Asia will need to brace for sharply reduced consumption in the United States over an extended period following the global financial crisis, and change the export-dependent structure of its economies and create more regional demand to drive their growth, experts told a recent symposium in Tokyo.
While the global crisis was initially thought to have spared Asia’s financial systems, its serious impact on the real economy has rapidly spread among countries in the region, they said, calling for more coordinated actions by Asian economies to deal with the ongoing turmoil.
Five experts from the region’s think tanks took part in the Feb. 18 symposium organized by the Keizai Koho Center to discuss what is required of Asia and Japan amid the global financial crisis. Akira Kojima, a senior fellow of the Japan Center for Economic Research, served as moderator.
They discussed the region’s economic prospects just as data show that the reality may be even worse than the grim forecasts released earlier this year by the International Monetary Fund, with Japan reporting a 12.7 percent decline in gross domestic product in the last quarter — the biggest fall in 35 years.
Rodolfo Severino, head of the ASEAN Studies Center at the Institute of Southeast Asian Studies in Singapore, said financial systems in Southeast Asia have had little exposure to the subprime mortgage-based securities or derivatives and other sophisticated instruments that triggered the crisis in their Western counterparts.
Southeast Asia had also learned from its crisis that hit the region in 1997, beefing up the regulatory environment and making sure to keep bad loans at the region’s banks at low levels, he said.
Still, the region’s real economies were not spared.
Reduced consumer demand in the U.S., Europe and Japan because of the crisis hurt the region’s exports to these markets, and the recession in the advanced economies reduced their capacity to invest in Southeast Asia, Severino said. “Not only is capital not flowing into the developing countries and emerging markets . . . but capital has been moving out,” he said.
Some Southeast Asian countries that had relied on labor exports have also been hit by the falling demand for migrant workers in the advanced economies and in the Middle East, who reduced cash remittances to their home countries, Severino added.
“We’ve all been affected in terms of employment, the drop in stock values, and the question that is being asked is whether at some point the unemployment and low standards of living will lead to social unrest and political tensions,” he told the audience.
Liu Junhong, a senior economist at the Institute of Japanese Studies and director of the Globalization Research Center at the China Institute of Contemporary International Relations, said the financial crisis disrupted China’s growth model that depended on foreign investments and exports. “Without the foreign capital inflow, exports fall and that weakens the engine of the Chinese economy,” Liu said.
Contraction in U.S. consumer demand has caused the bankruptcies of many small and medium-size export firms, particularly in the coastal areas, spreading unemployment mainly among workers from farming villages, Liu said.
The significant slowdown in the country’s rapid economic growth has prompted the Chinese leadership to announce a massive stimulus worth 4 trillion yuan, but Liu said doubts remain as to how quickly China can regain the fast growth.
Given China’s huge population of 1.3 billion and the large proportion that the public sector holds in the economy, it is possible that the stimulus can have quick effects in dealing with the crisis, Liu said.
However, the high social costs, including high effective tax rates and high prices of goods, remain a huge burden on ordinary Chinese, casting doubts over a boost in consumer spending that will be needed for more domestic demand-oriented growth, he pointed out.
The ongoing crisis, said Severino of the ASEAN Studies Center, underlined the role of the U.S. as the key market for the exports of Southeast Asia and as a key source of investment for the region.
“Historical figures have shown that this condition is truer now more than ever,” Severino said. “The irony is that while everyone is looking to the U.S. economy as the main source of the crisis, everybody is hoping that the U.S. will lead the recovery process in the world. The fact is that most of us, when the (U.S.) bubble was existent, were benefiting from it. And we have clung to the export-led model of economic growth.”
That will need to change, said Masahiro Kawai, dean and CEO of the Asian Development Bank Institute, because it would be too risky for Asia to count on a quick recovery of the U.S. economy.
Despite the massive fiscal stimulus efforts by the new U.S. administration of Barack Obama, it would be too optimistic to expect a full recovery in 2010 because it normally takes many of the stimulus efforts, including public works spending, at least roughly 18 months to have an effect on the economy, Kawai said.
It will also likely take some more time to clean up the mess in the financial sectors by disposing of “toxic assets,” he noted.
Kawai went on to say that Asia needs to brace for a “semipermanent” decline in U.S. consumption and to make structural adjustments in the region’s sources of growth.
The housing bubble boom inflated U.S. consumption and the country now needs to cut off the excessive portion — roughly equivalent to 5 percent of GDP — and such adjustments in the U.S. will force an adjustment on Asia’s part as well, he said.
Kojima of the Japan Center for Economic Research noted how both sides of the global imbalances tended to blame each other as the source of the problem.
