Only by acting in unison can Asia and the Pacific prevent the worst of the global financial crisis
With the developed world engulfed in a financial crisis of a magnitude not seen since the Great Depression, concerted actions by Asia-Pacific economies are needed to protect them against increasing spill-overs to the financial and manufacturing sectors – and ensure that people of all ages can continue to strive for healthier, more productive and meaningful lives. Already, the region’s financial sector is suffering. Equity markets have experienced severe losses as risk-averse investors flee. Similarly, a number of major banks have suffered losses due to their linkages to failed financial institutions in the United States and Europe.
Notwithstanding this grim global picture, there is some solace to be found in the fact that the Asia-Pacific region is battle-hardened. The 1997 financial crisis and the ensuing regulatory reforms implemented as a result of it have enabled countries here to withstand the worst of the financial sector fallout until now. The share of non-performing loans in total loans has declined significantly from levels in the early 2000s, while foreign exchange reserves have increased seven-fold to more than US$4 trillion in the region’s developing economies. Indeed, it is striking to note how many of the pre-1997 policy shortcomings of regional governments are now under the magnifying glass once again – lax supervision of financial systems, excessive credit creation and the build-up of asset bubbles – with the difference that this time around the loci is in the financial centres of the world.
However, where the origin of a crisis starts is not the point. In a systemic crisis, no player of the global economy remains unaffected. Consequently, even in our battle-hardened, economically dynamic region, the real economy has been hit, and the situation is worsening. Growth is under pressure across the entire region as the export engine decelerates. This slowdown, together with the scarcity of global credit, will further curtail the ability of domestic consumption and investment to take up the slack. The effects of declining growth for the region are compounded by continuing high food prices. Barring a severe contraction of the global economy, the recent easing is unlikely to continue. In any event the poor in our region will be hit the hardest. During the 1997 financial crisis, 19 million Indonesians and 1.1 million Thais fell below the poverty line – a stark reminder of the magnitude of human vulnerability and an indication of the kind of dire fall out that could be expected from the crisis. Furthermore, as unemployment rises and spending power is eroded, the poor take much longer to recover from crises. Inevitably, the hard-won progress towards attaining some of the Millennium Development Goals will become all the more difficult to sustain as households struggle to pay for their health and education needs. Likewise, governments will have fewer resources for social programs as tax revenues decrease and spending on financial sector support increases.
What can Asia-Pacific governments do to address these immediate threats to development? I propose a two-track strategy, focused on realizing an inclusive development process through a set of mutually supportive national and regional actions. First, sustaining domestic demand and protecting the livelihoods of the most vulnerable groups must be the bedrock of national policies in the months ahead. Domestic demand should be supported through increased government spending and the easing of monetary policy. The urgency in improving social safety networks, so evident after the 1997 crisis, dissipated with time. Now, time is of the essence:
immediate action must be taken to institute or to improve on the delivery of cash transfer programs and other social protection mechanisms that are targeted to those who need it most.
Second, in a globally integrated economy, an Asia-Pacific region acting in unison will be a more resilient region, ready to resume its long term growth path. Experiences from other regions abound of how overtly national policy actions can result in huge – albeit unintended – adverse domestic repercussions in neighbouring countries. For one, beyond the current coordination among central banks, contingency planning is required to respond to liquidity and capitalization problems of domestic banks. Action at the regional level will have greater credibility. Immediate tasks are accelerated implementation of the ASEAN+3 Chiang Mai Initiative foreign currency pool and its expansion to include other threatened economies in Asia and the Pacific. The amount of potential reserves available also needs to be increased to serve as a primary line of defence. Furthermore, countries should engage in consultations on exchange rate policies with a view to establishing more coordinated and durable regional currency arrangements. National exchange rate management policies operating in isolation have been a key cause of the recent build-up in asset, credit and investment bubbles in some countries of the region. They could also result in beggar-thy-neighbour competitive relations to the detriment of all in the region.
We stand at a moment of considerable risk but also great opportunity. If we are successful in avoiding the worst of the trouble ahead, we will not only improve the situation of the poor in our region – we will also play a major role in leading the recovery of the global economy. The past few years have already provided incipient signs of a historic global shift in economic power. We may look back on the current crisis as the true beginning of an “Asian Century” that will help bring increased prosperity to all peoples in a truly global process of inclusive development. But for this to happen, we must act now and act in unison.