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The renewed global economic slowdown is putting pressure on Asian countries to review their export-based growth model and their vulnerabilities to the inflows and outflows of capital. Martin Khor AMID more and more signs that the global economy is slowing, possibly towards a new recession, Asian countries facing the adverse effects will have to consider their policy responses. On 6-8 September,
finance ministry and central bank officials and economic experts from
Asian countries gathered in It was a timely meeting,
especially since the near-term economic prospects in the In the 2008-2009 'great recession', the region was affected by a sharp drop in exports which caused a dip in the Gross Domestic Product (GDP). But the economic stimulus
policies in the advanced developed countries and many Asian countries
(including The switch in policies from fiscal stimulus to austerity in the developed countries is a major reason for the recent slowdown, which is likely to last longer. The shared wisdom
is that In recent years the
share of consumption in Many other Asian countries
are even more export-dependent. In They are very vulnerable
to a slowdown in exports to developed countries as well as to Thus a slowdown of
Chinese exports to the In many South-East Asian countries, a major problem is the seeming lack of investment opportunities, since investment is lagging behind savings. In Malaysia, Singapore, the Philippines, Taiwan and Indonesia, investment rates have been around 20% of GDP in recent years, less than half the rate in China. Their investment rates have not recovered to the levels attained before the 1997 Asian crisis. They are too low to generate a rapid growth of effective demand. These countries need to plan for new sources of growth based on higher domestic demand, as well as expanded trade among the countries in the region and in other developing regions. A key lesson learnt by many Asian countries from the Asian crisis is that they should not be caught in the vulnerable situation of having their foreign reserves drawn down to the point of facing a debt default. Thus high current account surpluses and significant accumulation of foreign reserves have cushioned many countries during the 2008-2009 global crisis. However, the region also faces a number of financial vulnerabilities that the new global turmoil may make more evident. First, some countries in the region have significant current account deficits and rely on inflows of foreign capital to meet the deficits. They could face balance-of-payments problems should exports deteriorate, or if there is a reversal of capital flows. Second, many Asian countries have been liberalising their capital flows in the past decade. They opened up to foreign capital inflows, including direct investment, portfolio investment and loans. They also allowed capital outflows by resident individuals, banks and companies. Thus they are now more susceptible to surges of both capital inflows and outflows of funds by local companies and individuals. In periods where capital inflows are large, they balance out or exceed resident outflows. However, when a country faces a reversal of foreign capital flows, it would be difficult to bring back the local capital that went abroad. As a result, the country is exposed to the risks of significant net outflows. If this is not adequately matched by a surplus in the trade and current accounts, its balance-of-payments position could deteriorate. Third, Asian countries are exposed to surges of international funds searching for higher yield. The recent wave of capital inflows has caused problems such as currency appreciation (resulting in exports being less competitive), excess liquidity, inflationary pressures, and bubbles in equity and housing prices. The countries are
also vulnerable to a sudden reversal of capital flows, which can have
devastating effects. Some Asian countries like Fourth, many Asian countries have made losses due to the fall in value of their foreign reserves, much of which are held in US treasuries and bonds, as a result of the dollar's depreciation. The present lack of alternative to the dollar as a global reserve currency makes this problem more acute. While Asian countries can take national policy measures to control or reduce the vulnerabilities above, these may not be effective unless there is collective action at the global level. Thus, policy makers
in the region should be more active in pushing for global financial
reforms. This was one of the conclusions of the The new global slowdown has made it all the more urgent to rethink the national and regional growth models, and to have a strong regional voice in global economic policies and financial reforms. Martin Khor is Executive
Director of the South Centre, an intergovernmental policy think-tank
of developing countries, and former Director of the *Third World Resurgence No. 253, September 2011, pp 30-31 |
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