Asia would often say the problem is debt-financed American consumption — that the U.S. failed to save enough and spent too much. The U.S., on the other hand, charged that Asia spends too little and saves too much, he said.
“Excessive U.S. consumption was in fact a problem, but it is also true that Asia benefited from it. It is also true that the U.S. economy would not have been able to go on without an inflow of funds from Asia, which it accuses of saving too much,” Kojima said. “Today, this mutual dependency has reached a point where it is no longer sustainable.”
Kawai said Asia will have to brace for a 5 percent decline in U.S. demand and create regional demand that makes up for the fall. Asia also needs to accept a long-term decline of the dollar and to coordinate a regionwide currency appreciation.
“The adjustment has been forced on Asia” in the form of reduced demand in export industries such as automobiles, electronics and machinery, and nontrade-goods sectors such as services need to grow as the region tries to regain its economic balance, he said.
Areas that can stimulate the region’s demand include environment and low-carbon businesses, where Japan has the world’s leading technologies, and it can work together with China and the other economies of Asia, Kawai said.
Kawai also said it would be a common challenge for Asian economies to beef up social security mechanisms, without which a significant improvement in consumer spending cannot be expected and regional sustainable growth would be difficult.
India has also suffered from a sharp slowdown due to the global crisis. Ramgopal Agarwala, a distinguished fellow at the Research and Information System for Developing Countries, said many in India feel the country’s growth rate this year will be even slower than the 5 percent forecast by the IMF.
The growing consensus in India, he said, is that for stimulus the nation has to rely much more on domestic demand. Social infrastructure, education, health care and climate change are the main areas that require additional investments, he added.
India is now looking to fresh loans from the World Bank and other agencies like the Asian Development Bank to help finance these investments, “but we need to go further and strengthen the regional mechanism to meet the needs of these enormous resources,” Agarwala said, adding that Japan is expected to play a key role in this respect.
Agarwala said the ongoing crisis has exposed the problems of the U.S. dollar-based international reserve system, which he described as “unjust, inefficient and unsustainable.” It should be replaced by a new one based on an international currency like the Special Drawing Rights, he said, urging Japan to take the lead in reform of the dollar reserve system.
He also said the idea of an Asian Monetary Fund, advocated by Japan in the late 1990s but blocked by U.S. opposition, should be revived and used for providing regional stimulus. He said Japan should take the lead in a feasibility study of such a regional fund as well as creation of an Asian currency unit as a parallel currency — not as a common currency yet but just as a reference currency — that can help finance the regional stimulus.
Oh Yong Hyup, director of the international economy and finance department of the Korea Institute for International Economy, also said the idea of an East Asian single currency will gain momentum because of the global crisis.
“A currency competition will occur at the anchor currency level (among the U.S. dollar, the euro, the yen and the Chinese yuan, etc.) because the U.S. dollar will eventually fall as the U.S. debts will not be sustainable, especially with the massive stimulus packages” now being introduced, Oh said.
Oh said currencies of smaller economies will also “try to become internationalized to minimize their dependence on the U.S. dollar.”
If one country’s trade of goods is cleared only in dollars, “then you are bound to be hit not only by real economic shocks but also by financial shocks from elsewhere,” he said. “One of the ways to minimize the impact of external shocks on domestic economies would be to try to use more of your own currency, and a single currency in East Asia is likely to have similar benefits as internationalizing East Asian currencies at a lower cost.”
South Korea’s won is one of the currencies most devalued due to the impact of the financial turmoil that originated from the subprime woes in 2007. Its exchange rate against the dollar fell 46 percent since the beginning of 2008 and 24 percent since the shock of the Lehman Brothers failure last September, although Oh said the currency is forecast to strengthen this year.
East Asian countries created the Chiang Mai Initiative currency swap arrangements in the wake of the 1997 crisis as a regional scheme to address foreign reserve deficits. Finance ministers from the ASEAN and Japan, China and South Korea recently agreed to boost funding for the scheme from $80 billion to $120 billion.
But the fact that South Korea, in its efforts to deal with the won’s recent fall, had to sign a new currency swap agreement with the United States suggests that these regional Asian cooperation mechanisms are far from sufficient, Agarwala said.
Many of the symposium panelists agreed that Asia should try to further promote market integration through a regionwide free-trade agreement, make their cross-border production networks more efficient through elimination of trade barriers and pursue greater financial cooperation.
What will be needed, Agarwala pointed out, is a proper institutional mechanism to back up regional cooperation, with proper funding and staff. Institutions will be the key because, for example, occasional gatherings of the finance ministers of Asian countries will not be able to achieve an effective currency rate coordination, he said.