Global Trends by Martin Khor

Monday 24 August 2009

Asia should fight for its economic interests 

A conference in Penang on the economic crisis in Asia concluded that Asian countries must think and act together to fight the global crisis and reform the system.

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Now that there is an up-beat feeling about recovery in the global economy, will Malaysia and the rest of Asia see the return of good times soon? That was one of the questions at last week’s Conference in Penang on the Effects of the Global Economic Crisis on Asia.

The second in a series organized by the Consumers’ Association of Penang and the Third World Network, the conference brought together some present and former central bankers, finance ministry officials, researchers and NGOs, mainly from Asia.

In August 2008, when a similar seminar was held, the global crisis was beginning to affect Asia. In the year since, most Asian countries experienced huge export falls and significant GDP declines.

The past month has seen reports of the revival of economic growth in many countries in Europe and Asia.

Experts at the conference were, however, cautious.  Many warned that the “green shoots” are caused by the fiscal stimulus packages, whose effects are temporary. Thus, there may be a W curved “recovery”:  the economy goes down, recovers and then goes down again, in a double-dip recession.

Many participants advocated a more pro-active approach for Asian countries, to use their fiscal packages to start building new development models, and to use their economic weight to push for a reform of the international financial system.  

Datuk Seri Andrew Sheng, former Chairman of the Hong Kong Securities Commission and now a chief advisor to China’s banking regulatory commission, said there are three choices for Asia: to stick to the status quo, take defensive measures (to cooperate to avoid damage) and take an offensive approach (play take a leading role in reforming the international system that has caused the problems).

He said Asia is now somewhere between the status quo and the defensive approach.  While Asia has learnt through the last crisis that the IMF solution is bankrupt, the present crisis has also shown the Asian bankruptcy of collective thinking at the regional level.

“We don’t know how to respond,” he said, while commending the Chiangmai Initiative as a first necessary step at working together. Stressing the importance of policy networking, Sheng said Asian policy makers should engage with one another much more to collectively act on global financial architecture reform, and in order to achieve “shared governance”, which is needed if the systemic crisis of finance is to be overcome.

Former Governor of India’s central bank, Y.V. Reddy, agreed with Sheng that Asia should not only be defensive, as the region has 67% of the world’s currency reserves, 55% of population and a significant share of the world GNP.

He suggested that an influential Asian think-tank be set up to provide advice on finance to policy makers, and that Asia should act to rebalance the global financial system.  For example, there are only two credit agencies and two financial news agencies with global influence, all of which are Western-owned.  Similar agencies should be set up by Asians, using the perspective of developing countries.

Both Sheng and Reddy highlighted “regulatory capture” (the way financial firms had taken over top policy positions especially in the United States) as a major reason why the financial sector, its growth of leverage and its speculative and manipulative activities had been allowed, to the detriment of the real economy.

Sheng also warned that the “exit” from the present fiscal packages and bail-outs would be problematic, especially who pays for the cost.  He warned that the funds used for these would build up another big bubble, and benefits would go to those who know how to make bubbles and pass them on to others to bear the cost in a “bubble-thy-neighbour” process.

South Centre special economic advisor, Yilmaz Akyuz, said the US and Europe can be expected to soon exit from their fiscal stimulus.  There would be a decline in consumer spending growth in the US, and a period of weak and erratic growth in developed countries.

The policy challenges in Asia are how it can reduce dependence on foreign markets, how to maintain financial and exchange rate stability and how to reduce exposure to the US dollar as the reserve currency.

He pinpointed under-consumption in China and under-investment in many other Asian countries as problems, while in other countries there was still low savings and dependence on foreign capital. 

Akyuz also highlighted the need for regional cooperation to resolve the problem of instability of exchange rates among Asian countries, which disrupts trade performance and can hinder trade cooperation in the region.

In a session on Malaysia, financial liberalization was identified as a reason for the surge in foreign portfolio capital in recent years, followed by its sudden large exit in the second half of last year that caused the foreign reserves to fall from RM410 billion in June 2008 to RM317 billion before stabilizing at that level to July this year.

Another issue was why the investment ratio had dropped so drastically from 42-43% of GNP in 1995-97 to only 20-21% in 2005-08, when the savings rate was high at 51% in 2008.  The lack of incentive or opportunities for domestic investment and how to overcome this was identified as a priority.

Also presented at the conference were papers on how the recession is affecting countries including Malaysia, China, India, Indonesia, Pakistan, the Philippines, Thailand, Korea and Turkey.

International agencies including the UN Secretariat in New York, UNCTAD, UNDP and the UN Economic and Social Commission of Asia-Pacific  (ESCAP) also made presentations. 

Several of the UN experts said they did not expect a sustained global recovery at this stage, as the positive effects of the stimulus packages would wear off.