Traffic etiquette is powerful anecdotal evidence of economic sophistication, prosperity and self-assurance. Societies that seek all of these find that the law of the jungle prevails on their roads. Civility is a casualty as everyone wants to get ahead by any means possible. Traffic stalls, drivers snarl, productivity suffers and pollution thrives. All these change gradually with the rise in per capita income. Drivers are no longer so insecure as to not let anyone get ahead of them. They let people cross the roads and respect the elderly. Traffic flows more smoothly.
Alas, unlike the fables, such a condition does not live happily ever. Things can and do regress. As nations pursue growth when they should be pursuing consolidation and continuity, road traffic grows, civility declines, rule violations become commonplace and stress spills onto the streets. This is but one of the costs that nations face when they pursue growth, as developing countries do.
Economic growth often brings with it inevitable social disruptions. They are accepted as necessary costs for countries that are yet to offer a decent life to a vast majority of their citizens. But when the pursuit of economic growth takes precedence over other goals in ageing and mature societies, costs can be larger. Familiarity and continuity are essential for children and the old alike. They anchor associations, relationships and loyalties. Constant change destroys emotional and social threads, and hence the old find both the economic and social costs of rapid growth too painful to bear. Their savings count for less as inflation takes a large share of them, and their social linkages are lost, sometimes for ever. It is worth asking whether Japan chose wrongly after its economic growth halted in the 1990s. Perhaps it knew something that some of us don’t know, even today.
Pursuit of growth also forces policymakers to fail to recognize changes. East Asia is at risk of committing that mistake yet again, thanks to its growth fetish and insecurity. Sometimes, these two are one and the same. It is a pity that private economists and policymakers reinforce each other in this act of folly.
Most East Asian central bankers are making haste rather slowly with monetary policy tightening. Economists nod in approval as they point to signs of economic slowdown in the West, and opine that this is no time for engaging in monetary policy bravado. That would be true if only the world had remained frozen in the 1980s and 1990s, when trade was the only economic linkage between the West and Asian exporters. If the Western economies slowed, East Asia had to administer policy-easing boosters to its economy. Today, in a world of mobile capital and instant information, economic woes in the West result in capital flows into the East. Capital linkages hardly mattered two decades ago. Now such flows boost asset prices in the East. Rising asset prices boost domestic demand and economic growth. Policy easing—by stealth or design—is not only unnecessary, but also undesirable.
Most of the population finds that it cannot afford the assets whose prices have decoupled from values, thanks to vast and fast inflows from elsewhere. The bane of asset price bubbles is that they prove the adage that one has to be rich to become rich. They reward the prosperous, but not the productive. While economic and other accompanying rewards go to the elite, the costs of growth are widely shared. Erosion in purchasing power caused by a rising price level is the most prominent of them, but surely not the only one—as the earlier narration shows.
Hence, instead of advising governments to recognize that capital inflows have weakened traditional economic linkages with the West through trade alone, economists employed by the financial sector endorse policy inaction by resorting to constructs such as core inflation, which have no relevance to the cost of living of the common man. One should not be surprised—the world of finance has prospered in the last quarter century, when asset prices affected real economies rather than the other way around. No one pulls the rug from under his own feet.
Unfortunately, their advice has been heeded. World foreign exchange reserves have grown by $2 trillion since the beginning of 2008. US dollar weakness does not explain this, since it strengthened a lot in 2008. Countries have intervened massively in the foreign exchange market. The lion’s share of the honours belongs to East Asia. This accretion of reserves has not just accelerated economic growth, but has also boosted stock and property prices across the region to undeserved levels. It has also made the region’s economic path unsustainable, yet again.
Policymakers in East Asia have to wake up and smell the coffee soon. They should abandon statistical finessing of the rising cost of living, tighten monetary policy, and consider appropriate measures to signal lower returns to the capital invasion from the West. These are minimum steps required to preserve both their economies and societies.
V. Anantha Nageswaran is chief investment officer for an international wealth manager. These are his personal views. Your comments are welcome at firstname.lastname@example.org
To read V. Anantha Nageswaran’s previous columns, go towww.livemint.com/baretalk