeast Asian countries, a major problem is the seeming lack
of investment opportunities, since investment is lagging behind savings.
In Malaysia, Singapore, Philippines, Taiwan and Indonesia, investment
rates have been around 20 per cent of GDP in recent years, less than
half the rate in China.
Their investment rates not recovered to the levels attained before the
1997 Asian crisis. They are too low to generate a rapid growth of effective
These countries need to plan for new sources of growth based on higher
domestic demand, as well as expanded trade among the countries in the
region and in other developing regions.
A key lesson learnt by many Asian countries from the 1997-99 Asian crisis
is that they should not be caught in a vulnerable situation having their
foreign reserves drawn down to the point of facing a debt default.
Thus the high current account surpluses and significant accumulation
of foreign reserves have cushioned many countries during the 2008-2009
However, the region also faces a number of financial vulnerabilities
that the new global turmoil may make more evident.
First, some countries in the region have significant current account
deficits and rely on inflows of foreign capital to meet the deficits.
They could face balance of payments problems should exports deteriorate,
or if there is a reversal of capital flows.
Second, many Asian countries have been liberalizing their capital flows
in the past decade. They opened up to foreign capital inflows, including
direct investment, portfolio investment and loans. They also allowed
capital outflows by resident individuals, banks and companies.
Thus they are now more susceptible to surges of both capital inflows
and outflows of funds by local companies and individuals.
In periods where capital
inflows are large, they balance out or exceed resident outflows. However,
when a country faces a reversal of foreign capital flows, it would be
difficult to bring back the local capital that went abroad.
As a result, the country is exposed to the risks of significant net
outflows. If this is not adequately matched by a surplus in the trade
and current accounts, its balance of payments position could deteriorate.
Third, Asian countries are exposed to surges of international funds
searching for higher yield. The recent wave of capital inflows has
caused problems such as currency appreciation (resulting in exports
being less competitive), excess liquidity, inflationary pressures, and
bubbles in equity and housing prices.
They are also vulnerable to a sudden reversal of capital flows, which
can have devastating effects. Some Asian countries like Thailand
have used capital controls to reduce inflows, but the pressures continue.
Fourth, many Asian countries have made losses due to the fall in value
of their foreign reserves, much of which are held in US treasuries and
bonds, as a result of the dollar’s depreciation. The present lack of
alternative to the dollar as a global reserve currency makes this problem
While Asian countries can take national policy measures to control or
reduce the vulnerabilities above, these may not be effective unless
there is collective action at the global level.
Thus, policy makers in the region should be more active in pushing for
global financial reforms. This was one of the conclusions of last week’s
The new global slowdown has made it all the more urgent to rethink the
national and regional growth models, and to have a strong regional voice
in global economic policies and financial reforms.
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