Tuesday 13 October 2009
Changes in the wind
For the countries of East Asia, including China, there was no decoupling from the financial crisis in the US and Europe, which caused East Asia’s exports to drop. But because its economies and banks are sound, by this year’s second quarter, East Asia was beginning to show growth. Stimulus packages in China and India increased those nations’ economic growth, which has had a ripple effect on their neighbours. For East Asia, the worst seems to have passed.
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Changes in the wind
By LEE KUAN YEW
13 October 2009
For the countries of East Asia, including China, there was no decoupling from the financial crisis in the US and Europe, which caused East Asia’s exports to drop. But because its economies and banks are sound, by this year’s second quarter, East Asia was beginning to show growth. Stimulus packages in China and India increased those nations’ economic growth, which has had a ripple effect on their neighbours. For East Asia, the worst seems to have passed.
China is now aiming for 8 per cent growth in 2009. However, continued low interest rates in East Asia will fuel asset bubbles. And before long, interest rates will rise with excess money supplies unless they are sterilised (withdrawn).
Despite domestic political difficulties, GDP growth in Thailand and Malaysia shows no significant decline. In Indonesia, the July re-election of President Susilo Bambang Yudhoyono has been welcomed by foreign and domestic investors. Jihadist bombings of the JW Marriott and Ritz-Carlton hotels a week after the election have not shaken confidence in President SBY, as he is affectionately called.
Japan’s economy continues to be sluggish; even after four stimulus packages, it grew only 0.9 per cent in the second quarter. Japanese workers, however, are still the world’s best when it comes to skill and dedication to excellence. In automobiles, electronic cameras, camcorders and several other export industries, Toyota, Honda, Sony, Mitsubishi, Hitachi, Mitsui, Canon and Nikon are highly regarded, highly competitive, brand names.
A looming problem for Japan is its ageing population of 127 million. With a fertility rate of 1.37 children per female, the population will decline to 90 million by 2055. In 2000, 3.6 Japanese workers supported each old person (over 65), but by 2055 only 1.2 workers will support each senior. Yet the Japanese continue to reject immigration. This will not be an easy position for Prime Minister Yukio Hatoyama’s new government to change.
Small economies such as Singapore have no alternative but to export and grow, because their domestic markets are too small. After the first quarter, Singapore expected its decline to be minus 6 to minus 9 per cent, but in the second quarter, exports recovered. Negative growth will shrink to minus 3 to minus 6 per cent. Singapore is export-dependent, with the world’s highest trade-to-GDP ratio: 360 per cent.
Singapore’s fertility rate, at 1.28, is lower than Japan’s. But, unlike Japan, Singapore welcomes younger skilled and educated immigrants from many countries, adding to its already cosmopolitan society Filipinos, Myanmarese, Indonesians and Caucasians, some married to Singaporeans. Larger numbers of immigrants come from Malaysia, China and India. These immigrants keep Singapore’s economy vibrant and reverse the greying process.
Fallout from the US economic crisis
Both the Asian Development Bank and the World Bank forecast that East Asia will be the world’s highest-growth region, and fund managers have poured money into its stock markets. But in July, Larry Summers, director of the National Economic Council - while speaking at the Peterson Institute for International Economics - warned that the US can no longer be the world’s consumer, that Americans must reduce consumption and increase savings, and that in order for US exports to increase, the dollar will remain weak.
The thrift habits of the Chinese are deep-seated, born of centuries of deprivation. Their experience over the millennia is that during floods, famine, pestilence, earthquakes and war, the central government will not rescue them; therefore, savings are vital to survival. But change the Chinese must. In September, at the ‘Summer Davos’ forum in China’s northernmost seaport of Dalian, Premier Wen Jiabao said that China should ‘make greater effort to enhance the role of domestic demand, especially final consumption, in spurring growth’. He added that boosting domestic demand is ‘a long-term strategic policy for China’s economic growth’. His remarks are a signal to the US and the EU that China is changing its economic development strategy, but that the process will take time.
Prior to the current economic crisis, the world didn’t challenge the Washington consensus that the Anglo-Saxon economic model is the most efficient for the allocation of financial resources to produce the highest return. However, the US market model is no longer considered ideal. China is confident that it is better for the government to maintain control of and manage its economy. China will now also be slower to open its closed capital markets to avoid large inflows and outflows of speculative foreign currencies.
China has about US$1 trillion of its reserves in US Treasuries. For China to move out of the dollar would trigger a devaluation that would severely diminish its reserves. However, China has proposed that in the future, an international currency be created to take over the role of the US dollar. India, Brazil and Russia support this view. China has offered to settle East Asian countries’ trade accounts in renminbi (RMB). Likely reserve currencies other than the dollar are the euro, renminbi and the Japanese yen.
But, when all is said and done, the US dollar is likely to remain the leading currency, because the American economy will remain the most entrepreneurial and dynamic in the world.
This article by Singapore’s Minister Mentor first appeared in the Oct 19 issue of Forbes
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