Job growth and sustainable development post 2012
Although the Asian region is better prepared for economic turmoil than it was a decade ago, high levels of financial, trade and investment integration with the Western economies ensure that no country is immune to the effects of the Eurozone debt crisis.
While most of the European Union (EU) economies struggle to design new austerity measures to meet EU demands, the fallout still continues to spread outside the Eurozone. However, unlike before, the Asian region is better prepared for currency and balance of payment crises than it was a decade ago, having instituted wide ranging reforms, improved current account balances and built up a protective buffer of foreign exchange reserves.
Notwithstanding all these measures, high levels of financial, trade and investment integration with the Western economies leaves no country immune to the economic woes in the West. Therefore, the slowdown in the West arising from the European sovereign debt crisis will continue to exert significant downward pressures on growth in the region. There are a number of potential and economic vulnerabilities that raise serious concerns and need to be managed carefully by emerging economies in Asia to ensure continued economic growth.
Capital flows
The macroeconomic difficulties for most economies of the West, once again, will put pressure on the movement of short-term portfolio capital. During times of generalised international risk aversion, short-term portfolio capital exits developing countries. Hence efforts aimed at preventing excessive currency depreciation reduce the availability of reserves to cover external short-term debt repayments and current account deficits.
Another potential vulnerability stems from the financial services sector although most Asian economies possess adequate reserve cover for external short-term debt at a macro level. However in some cases some of the smaller economies may run the risk of being overly dependent on foreign sources for their borrowing. The global credit crunch may result in governments coming under increased pressure in continuing to fund their development activities at high commercial rates.
Trade and investments
A third source of vulnerability is the region’s dependence on trade and investments with developed countries. Even though regional trade has been growing impressively, it generally consists of raw materials, parts and components in the manufacturing sector. To a very large extent these exports are linked to demand for final consumer products in developed countries. The double dip recession in many developed countries will therefore before long find its way back to the region through a huge drop in trade, investments and tourism.
The increasing spill-over effects of the Western financial crisis into the real sectors and its evolution into an economic recession, combined with long term challenges posed by climate change, and huge volatilities in prices have all converged to pose a huge challenge for the Asian region. Due to the convergence of the political and economic crises in the West, Middle Eastern political turmoil must be taken into account when developing countries devise policy responses to face these emerging economic challenges post 2013.
Policy response
The challenge for most governments would be to redesign fiscal policy — and economic policies more broadly — in order to strengthen its impact on employment and aid in its transition from purely a demand stimulus to one that promotes structural change for more sustainable economic growth.
Stimulus packages should move away from mostly focused on income support measures, with tax-related measures accounting for more than half of the stimulus provided. In many countries, such as Argentina, China and the Republic of Korea, in contrast, infrastructure investment tended to make up the larger share of the stimulus and has strengthened the supply-side conditions.
The optimal mix of supporting demand directly would be through taxes or income subsidies or indirectly through strengthening supply-side conditions and by investing in infrastructure and new technologies, but in most contexts, direct Government spending tends to generate stronger employment opportunities.
Role of the State
In most Asian economies the state will remain the single most important organising unit of political, economic, and security affairs, but will confront fundamental tests of effective governance. The first will be to benefit from, while coping with, several facets of globalisation. The second will be to deal with increasingly vocal and organised publics. The elements of globalisation — greater and freer flow of information, capital, goods, services, people, and the diffusion of power to non state actors of all kinds — will challenge the authority of virtually all governments.
At the same time, globalisation will create demands for increased international cooperation on transnational issues. All states will confront popular demands for greater participation in politics and attention to civil rights — pressures that will encourage greater democratisation and transparency. This provides a unique opportunity for all emerging economies in Asia to reorient economic growth towards a long-term development path that is inclusive and politically sustainable.
(The writer is a Senior Company Director.)
