The first speaker of the first session, Prof. Peter Petri, Brandeis University, noted that recovery in the Asia-Pacific was underway but as of yet incomplete. He underlined the fact that many of the problems identified for APEC prior to the summit in Singapore in 2009 continued to plague the world, and postulated that the fragility of the global economy was creating unforeseen negative side effects and that there has never been a time in history when economic cooperation has been more crucial.
Every economy in the Asia-Pacific has experienced a strong rebound. One of the biggest surprises for many economists has been the extraordinary growth in Asia following the crisis. Each economy in the region has seen growth rates of 1.5% to 7.5% since the financial crisis. Furthermore, 40% of the economies of the region have reported growth rates of more than 7.5% since the crisis.
Although Asia seems to be recovering, its main trading partners, the United States and Europe, continue to see dulled growth. Economists estimate that the US economy has lost 8 million jobs in the crisis and that the country will not return to pre-crisis growth levels until sometime between 2013 and 2020. This is not a welcome scenario for individuals or politicians in the United States.
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| The fist session on economic Recovery and Growth: (l-r) Amb. Donald Campbell, Chair, CANCPEC; Prof. Peter Petri, Brandeis University; Dr. Masahiro Kawai, Dean, The Asian Development Bank Institute, (ADBI); and Dato' Dr. Mahani Zainal Abidin, Chair, MANCPEC / Chief Executive, Institute of Strategic and International Studies (ISIS) Malaysia |
One characteristic of the global economy since the financial crisis in 2008 has been the persistence of global imbalances. It seemed during the crisis that the gap between rich and poor countries was shrinking, but the recovery has caused this gap to widen again. As long as such imbalances exist, it will be difficult for economies with overall trade deficits to stimulate their economies or increase exports. Some countries are beginning to try out quantitative easing or other risky stimulus measures due to these imbalances. Such risky measures have had adverse effects among the countries of Europe, dulling their growth. The measures are the reason why the euro has been depreciating while the renminbi and dollar have strengthened.
Major structural reforms are needed. Some economies have already implemented positive changes. In China, household savings and domestic consumption have gone up. This has contributed to worldwide growth. However, Chinese net exports seem to be increasing again and, considering that China's economy is growing three times faster than those of its major trading partners, this could lead to disastrous results.
Asian economies appear to be reorienting themselves toward demand in other Asian markets. Increasing regional interdependency is a welcome change. The share of each economy's exports to other Asian economies has increased from around 35% in the fourth quarter of 2008 to over 37% today.
Prof. Petri asked the meeting to consider whether the economic policies implemented worldwide since the 2008 financial crisis had really helped. Basel III is a sign of good progress, although many countries have yet to implement it. World Trade Organization (WTO) Doha Round negotiations have stalled, but at least the worst forms of protectionism seem to have been avoided. Countries have failed to take advantage of opportunities to create new engines of growth through green technology. Massive structural reforms have not been implemented. On the whole, Prof. Petri exclaimed, the situation was not good.
What does all of this imply for international cooperation in 2011? The G-20 was effective at mitigating the amount of economic damage caused by the financial crisis, and the organization is still vital to the health of the world economy. The group is still needed for its role in refocusing the reform agenda, defusing currency conflicts, and strengthening the implementation of policy recommendations.
Prof. Petri closed by underlining the critical role of APEC and other international organizations in the wake of the crisis. The extraordinary vision of APEC for the creation of a dynamic, cooperative and integrated economy in the Asia-Pacific has the potential to facilitate tremendous economic growth. The Trans-Pacific Partnership (TPP) as well may have a role to play in the creation of a region-wide Free Trade Agreement (FTA), which would effectively ensure regional economic stability. The opinion of the rest of the world about the Asia-Pacific is changing. The region is finally being considered an essential partner in the world economy. The world needs Asia's help to return to full economic growth.
The second speaker of the session, Dr. Masahiro Kawai, Dean, The Asian Development Bank Institute, (ADBI), presented on the challenges now faced by Asia as each economy works for future economic growth. Before the financial crisis, it was thought that Asian economies were very resilient due to the reforms implemented following the 1997 Asian economic crisis. This belief proved false in 2008. A major problem for the region is its dependency on demand in the United States and Europe. With many projecting that US demand will remain subdued, it is important that interregional trade be further encouraged. At the same time, Asia needs to address a number of imbalances.
The post-crisis recovery period in Asia was brief. GDP growth rates recovered quickly in each economy. Most growth rates today are comparable to growth rates seen in the past 20 years. The IMF has reported that growth rates elsewhere in the world are recovering as well. Current account balances everywhere are improving. Although recovery remains fragile, it looks like the global economic situation is getting better.
Given the state of the world economy, it is important that Asia work to achieve not just further economic growth, but balanced and sustainable growth. Overdependence on exports to the United States and Europe has led to undesirable phenomena such as unstable current account deficits, widening social disparities, and the rapid deterioration of the environment.
