Asians hoping for a calmer year after 2007 have been quickly disavowed of such optimism. Between economy-shaking snowstorms in China, dumpling crises in Japan and worsening financial conditions in the West, 2008 looks like a more dangerous year.
“I’m worried about the effects of an ever-worsening liquidity crunch in the US,” says Ifzal Ali, chief economist at the Asian Development Bank. “At this time, it’s never been more important for Asia to make sure it maintains its gains over the last decade.”
Serious economists no longer spin the myth of Asia decoupling itself from the West. Even so, Asia hasn’t yet been directly slammed by the subprime loan crisis and slowing US growth. The important word here is “yet”.
William Pesek is a columnist for Bloomberg.
While the list of pitfalls Asia wants to avoid is a long one, resisting the urge to follow the US’ lead may top it. That’s a sea change for officials who still view the US as their economic mentor. Even in the years following Asia’s 1997-98 crisis, during which advice from the US and the International Monetary Fund deepened the turmoil, leaders were loath to blow off the biggest economy. Yet, many in Asia are aghast at how badly the US is handling its own financial crisis.
It has been a decade since the US heavy-handedly told Asia how to retool its economies. It counselled higher interest rates to support currencies, fiscal belt-tightening, more independent central banks, greater corporate responsibility and avoiding bailing out investors.
Now, as the US faces its own crisis, it’s doing everything it told Asia not to. The US’ policies are beginning to complicate life for Asia.
A decade ago, Asia sent financial turmoil to the West, slamming markets in New York. Today, the US is returning the favour via what Asians call “American contagion”.
Take the Federal Reserve’s rate cuts. Along with bailing out investors who bet big on turbocharged securities they barely understood, the Fed is sending a tidal wave of capital Asia’s way. The US is devaluing its way to growth, something for which it long chastised Asia.
The money now entering Asia is of the “hot” variety that caused problems in this region in the late 1990s. The US is also opening the fiscal floodgates to avoid recession, something that will only add to its imbalances.
Neither is the US a corporate role model. Early this decade, Asia watched with horror as free-market icons Enron Corp. and WorldCom Inc. imploded. Now Asians are witnessing the fallout from the “Enronization” of US investment banks.
Like Enron, Wall Street moved its riskiest investments off balance sheet. In Wall Street’s case, it was structured-investment vehicles. Executives barely knew the risks, never mind credit rating companies. The economy supposed to be the most transparent proved to be anything but.
Rather than fixing a broken system, treasury secretary Henry Paulson supported the creation of what was essentially a bailout fund. That, coupled with a compliant Fed, suggests US officials didn’t learn a key lesson of the Asian crisis: If investors avoid the consequences of their actions, they will make even bigger mistakes next time.
The US doesn’t get all the blame. Asia should have used the growth of recent years to improve economies, wean itself off exports and build deeper bond markets. Yet, all this would merely be food for thought if Asia weren’t on the front lines of the US’ missteps.
Aside from borrowing more Asian savings, the US will have an eye on the region’s currency reserves more than ever. Concerns about sovereign wealth funds are taking a back seat to Wall Street’s financing needs. At least at the moment, investments by China, Singapore, the United Arab Emirates and other cash-rich governments are getting a warm welcome.
What’s Asia to do in this environment? Last week’s quarter-point rate cut by the Philippine central bank will hardly be the last in Asia. Monetary authorities are shifting their focus from inflation to supporting growth. While slowing growth won’t help Asia’s high poverty rates, neither will higher food and energy costs.
China’s snowstorms and a scandal surrounding pesticide-tainted dumplings sent to Japan are stoking inflation concerns. For years, China exported deflation around the globe. Now the opposite is happening as China raises production costs to ensure the safety of its exports. Agriculture prices also are on the rise.
The temptation in Asia will be to cut rates and increase government debt levels to keep growth rates high. Officials need to tread carefully and find the right balance.
“The concern is the hard-won credibility of central banks and governments,” Ali says. “To lose that, you lose a lot in the process.”
Wider Angle will be back next week.
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