[governance-vn] EPA: Why Asia Won't Save The World

[Vern Weitzel]

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Subject: [vnnews-l] EPA: Why Asia Won't Save The World
Date: Thu, 12 Jun 2008 11:40:33 -0700 (PDT)
From: Stephen Denney <sdenney at OCF.Berkeley.EDU>
Reply-To: Stephen Denney <sdenney at OCF.Berkeley.EDU>
To: vnnews-l <vnnews-l at coombs.anu.edu.au>

sent to vnnews-l by Stephen Denney <sdenney at OCF.Berkeley.EDU>



Newsweek

June 16, 2008
International Edition

Why Asia Won't Save The World;
Asian exporters helped buoy the global economy; now, stagflation is
threatening their growth miracle.

BYLINE: Bt George Wehrfritz

SECTION: WORLD AFFAIRS; Pg. 0 Vol. 151 No. 24 ISSN: 0163-7053

LENGTH: 1138 words


Not long ago, investors hailed Vietnam as a dynamic, export-driven
"China-killer." But in recent months, it has moved ahead of its giant
neighbor for a less laudable reason: it's the Asian economy most likely to
crash in 2008. With suddenness only the world's fastest-growing region can
deliver, Vietnam's economy has lurched off course. Its main stock exchange
has plunged 55 percent this year, inflation topped 25 percent in May, wage
protests are erupting at scores of factories and the national budget is
cracking under the weight of imported energy. In May, ratings agencies
Standard & Poor's and Fitch lowered Vietnam's credit rating on fears of
financial instability. Morgan Stanley warned of a possible "devaluation
episode" centered on its embattled currency, the dong, cautioning that
such a development "could trigger a contagion throughout the region"
similar to the 1997-98 Asian financial crisis.

Vietnam may turn out to be the canary in Asia's coal mine. Like the rest
of the region, its economy is export-driven, energy-dependent and
labor-intensive. The formula worked well as long as energy remained cheap
and American consumption steamed ahead. But as Western consumers spend
less, and rising oil and food prices lead to double-digit inflation
throughout the region, the economic tables have turned. The burgeoning
middle class that was supposed to create self-sustaining growth for Asia
and help buoy the world in a global downturn looks beleaguered, and the
poor are becoming desperate.

Imported oil has outraced export earnings, staining the national trade
balance red. Meanwhile, leaders in Hanoi and elsewhere have proved
themselves unable to raise interest rates, tighten the money supply or
adjust its dollar-pegged currency sufficiently to avert an
inflation-induced meltdown. "They panicked," says William James, a senior
economist at the Asian Development Bank in Manila, referring to the
Vietnamese government's imposition of a rice-export ban and various
domestic price controls this year. He adds: "[Vietnam] is a real ground
zero for what's going to happen with inflation" in Asia.

>From Seoul to Jakarta to Islamabad, policymakers are making the same 
missteps. Faced with their toughest economic challenge in a
decade--surging inflation--governments have yet to embrace the proven
macroeconomic-policy response: aggressive monetary tightening. Instead,
they favor stopgap administrative measures like price caps, based on the
flawed logic that today's price surge is temporary, so overreacting to it
could undermine economic growth that (truth be told) is already weakening,
thanks to declining Western consumption and deteriorating terms of trade.
The problem, argues Sailesh Jha, an economist at Barclays Capital in
Singapore, is that inflationary momentum is stronger than it's been in
nearly two decades in Asia, and likely to rise--not stabilize--well into
2009. "Asia's central bankers are sitting on the fence when they should be
reining in inflation," he says. "That's the same fundamental mistake the
Americans made in the 1970s."

That historic blunder added the terrifying word "stagflation" to the
modern economic lexicon. It means slow growth coupled with persistent
price rises, evidence of which is already appearing in Asia's economic
data. In industrial powerhouse South Korea, for example, the official
inflation rate stands at 4.9 percent, but national income is growing by
1.3 percent. Thailand's consumer price index has tripled over the last
year and Indonesia's has doubled despite slower real growth in both
nations. Inflation in China and India is approaching 10 percent, even as
both economies are slowing: China from 11.9 to 10 percent and India from 9
to 8 percent.

The juxtaposition may not seem alarming yet--but economists agree that
official figures in Asia understate inflation and overstate growth
significantly, creating the false impression that Asia is maintaining high
growth while keeping prices in check. In April, former Reserve Bank of
India deputy governor S. S. Tarapore noted that the indices used in his
country (as well as in many other parts of the region) "greatly
underestimate the extent of inflation."

That's a dangerous illusion. Historically, policy dithering as
inflationary spirals build has magnified the havoc they ultimately wreak.
Unless tackled quickly, price spikes in commodities lead to demands for
higher wages which push up the general price levels, particularly in
fast-growing economies. Central banks can head off such a spiral by moving
early to tighten money supply through higher interest rates. But real
interest rates in Asia are still low or even negative, while bank lending
is up sharply thus far in '08. Daniel Melser, a senior economist at
Moody's economy.com in Sydney, says the focus of Asian central-bank policy
is designed to "suit exporters."

Despite this effort, the export boom is slowing. While China's exports
officially rose 21.4 percent in the first quarter of 2008 to $306 billion,
the problem with that number is that China, like much of Asia, tallies its
exports in fast-depreciating U.S. dollars. Measured in euros or yen (the
coinage of Beijing's largest and third largest trading partners
respectively), China's exports ticked up just 4 percent during the first
quarter of 2008. Hardly a global economy-saving performance.

The real trade story is surging imports--much of it $130-per-barrel
crude--into Asia. Last week Lehman Brothers said China's trade surplus
peaked in the first quarter, and that, excluding China and Japan, the rest
of Asia is already running a trade deficit, thanks to a "ballooning import
bill" for food and fuel, much of it subsidized by government (at least for
now). So far in 2008, Vietnam has already spent $38 billion on imports,
more than it did in all of 2007, tripling its trade deficit.

When those subsidies are cut, as they undoubtedly will be, the rest of the
world will begin to feel Asia's inflationary pain in the form of rising
prices on consumer goods. The fast-growing economies that were supposed to
help prop up the rest of the world would instead pull it down. Unless food
and oil prices come down sharply, a number of Asian economies including
Indonesia and the Philippines could see growth forecasts slashed by 4 to 5
percent, according to the ADB's James. "The answer," he says, "is for
governments to accept slower growth in the short run and control
inflation." That would hammer exporters, and slow job creation. Still,
"inflation is more likely to cause riots than joblessness," says Felipe
Medalla, former head of the National Economic and Development Authority in
the Philippines. "People blame the government for higher prices, but when
they get laid off they blame their bosses." If stagflation takes root in
Asia, there will be plenty of blame to go around.