Asia and the Pacific cannot afford to ignore development funding amidst financial turmoil
Two months have passed since the effects of the global financial crisis were first felt in Asia and the Pacific. Much has been said about them. And yet, one of the effects less spoken of is the impact of the crisis on the availability of public and private finance for development – a key issue for our region, where more than 900 million people are estimated to live in poverty.
Such financing has been dramatically curtailed, and the simple fact is that our region cannot afford any cutbacks in this respect. With so many of the world’s poorest in our region, any reduction will only compound their plight. To avoid this, we need to safeguard the Asia-Pacific region’s hard-fought gains in reducing poverty and promoting development; and we need to continue seeking out new and innovative sources of financing for that development. In tackling both these tasks, we need to think and act in unison.
The crisis poses a serious threat to the outlook for Asia-Pacific economies. Investment and consumer confidence has been shaken by falling corporate profits, credit squeezes and mounting concerns of job security and reduced household incomes. The economic growth in our region’s developing economies is expected to fall to 6.1 per cent next year, from an estimated 7.0 per cent in 2008. A number of countries, including Japan and Singapore, are officially in technical recession. Our equity markets have fallen sharply during the past few months – by more than 35 per cent in the Russian Federation,
Kazakhstan, India and Indonesia, between mid-August and mid-November. In China, it fell by 21 per cent. Of equal concern is the excessive currency volatility seen in recent months. The greatest losses since mid-August have been seen in the Republic of Korea and Indonesia, with their currencies falling by more than 20 per cent, followed by India at 13 percent and the Russian Federation at 11 percent.
How do we face the global financial crisis and its consequences? The good news is that we are not starting from the scratch. The regulatory reforms that were implemented after the 1997 financial crisis and the massive foreign exchange reserves that have been built up since then have provided a cushion to withstand the worst of the fallout. The events of 1997 also propelled the region to look for mechanisms at reducing its vulnerability to crises. These include the Asian Bond Fund, through which regional central banks have set aside a portion of their reserves in a pool to invest in bonds issued by Asian governments; and the ASEAN +3’s Chiang Mai Initiative, which provides foreign exchange reserves support through a system of bilateral currency swaps. However, more needs to be done as many countries are not included in these initiatives.
There are also a number of other areas where regional cooperation in financial and monetary matters could be strengthened further. Firstly, the Asia-Pacific region must play a leading role in the discussions on reforming the global financial architecture. Secondly, we should cooperate in the formulation of effective and coordinated macroeconomic policies at the regional level to reduce economic vulnerability. Thirdly, a regional contingency plan needs to be established to respond quickly to liquidity and capitalization problems of domestic banks. Fourthly, consideration should be given to a regional trade financing facility to address concerns that recession in developed countries will significantly restrict trade as trade credit has dried up. Fifthly, governments must take action to institute or to improve on the delivery of cash transfer programs and other social protection mechanisms that promote gender equity, and are targeted to those who need it most.
If such measures are not taken, there is a greater probability that the crisis will distract us from the long-term development goals that our region is committed to realizing.
While several countries have done well in mobilizing and utilizing domestic and international resources for development – the region has accumulated foreign exchange reserves in excess of $4 trillion – this is only a part of the story. There are many countries, in particular the least-developed countries, land-locked developing countries and small island developing states, which have done less well. In these countries, savings are low and resources are scarce. As a result, investment in basic services such as health and education is far behind the required amount.
World leaders are currently attending the Doha Follow-up International Conference on Financing for Development to review the implementation of the Monterrey Consensus, which enshrines our collective commitments to eradicate poverty, achieve sustained economic growth and promote sustainable development in a fully inclusive and equitable global economic system. But realizing these commitments is very much dependent on the availability and quality of financial resources and the stability of the global financial system. The current global financial crisis provides an opportunity to take a fresh look at many aspects of the development process that has shaped the world economy. We must build on the current momentum in regional cooperation and global partnership in order to face the immediate financial crisis – and, in the process, build a future for our region that we can all be proud of.