These problems have been taken up in a new book by the Asian Development Bank (ADB) and the ADBI. Dr. Kawai reported that the book recommended the following strategies in order to promote healthier growth:
| ・ | Restore the sustainability of current account balances by rebalancing economies through government spending and corresponding supply side adjustments; |
| ・ | Focus on social inclusion by promoting inclusive growth; |
| ・ | Promote social resilience by strengthening social safety nets; |
| ・ | Strengthen efforts on environmental sustainability; and |
| ・ | Promote further regional cooperation and economic integration. |
The countries of Asia face many different challenges. Among these challenges are inclusive growth, increased investment to support consumption, environmental investments and green growth, regional integration, and the managing of capital inflows. On the last point, rapid capital inflows may possibly lead to short-term macroeconomic instability and should be avoided. On the other hand, it would be unwise to forget that the 1997 Asian Financial Crisis was caused by rapid capital outflows. Both must be guarded against.
There are a number of ways to increase economic stability. Exchange rate appreciation is a good instrument, but has a negative impact on trade relations. Fiscal policy tightening has been recommended by the IMF, but steps taken for this may be hard to reverse later. Countries should strengthen their supervisory and regulatory frameworks. Global and regional cooperation is important for this. The US Federal Reserve needs to pay more attention to the implications of its policies on the global economy.
In conclusion, Dr. Kawai stated that it seemed short-term economic recovery goals had been achieved but that the long-term objective of achieving balanced and sustainable growth was yet far off. Closer regional policy cooperation, structural reforms, infrastructure investments, green growth, and further financial cooperation may help Asia achieve its long-term goals. In the short term, the most important issue for each economy is how to properly manage capital inflows.
For the third presentation of the session, Dato' Dr. Mahani Zainal Abidin, Chair, MANCPEC / Chief Executive, Institute of Strategic and International Studies Malaysia, presented on issues of economic growth which need to be further debated in the Asia-Pacific. There are two main issues:
| ・ | How to maintain sustainable recovery over the short term; and |
| ・ | How to implement economic restructuring over the long term. |
Restructuring will require the stimulation of domestic demand in Asia. Asian economies have until now been promoting growth through exports supported by cheap labor costs. With wages low across Asia, it is difficult to say how Asian economies will possibly increase domestic consumption rates. This problem as well illustrates the need for structural reform.
Before the financial crisis of 2008, economists questioned whether Asia and the West had decoupled. Economists now know this has not yet happened. However, it is still a possibility. With low growth in Europe and the United States, how can an interconnected Asia expect to grow further? The region has high growth potential. Regional trade is increasing. There is a need to bolster investment. Asian economies should implement coordinated regional infrastructure investments. The cooperative investments carried out through ADB are not enough; governments need to sit down and agree to massive joint projects for infrastructure improvements. This should start with wage issues and other problems in the regional labor market.
The most important and immediate issue for each economy in East Asia and the Pacific is how to sustain economic recovery. Collaboration on macroeconomic policy is needed. Many emerging markets face rapidly appreciating exchange rates, driving fears of competitive devaluation. If this issue is not dealt with quickly it will impact shortterm growth.
Growth in services is an important driver for the economies of the Asia-Pacific, but many issues regarding the export of services have yet to be dealt with. APEC economies must put greater effort into liberalizing the services sector.
Dato' Dr. Mahani turned to the topic of factors which may hinder restructuring. Economies first need to realize that imbalanced growth is unacceptable. Developed economies need to make headway on housing issues, education, natural resources, social safety nets, and job training. Emerging economies need to work on shifting from producer societies to consumer societies. China in particular needs to restructure its economy for this.
The economies of the Asia-Pacific need to work out how to maintain sustainable growth over the short term and how to implement restructuring over the long term. The financial sector and real economy have become disconnected. Although many real economies continue to struggle, financial sectors across the world have already returned to pre-2008 growth levels. Until the two sectors can be joined together the world will not see a true recovery.
Discussion
A meeting participant raised the issue of regional credit ratings agencies, noting that there was high dependence on agencies located in the United States. He suggested that Asian ratings agencies band together to create a single agency to compete with other international agencies, and that this would encourage bond markets and permit the issuing of credit over a longer range of time, giving the regional economy a more stable structure. Dr. Kawai responded that there were about 60 credit ratings agencies in the world and that 30 of these were located in Asia. He conceded that, despite the region having half the world's agencies, Moody's, S&P, and Fitch remained the most widely trusted and utilized agencies. One important issue, he noted, was that each economy's credit rating agencies were using their
A participant brought up the issue of double counting, and requested to know how trustworthy regional economic data really was. Prof. Petri admitted that interregional trade data may be inaccurate because of products being shipped back and forth between economies over the course of the manufacturing process. Dr. Kawai suggested that researchers analyze economic strength in terms of value added instead of trade completed.
Discussion turned to the issue of the US tax package and what would happen if no consensus was reached on the continuation of the Bush tax cuts. Prof. Petri told the meeting that the United States was experiencing a very difficult political climate, but that there was at least consensus on the need for fiscal prudence.
The conversation moved on to the topic of decoupling. Dr. Kawai explained that it seemed that short-term cyclical economic movements were actually quite correlated between economies, and that in that sense it was hard to find evidence of decoupling. However, monetary policy trends did seem to be diverging. While everyone in Asia was talking about monetary policy tightening, Mr. Bernanke in the United States had announced that he believed that his country and the countries of Europe should concentrate on the further easing of monetary policy.