It isn’t just the seriousness of the subprime mortgage crisis that’s unsettling.
What’s also disturbing, from an Asian perspective, is the scale of the stimulus package that has been put together to keep the US economy from tipping into a recession.
At $168 billion (Rs6.67 trillion), the largesse is almost three-fifths more generous than the record $107 billion that 22 rich nations together gave out as official foreign aid in 2005, the year after the devastating Indian Ocean tsunami.
Middle-class Asians ought to turn green with envy at the “home bias” implicit in the munificence of President George W. Bush’s administration. Unlike the 111 million US households that will enjoy some tax rebate, there won’t be any cheques in the mailbox for the Asian workers.
All they can do, if the going gets rough, is to blame their karma, and since many Asian cultures believe in rebirth, there’s always hope for better luck in the next life.
With the US Federal Reserve slashing interest rates, economies in the region are looking vulnerable. The spurt in domestic inflation and the asset bubbles that typically follow lax monetary discipline in the West may erode the purchasing power of the Asian wage earner and exacerbate inequalities.
At the same time, if consumption in the US doesn’t revive quickly, exporters in the region may start cutting jobs. There already are signs of trouble: Taiwan’s unemployment rate unexpectedly rose to a seven-month high in December.
The talk last year was of a resurgent Asia “decoupling” from a slowing US economy and marching to its own beat.
After the synchronous $5.2 trillion rout in global stock markets in January, those expectations have evaporated.
Just last month, the $3 billion initial public offering (IPO) of Reliance Power Ltd was rated “subscribe” by three out of four analysts, according to Bloomberg. India’s biggest IPO attracted orders for 73 times the stock on offer when it closed on 18 January; yet, the shares fell as much as 21% on debut on Monday on the Bombay Stock Exchange.
India’s hunger for energy hasn’t abated in one month.
The stock took a drubbing because of events unfolding half a world away.
No safe haven, yet
Asia isn’t yet a haven for investors. Nor is the region’s rapid economic growth any match for Western prosperity. And that’s as true at a national level as it is for individuals: Being born in a developed country remains, by far, the biggest prize in the ultimate lottery of life.
That’s the finding of World Bank economist Brank Milanovic’s new study, titled Where in the World Are You?
The circumstances of our birth, Milanovic says, may matter much more than our efforts.
If each nation’s population is divided into 20 income classes, then climbing nine rungs from the bottom—a tough task in societies where vested interests allow only limited social mobility—will take a person the same distance as can be more easily travelled by being born in a country twice as rich.
The country of birth explains about 60% of one’s position in global income distribution.
“Living in a richer country is particularly important for low-income classes,” Milanovic says. The poorest 5% of Germans are, as a group, at the 73rd percentile of the world income distribution, which makes them more affluent per capita than the richest 5% of Indians.
This may explain why rich countries pay poor ones for limiting annual emigration to less than 0.1% of the latter’s population.
However, this compensation, which goes by the name of “official development assistance” is only 0.3% of rich nations’ annual economic output, with the US contributing just 0.17% of its gross national income in 2006. By contrast, the plan that the US Congress has passed and sent to Bush to reinvigorate the economy will cost the US treasury about 1% of national income.
Put pressure on rich nations
This is an opportune time for Asian countries to drop the macho rhetoric about their non-existent economic resilience and demand—together with Africa—that rich nations fulfil their 1970 pledge to devote at least 0.7% of their national income to foreign aid.
The inordinate delay in meeting that goal has slowed the adjustment that’s needed to create a more balanced global economy with multiple centres of demand.
As long as Asian workers have little chance of improving their relative standing in the world without hoping to be reborn as Germans or Americans, decoupling will remain a myth.
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