They should focus on stimulating domestic demand instead of relying on exports
By ANTHONY ROWLEY 7 February 2009
It may seem like a cruel irony that Asian economies are suffering so badly now from a crisis which was not directly of their own making. But in fact, they have only themselves to blame. The poignancy, and indeed absurdity, of their predicament was highlighted this week in comments from the Institute of International Finance (IIF) in Washington as well as from International Monetary Fund (IMF) managing director Dominique Strauss-Kahn.
‘A remarkable development in the latest downturn is that countries least affected by credit difficulties seem to have become most severely hit by the global downturn in recent weeks,’ noted the IIF.
For example, it added, ‘credit market damage is measurably greater for the US and Euro area than for Japan (and yet) growth in Japan and the rest of Asia has been hit hardest in recent weeks’.
A remarkable development indeed and one that illustrates vividly the sad and utter dependence of most East Asian economies - from Japan and South Korea to Singapore and Hong Kong (or Taiwan for the matter) - on export demand. When exports go, everything goes in these economies that lack the domestic demand (however badly diminished) that buffers North American and European economies.
‘Global exposure, not credit exposure, has become the greatest challenge,’ added the IIF, in a comment that went to the heart of the matter, as did that by Mr. Strauss-Kahn during a briefing for journalists when he noted that East Asia had prospered from buoyant external demand over the past decade but is now experiencing the ‘other side of the coin’.
Was all this predictable? Absolutely. I have, in recent years, challenged the fallacy of believing that the high level of intra-trading among East Asian economies meant that they had achieved greater independence from external demand. Such claims became even more exaggerated prior to the outbreak of the current crisis when it was argued that Asia had ‘decoupled’ from world demand. The point has often been made here that East Asian economies had in effect allowed themselves to become offshore ‘production platforms’ serving the voracious (and credit-financed) appetite for consumer goods in the US and other so-called advanced economies. The US sub-prime crisis was an accident waiting to happen and the shock that it has transmitted to Asia via the trade route was as predictable as past oil or financial system shocks.
What to do about it? Incredible though it may seem, given the massive damage that is being done to output and employment as well as corporate profits by the current slump (not to mention the secondary damage to Asian financial systems that went into the crisis in fairly good shape), many policymakers in this region and elsewhere are hoping to revert to the status quo ante. They are talking of the need to get the discredited system of securitised financial transactions going again. Economies still reeling from an orgy of over-lending and over-borrowing are being encouraged to think that these vices become virtues when growth is at stake. All this would be setting the stage for the next credit calamity but for the fact that damage to consumer psychology from the current crisis probably rules out any recovery for a long time. Now is the time for Asian economies to strike out in bold new directions and (as has again been argued here many times) focus on stimulating domestic demand, by whatever means, rather than pursuing a mercantile obsession with exports and foreign currency reserve building. If a deeply-indebted US is forced to devalue the US dollar in order to repay its debts (or allow hyper inflation to do the job for it), Asian nations will, in any case, lose their reserves.
As Mr. Strauss-Kahn argued this week, Asian economies will have to undergo ‘huge change’ as they shift from traditional export-led growth towards greater reliance on domestic demand. It will be a ‘big shift’ for these economies, a ‘huge change’, he said. But there are already signs of such a shift in the way that the Chinese economy is working and others will need to follow suit if they are to reduce their vulnerability to outside shocks, he said.
Stimulating domestic demand does not mean aping the antics of administrations (notably those in the US or Britain) that have encouraged their people to binge on credit to the point of stupor.
What it means in Asia is focusing on building up the region’s transport, communications, energy, education, health, welfare, sanitation and water infrastructure to the point where it can support a viable Asian economic community.
This can be financed by government budgets - deficits if necessary - and by using US dollar reserves (while they are still worth something).
It will create untold thousands of jobs, both directly and via spin-off effects. Most important, it will help spread wealth among the millions of still very poor in this part of the world so that as personal consumption builds up on the back of private consumption, it will be broad-based and sustainable.
Some people are beginning to get the point. Speaking at the recent World Economic Forum in Davos, chairman and CEO of the Japan External Trade Organisation (Jetro) Yasuo Hayashi said that India would offer major investment opportunities as it lacked basic infrastructure. Japanese companies also hope to pick up investment projects in China, especially in the environment sector and they will look for opportunities in South-east Asia, including plans to construct an industrial corridor linking India and Vietnam, he added.
