Barely a year ago, hot money, booming asset prices and sharply rising currencies were together seen as Asia’s economic scourge. Today, the picture could hardly be more different as the region faces an arguably more profound menace: the abrupt closure of trade.
The weakness of the region’s growth model – an excessive reliance on exports to the West – has been laid bare; so too have the shortcomings of policies designed to accumulate foreign exchange reserves and weaken effective real exchange rates.
In recent months, swathes of Asian manufacturing firms have gone bust, thanks to the high concentration of their exports to markets in the US, Europe and Japan that have succumbed to recession. In January, exports contracted by a whopping 36% in Indonesia, 27.8% in Malaysia, 34.8% in Singapore and 24.2% in Vietnam.
Where the 1997 crisis gave way to a period of dizzying growth rates – a development which led to proclamations once more of “east Asia’s miracle” – the fallout from today’s crisis will likely linger for years to come as households and firms face up to the grim reality of expensive credit and lower asset prices.
“We are seeing a massive evaporation of demand from the markets the region depends upon,” says Masahiro Kawai, economist and dean at the Asian Development Institute (ADBI) in Tokyo. As a result, the ADB forecasts south-east Asia will grow a paltry 0.7% this year, down from 4.3% in 2008, while Malaysia, Singapore and Thailand are expected to contract to levels not seen since the 1997 crisis.
Getting together
Today’s economic emergency has of course led to a bout of outward regional coordination, in many ways akin to the response to the 1997 crisis. The association of South-East Asian Nations (Asean) together with Japan, China and South Korea has expanded their pool of foreign-exchange reserves to $120 billion from $80 billion, designed to boost market confidence in the stability of regional currencies; and free trade agreements (FTAs) have been signed this year between the regional bloc and Australia and New Zealand, to complement existing bilateral treaties with China, Japan and South Korea.
Asean leaders are now also looking to convert their web of trade accords into a comprehensive Asia-wide FTA, tearing down tariffs and non-tariff barriers to enhance the free flow of goods, services and capital. An Asean economic community, modelled on the European Union, is ambitiously penned in for 2015.
Doubt
Yet the short-term need to boost growth may conflict with the long-term objective of economic integration. Just as some EU members have acted unilaterally during the current crisis to protect financial and manufacturing industries, analysts are sceptical that Asia’s emerging regional spirit will outweigh entrenched domestic opposition to liberalization. “Just like the setbacks after the promises of regional integration after the 1997 crisis, I do not see a concerted coordinated effort to create an integrated market while Thailand, Malaysia and Indonesia have their own political distractions,” says Lim Chee Sing, chief economist at Malaysia’s RHB Capital in Kuala Lumpur.
Policies that encourage the free flow of labour at a time of rising unemployment across the region could spell political suicide for governments across the region, fears Lim. And opposition from the domestic business community will mount if foreign competitors within Asean and beyond are allowed to pile in. Moreover, while the WTO has reserved its accusations of trade protectionism for the US and Europe, small-scale violations by China, Korea and Indonesia have not gone unnoticed.
But some are more optimistic: “There have been some small moves towards protectionist policies in the region but I think, in general, leaders now realize the absolute necessity to keep trade free to help exports,” says Shujiro Urata, economics professor at Waseda University in Tokyo and co-author of a feasibility study, backed by east Asian governments, to explore options on a free trade area.
Yet even Urata concedes that a lack of political leadership to carry the torch for regional integration could derail the ambitious plans. “We used to have figures like Mahathir [former prime minister of Malaysia and influential proponent for Asian unity] but this is no longer the case,” he laments. “China seems to be more concerned about its relationship with the US, rather than wanting to discuss the need for a regional FTA.”
Against this backdrop, nations could well embark on “a ‘path of least resistance’ under current conditions to postpone such reforms and liberalization until the economic landscape improves,” warns Tai Hui, an economist with Standard Chartered in Singapore.
For now, alternative export markets to the West are relatively small. India has a low per-capita income and although China has become a significant importer for the region – from $22 billion in 2000 to $115 billion in 2008 – this mainly comprises intermediate components. The Asian giant then assembles things like cars, laptops, and toasters for western consumers – a group now effectively in hibernation. Mounting job losses and insecurity among Asean consumers means they are unlikely to drive export demand.
Three-point plan
The best solution, agree analysts, would consist of a three-pronged strategy. In the short term, says the ADBI’s Kawai, fiscal stimulus packages should support agriculture and small and medium enterprises; in the medium term, Asean leaders should focus on achieving an integrated domestic market, to “fill the gaps in manufacturing and services left by Indo-China... and focus on capturing emerging pools of capital from north Asia and the Middle East,” says Hui. And, in the long term, exports should shift to domestic consumers in China and India. With diversified export markets, the theory goes, the region will be structurally better prepared to ride out a global downturn.
After all, Asean has immense potential, with half a billion people, an economy the size of India’s and vast, untapped savings. If policy-makers learn the right lessons from the current crisis and take steps to boost domestic consumption, and if China moves to boost its own internal demand, south-east Asia’s growth model will get a new lease on life.