Author: Gary Hawke

No part of the world economy is exempt from a global crisis. Asia is strongly integrated with the world economy, and therefore will be significantly affected.

However, “crisis” needs to be unpackaged. It has several components.

Asian economies have been only modest participants in the consumer exuberance based on credit which has characterized some economies. Asian banks have been minor participants in exploiting new credit instruments whose valuation has proved to be more problematic than expected by rating agencies and investors. Consequently, Asian economies are less plagued by over-valued assets and bank losses than are some other economies, notably the US and in Europe.

Asia’s current economic problems stem from collapse of confidence and from declining export markets. These are not new problems.

It has been conventional for some years to observe that Asian economies have followed a growth strategy which includes exporting to the US and European markets, the “flying geese” model begun by Japan, but that eventually the growth of their own markets would provide a real choice – continued international exports or regional self-sufficiency. The same conventional thinking also concluded that it was very much in the interests of the world that internationalism should continue.

The crisis has brought the availability of choice closer. Fortunately, Asian economies have a range of options, and are not confined to the two extremes. Furthermore, the growth of cross-border production networks, within Asia and between Asia and other regions, means that regional self-sufficiency is not the same as national autarchy. There is no need to replace the export-led strategy with a “new growth model”. Asian economies will make a modest adjustment towards relying on existing and extended production networks with final consumption more frequently within the region.

The crisis of confidence is the appropriate context in which to consider fiscal stimuli. In a globalised world, the relevant demand is world demand and national subsidies can have only a modest effect on that.

But fiscal policy can overcome informational and co-ordination problems that prevent producers from using available resources. Not only is unemployment averted, but investment facilitates the desired balance between current and future consumption. The key remains good choices of investment projects, whether public investment in infrastructure projects or private investment in efficient production networks.

There will be some public relief of distress, but Asian economies will probably remember the lessons they taught the world in earlier decades. First, poverty relief should be directed to genuine poverty; one of the easiest predictions in current circumstances is that there will be noisy clamour from the relatively well-off for security against possible disaster, most of which will not happen. It is insecurity rather than poverty which promotes social tension but public expenditure is not the appropriate response. Public expenditure should not be wasted. Secondly, public assistance should be directed towards adjustment to future economic efficiency, not protection of existing uneconomic activity.

Asian economies have a common interest in responding to current circumstances by strengthening their regional integration and extending policy co-operation. They are doing so through a range of regional institutions, led by the Asian Development Bank. New Zealand’s interests lie very much in responding positively to Asian invitations to participate in these processes, and ensuring that Asian regionalism remains outward-looking so that it is compatible with open regionalism in the wider Asia-Pacific Region.

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This article was originally published by the Asia New Zealand Foundation.

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This entry was posted on Tuesday, March 3rd, 2009 at 10:05 pm and is filed under Financial Integration, Financial crisis, Trade. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.