Thursday 30 October 2008
Short-sighted policymakers have failed Asia again
So much for the idea of ‘market-led’ economic integration that Asia, or some of its more short-sighted policymakers at least, have allowed themselves to believe is good for this region. The notion that markets could substitute for formal cooperation has always been suspect and now it has been revealed as a sham as the crisis claims new victims and as Asian currencies swing sharply against each other with no mechanisms in place for a joint policy response.
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Short-sighted policymakers have failed Asia again
By ANTHONY ROWLEY
29 October 2008
So much for the idea of ‘market-led’ economic integration that Asia, or some of its more short-sighted policymakers at least, have allowed themselves to believe is good for this region. The notion that markets could substitute for formal cooperation has always been suspect and now it has been revealed as a sham as the crisis claims new victims and as Asian currencies swing sharply against each other with no mechanisms in place for a joint policy response.
Asia has certainly not helped itself by going into this crisis without the kind of institutional framework of cooperation that Europe has, and that previous Asian crises ought to have taught policymakers is essential.
The yen and the Korean won, to take one example, are now wildly misaligned as the yen has hit a 13-year high against the US dollar, while the won has plunged. Even though the misalignment may not appear so great in terms of real effective exchange rates, recent swings have been so rapid and so extreme as to cause real damage in the area of trade and investment.
It would be futile to expect Asia to have achieved a European degree of monetary cooperation, given the complacency of Asian governments toward regional integration. But it is culpable for Asia to have avoided even a gesture in this regard, such as adopting an Asian Currency Unit to monitor movements of regional currencies against each other relative to the US dollar etc. Similarly, Asia has shied meekly away from the idea of creating a regional monetary fund of its own, even though its policymakers have often made bold to criticise the IMF.
Asia - mainly China and Japan but also India and some city states - hold one half of the world’s total foreign exchange reserves, or around US$3 trillion in all. Yet they have no structure for using these reserves beyond the network of currency swaps known as the Chiang Mai Initiative, which totals only US$80 billion or 2.7 per cent of total reserves. By the time Asian policymakers get round to making the CMI into a usable tool, the current crisis will have come and gone.
It was left to Japan during the 1997-98 Asian crisis to come to the rescue of South-east Asia by bailing out local financial systems and money markets through the so-called Miyazawa Initiative. But after abandoning former vice-finance minister Eisuke Sakakibara’s sensible idea of launching an Asian Monetary Fund, Japan is content now to make its reserves available via the IMF, where they will do nothing to cement regional integration.
In addition to the idea of market-led regional integration, another daft notion that took hold was that emerging markets had ‘decoupled’ from advanced economies. Said IMF first deputy managing director John Lipsky: ‘As the financial crisis has spread rapidly to emerging economies, we have moved from talk about decoupling to a situation where these economies are now at substantial risk.’ The decoupling theory was always deeply suspect even in terms of the most obvious linkage between emerging and ‘advanced’ economies - that of trade. The US (pre-recession) accounted for more than 42 per cent of global consumer demand and Asia’s ‘integrated’ economies (meaning linked as components of a huge manufacturing platform) were furiously producing goods mainly for the US consumer and for Europe. Hardly what one could call a de-linking.
Now that the crisis is upon us, it is painfully obvious that the umbilical chord connecting advanced economies and those of Asia and other developing nations has yet to be severed in terms of capital flows as well as trade. To quote John Lipsky again: ‘Emerging markets as an asset class are coming under increasing strain. Intensified financial de-leveraging is having a global reach, including to emerging economies. More intense capital account pressures could seriously harm growth in these economies.’
How absurd that Asia, with its huge household savings as well as enormous foreign exchange reserves, should face such pressures - again as a result of the leisurely and short-sighted way in which its policymakers have approached regional integration. Where is the Asian bond market, for example, that could intermediate local savings into local investment - let alone mechanisms for channelling reserves into such investments?
To argue as Asian finance ministers and other policymakers in this part of the world often do that they can afford to move ‘only at the pace of the slowest’ so far as regional integration initiatives are concerned is a pitiful cop-out. There is no reason why a European-style ‘two-speed’ (or even three-speed) approach should not be adopted with Japan, China and Korea taking the lead instead of leaving it all to Asean.
Asia is still in nappies when it comes to regional integration and its nannies are truly ‘wet’ nurses.
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