Global Trends by Martin Khor

Monday 8 November 2010

Watching Obama in Asia, after his electoral setback

Just days after his electoral setback, President Obama is on a tour of Asian countries.  Questions  abound on why his party did so badly, and whether there will be consequences for Asian and other countries.


This week, the United States' President Barrack Obama is on a tour of Asia, coming just days after his party's major setback in Congressional elections.

Obama's visit to India, Indonesia, South Korea and Japan (and his participation in the G20 and APEC summits) may give signals on whether and how his international policies may change, after this defeat.

Obama himself says that his Asian trip is aimed mainly at generating more exports for the US.   He wants to open up Asian markets for his companies, and 200 business leaders are accompanying him to India

With the US economy in dire straits, and the balance of trade still in deep deficit, Obama wants to double American exports as a major path to economic growth.

The loudest message from the Democrats' defeat (it lost the House of Representatives and saw its Senate majority reduced) is that the American voters wanted to punish the President for the continued high unemployment (9.6 per cent) and failure to achieve real economic recovery.

There are many analyses of why the Democrats did so badly.  Obama himself blames it on his focusing on getting things done, but neglecting to explain it properly to the public.

His supporters point to his successes – health care reform, re-regulating financial institutions, rescuing the financial system, and restoring economic growth through fiscal stimulus.

But they say Obama lost the battle for hearts and minds because he didn't communicate his policies well enough, while the Republicans went hammer and tongs at him and succeeded in portraying his policies as dangerous and evil.  

Others view the Democrats' failure differently.  The economist Paul Krugman faults Obama for having taking inadequate economic recovery measures.  The fiscal stimulus (increased government spending) was not big enough.

Even if he faced a hostile Republican party that would not allow a bigger fiscal stimulus, Obama should have gone for the right policy then blame the Republicans if they blocked it.  Instead he chose an inadequate policy that did not deliver a strong enough recovery, for which he took the blame himself.

Another economist, James Galbraith, was more scathing.  In his view, Obama's sin was to assign economic policy to a closed circle of bank-friendly economists and Bush carryovers (economic advisor Larry Summers, Treasury Secretary Timothy Geithner and Federal Reserve chairman Ben Bernanke).

These men had no commitment to an early recovery, the Democratic Party, or Obama's success.

Instead, their primary goal was to protect their own past decisions and their own professional futures, says Galbraith.

When Obama took power, his team should have cleaned up and downsized the financial institutions and tamed the big bankers.

Instead, they announced "stress tests” that obscured the banks' true condition, permitted the banks to ignore the market value of their toxic assets, allowed management to stay in place, prosecuted no one and cut interest rates to zero.

The banks' profits and bonuses soared.  With free funds, the banks could make money with no risk, by lending back to the Treasury and fuelling a new stock market boom, but they did not provide new loans, thus there was no recovery.

According to Galbraith, this led to the failure to create jobs, and also the public rage at "bailouts”. Yet the Obama economic team produced sunny forecasts, with Summers forecasting that unemployment would peak at 8 percent.  Since unemployment is 9.6 percent, Obama team had to take responsibility for the bad performance instead of blaming it on the previous administration's policies.

In his Asian trip, Obama will hear complaints about the new Federal Reserve initiative to pint and pump money into the US economy.

Just a few days after the elections, the Fed chairman Ben Bernanke announced a new round of  “quantitative easing” (dubbed QE2) in which the Fed would pump US$ 600 billion of newly-created cash into the economy by buying up government bonds from the banks.

This is seen by the many critics as having at least three adverse effects.  First, it will drive down the value of the dollar.   The US is being accused of taking part in competitive devaluation to make its exports cheaper.

Second, countries that hold the US dollar as a major part of their foreign exchange reserves would see a dimunition of these reserves in terms of their own currency.

Third, QE2 will drive long-term interest down in the US and prompt investors and speculators to place their funds abroad in search of higher returns. A large part of the US$ 600 billion may thus not assist in a US recovery but instead flow abroad.

Developing countries are bracing for an even greater inflow of short-term capital, when they are already flushed with too much foreign funds.

Asian countries in particular are averse to this influx of funds, having learnt the lesson of 1996-99 that large inflows can be followed by sudden large outflows, leaving their economies devastated.

Moreover, the capital inflows are already pressurising the domestic currency to appreciate.  This makes the countries' exports more expensive and thus less competitive.

Even without QE2, developing countries are facing excessive capital inflows and many of them (Brazil, South Korea, Thailand) have started taking capital control measures (such as imposing a tax on certain types of short-term capital) to discourage the inflows, and other countries are considering similar measures.

The condemnation of QE2 has come thick and fast.  A Chinese central bank advisor called the printing of US dollars the biggest risk to the global economy and said China should use currency policy and capital controls to cushion itself from external shocks.

Thailand's finance minister said the Thai central bank is in close talks with other central banks in the region over measures to prevent excessive speculation.

Brazil's finance minister said “it does no good at all to just throw dollars from a helicopter.”   The South African finance minister said the Fed decision undermines the spirit of multilateral cooperation and is counter to the G20 finance ministers' pledge.

Germany's finance minister had a sharper rebuke, calling the US policy “clueless”, and predicting that  pumping more money would not solve the US' problems.

With this chorus of criticism, Obama will not have an easy time at the G20 Summit in Seoul this week.

His fellow G20 leaders as well as the public will be watching for signs whether the US administration will be focusing its policies more to fit the new post-election political configuration, which could mean the US may become more protectionist or more single-minded in pursuing its perceived national interests.

Or whether Obama will still be able to wave the flag of international cooperation and policy coordination, which was his hallmark when he first assumed the Presidency two years ago.