Adding Bounce to Asia’s Rebound – The Irrawaddy



BANGKOK — The role of exports and trade in Asian economic growth is coming under increasing scrutiny, as Asian countries show impressive rebound figures as they kick out of the global economic downturn ahead of countries in the West.

In recent months, Asian countries have used massive domestic “stimulus” packages to bolster economies, some of which, such as Japan, Thailand and Singapore, initially suffered badly in the months after Lehman Brothers folded in the US, and the world’s economy teetered on the brink of another Great Depression.

Heads of government at the recent 15th ASEAN Summit in Hua Hin, Thailand (Photo: Simon Roughneen)

Looking forward, Asian countries are seeking to decouple from the West. Despite his country’s almost un-Asian slow economic recovery rates, Japan’s Prime Minister Yukio Hatoyama said that East Asia should “lead the world,” in advance of last weekend’s Asian summits held in Hua Hin, Thailand.

Closing the summits, Surin Pitsuwan, the general-secretary of the Association of Southeast Asian Nations (Asean), said that Asia has “a heavy responsibility to pull the world economy along, and not disappoint the international community.”

On the face of it, this might seem to be true. This week, the International Monetary Fund (IMF) raised its forecast for Asia, saying the diverse region, spanning countries from New Zealand to India, would grow 2.75 percent in 2009 and 5.75 percent in 2010, below the 6.7 percent average of the past decade.

In comparison, the economies in the almost-defunct G-7 grouping, comprising the US, Canada, Japan, the UK, Germany, France and Italy, were predicted to shrink around 2.5 percent this year, before growing 1.25 percent in 2010.

“Asian bilateral and multilateral currency swap agreements formed during the crisis are perfect examples of the gradually diminishing influence of the West in Asia,” said Arpitha Bykere, the senior Asia analyst at Roubini Global Economics in the US, referring to ventures such as the Chiang Mai Initiative and Chinese agreements to back Southeast Asian currencies.

The role of the IMF in Asia has been a bone of contention since the 1997 financial crisis, when countries such as Thailand and Indonesia were instructed to undertake harsh economic reforms after their economies contracted as a result of that turmoil.

However, political and economic structural differences among the Asian countries will constrain the formation of an Asian regional bloc to offset the influence of the US. Japan, China and Australia have all floated different versions of how pan-Asian economic co-operation can proceed, with Japan seeking to integrate the US into any future wider Asian structure, to counter Chinese weight and to perhaps reassure Washington after some indications that Tokyo seeks to loosen the security alliance with the US.

Interestingly, Surin believes that Asean offers a model for regional cooperation, though critics more often than not note the Southeast Asian bloc’s relative slowness to harmonize structures and links over its four decades of existence.

Still, Asian economies are looking at ways to boost regional cooperation and domestic markets as a way to reduce dependency on Western markets for exports. Thai Prime Minister Abhisit said as much at the Asean summit last Sunday: “We feel export of goods and services to the West will no longer serve us.”

Free trade agreements between Asean and India and Asean and China, set to come into force in 2010, are expected to pave the way for expanded regional trade. But as a recent report released in Bangkok by the United Nations Economic and Social Commission for Asia and the Pacific makes clear, much more work still needs to be done to make Asia less reliant on the West.

“The crisis has shown that Asia-Pacific needs to rebalance its sources of growth and stimulate domestic demand,” says the report.

How far this can be taken in the near term remains to be seen. The IMF report outlines that “Asia has not decoupled from the rest of the world,” adding that “Asia’s fortunes remain closely tied to that of the global economy.”

The role played by Asian economies in a still globalized world is important to understanding how Asia is linked to other continents.

Razeen Sally, the director of the Brussels-based European Center for International Political Economy and author of “New Frontiers in Free Trade: Globalization’s Future and Asia’s Rising Role,” told The Irrawaddy that much of Asia’s intraregional trade and investment in the information and communications technology sector is part of transnational production sharing arrangements for the final export of goods to the West.

Writing in Thursday’s Wall Street Journal, Sally said: “One company, for example, may invest in several factories in different East Asian countries and then ship components between them to be eventually assembled into a final good for export to the US or Europe. Thus East Asian integration is tightly linked to global integration.”

For Asian countries to become less reliant on exports to the West—where consumers are slowly morphing into Asian-style savers as unemployment rises and economic confidence wavers—there need to be drastic policy reforms in Asia, according to Peter Drysdale, of the Crawford School of Economics and Government at the Australian National University.

“There will be a major challenge in the medium term of sustaining the growth of domestic demand in Asia since there will have to be massive structural reforms to do so,” he wrote in an email to The Irrawaddy.

This means Asian countries would have to spend government money on social welfare programs, for example, to dissuade potential consumers from current high savings levels, and provide replacement markets for sectors that are struggling to export to the buy-shy West.

China for one is not yet doing this. As Stephen Roach, the Asia chairman at Morgan Stanley put it in an interview with the Council on Foreign Relations: “They’re sort of talking the talk, but they’re not walking the walk.”

Drysdale says there is a need “to change a whole raft of policies and institutions that currently favor export-oriented growth and introducing a range of policies that support the growth of the non-tradable goods sectors of the economy.”

However, decoupling Asia from the West along the lines spoken of by PM Abhisit and others seems unrealistic for some time at least.

“The fact is that even now, intra-Asia trade largely caters to final demand in the US and EU due to weak domestic demand in most Asian countries,” analyst Arpitha Bykere told The Irrawaddy.

“In 2008, the US and EU consumption amounted to US $19 trillion, while Asian consumption was less than $5 trillion. So intra-Asia trade and consumption will fail to offset lower demand in the US in the next few years,” he added.

Meanwhile, political factors in the US, where the Obama administration is averse to boosting trade links with Asia due to pressure from leftist Democrats and trade unions that feel that jobs are being shed to lower-paid workers overseas, will make it all the more necessary for Asia to lessen its dependence on its most important export market.

However, given the intertwined relationship between the US and many Asian economies, particularly China, which holds much of the massive US debt in Treasury bills, President Obama’s meetings with his Chinese and Japanese counterparts next month will give a good indication of where this is going.

Obama will also meet Asean leaders in Singapore for the first ever US-Asean summit. With Asia and the US codependent for the foreseeable future, it remains to be seen whether the Obama administration will seek ways to further harmonize economic links with Asia in the face of ideologically driven domestic opposition and in the face of an Asia apparently divided on links with the US going forward.

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