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Time for Asia to strike out in new directions
They should focus on stimulating domestic demand instead of relying on exports
By ANTHONY ROWLEY
7 February 2009
It may seem like a cruel irony that Asian economies are suffering so badly now from a crisis which was not directly of their own making. But in fact, they have only themselves to blame. The poignancy, and indeed absurdity, of their predicament was highlighted this week in comments from the Institute of International Finance (IIF) in Washington as well as from International Monetary Fund (IMF) managing director Dominique Strauss-Kahn.
‘A remarkable development in the latest downturn is that countries least affected by credit difficulties seem to have become most severely hit by the global downturn in recent weeks,’ noted the IIF.
For example, it added, ‘credit market damage is measurably greater for the US and Euro area than for Japan (and yet) growth in Japan and the rest of Asia has been hit hardest in recent weeks’.
A remarkable development indeed and one that illustrates vividly the sad and utter dependence of most East Asian economies - from Japan and South Korea to Singapore and Hong Kong (or Taiwan for the matter) - on export demand. When exports go, everything goes in these economies that lack the domestic demand (however badly diminished) that buffers North American and European economies.
‘Global exposure, not credit exposure, has become the greatest challenge,’ added the IIF, in a comment that went to the heart of the matter, as did that by Mr. Strauss-Kahn during a briefing for journalists when he noted that East Asia had prospered from buoyant external demand over the past decade but is now experiencing the ‘other side of the coin’.
Was all this predictable? Absolutely. I have, in recent years, challenged the fallacy of believing that the high level of intra-trading among East Asian economies meant that they had achieved greater independence from external demand. Such claims became even more exaggerated prior to the outbreak of the current crisis when it was argued that Asia had ‘decoupled’ from world demand. The point has often been made here that East Asian economies had in effect allowed themselves to become offshore ‘production platforms’ serving the voracious (and credit-financed) appetite for consumer goods in the US and other so-called advanced economies. The US sub-prime crisis was an accident waiting to happen and the shock that it has transmitted to Asia via the trade route was as predictable as past oil or financial system shocks.
What to do about it? Incredible though it may seem, given the massive damage that is being done to output and employment as well as corporate profits by the current slump (not to mention the secondary damage to Asian financial systems that went into the crisis in fairly good shape), many policymakers in this region and elsewhere are hoping to revert to the status quo ante. They are talking of the need to get the discredited system of securitised financial transactions going again. Economies still reeling from an orgy of over-lending and over-borrowing are being encouraged to think that these vices become virtues when growth is at stake. All this would be setting the stage for the next credit calamity but for the fact that damage to consumer psychology from the current crisis probably rules out any recovery for a long time. Now is the time for Asian economies to strike out in bold new directions and (as has again been argued here many times) focus on stimulating domestic demand, by whatever means, rather than pursuing a mercantile obsession with exports and foreign currency reserve building. If a deeply-indebted US is forced to devalue the US dollar in order to repay its debts (or allow hyper inflation to do the job for it), Asian nations will, in any case, lose their reserves.
As Mr. Strauss-Kahn argued this week, Asian economies will have to undergo ‘huge change’ as they shift from traditional export-led growth towards greater reliance on domestic demand. It will be a ‘big shift’ for these economies, a ‘huge change’, he said. But there are already signs of such a shift in the way that the Chinese economy is working and others will need to follow suit if they are to reduce their vulnerability to outside shocks, he said.
Stimulating domestic demand does not mean aping the antics of administrations (notably those in the US or Britain) that have encouraged their people to binge on credit to the point of stupor.
What it means in Asia is focusing on building up the region’s transport, communications, energy, education, health, welfare, sanitation and water infrastructure to the point where it can support a viable Asian economic community.
This can be financed by government budgets - deficits if necessary - and by using US dollar reserves (while they are still worth something).
It will create untold thousands of jobs, both directly and via spin-off effects. Most important, it will help spread wealth among the millions of still very poor in this part of the world so that as personal consumption builds up on the back of private consumption, it will be broad-based and sustainable.
Some people are beginning to get the point. Speaking at the recent World Economic Forum in Davos, chairman and CEO of the Japan External Trade Organisation (Jetro) Yasuo Hayashi said that India would offer major investment opportunities as it lacked basic infrastructure. Japanese companies also hope to pick up investment projects in China, especially in the environment sector and they will look for opportunities in South-east Asia, including plans to construct an industrial corridor linking India and Vietnam, he added.
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