East Asia and the global crisis

Posted by Peter Drysdale on 3 February 2009

East Asia’s moment of truth

Editors’ note: This was first posted on the East Asia Forum, a platform for the best in East Asian analysis, research and policy comment on the Asia-Pacific region and world affairs.

Last year was a year of dramatic change in the East Asian economy, a defining moment for East Asian leadership. The economy went into sharp reverse everywhere. What wasn’t evident at the time was that the seeds of economic deceleration in China had been sown before the effects of the American and European financial crisis started to wreak their havoc. The speed of economic reversal caught even the most experienced observers by surprise.

Bubbling not far beneath the surface of the economic ferment were powerful currents of political change.

Last year was also the year in which China stepped decisively if awkwardly on to the world stage.

Its economy, at the beginning, was remarked upon as the driver of a historically unprecedented boom which saw world energy, food and raw materials prices jump to atmospheric heights. It hosted the Olympic extravaganza in Beijing, showcasing China’s remarkable achievements since it opened to the world alongside its rich heritage of culture and history. But the troubles in Tibet in the lead-up to the Olympics put a searing spotlight on the disjuncture between China’s achievements and its political development, deflected somewhat by the devastating earthquake in Sichuan which called forth huge reserves of national spirit and international goodwill. By the end of the year, growth had collapsed from 2007-based projections of 13 per cent for the year to 6.8 per cent end year-on-year, with national output virtually stationary in the last quarter.

Japan continued in stasis until it too was skittled by the collapse in America.

Until the world fell down, the rest of the region, including Australia, that most East Asian of the East Asian economies, was pre-occupied with managing all aspects of the China boom – the pressure on energy, resource and food markets, the macroeconomic pressures, the looming foreign economic investment and commercial presence – and beginning to think about its long-term political consequences. India too was more and more caught up in the wave.

Never should the East Asian economy have been more conscious of that its role on the world stage and the need to re-position quickly to manage the global system consequences of its own economic success and the dangers that the huge imbalances that had been created on the way now presented to its sustainability. East Asia bore no responsibility for America’s squandering the beneficence of East Asia’s success – the apparently never-ending supply of cheap credit negligently guarded by the private and public custodians of the developed world’s financial system. But in this and in many other global system-making or system-destroying economic and political affairs, East Asia now had significant prudential responsibility and it failed at every stage to exercise it.

East Asia’s missing institutions

Despite the emergence of East Asia – China, Japan and the rest of East Asia through to Australia and New Zealand reaching out to India – East Asia could not step up to the mark because the structures are still not up to the task of global participation. The stage is still set for the wrong play – the trivia of regional FTAs and ‘mickey-mouse’ financial cooperation. In East Asia, like elsewhere in the world, the risks that we now face, not only economically but also politically, are a consequence of failure in the architecture of governance, including regional architecture that frustrates a coherent East Asian and international response to the big problems of the day in their global context.

That’s an issue for another day, but it is a day fast approaching, including the need to deal with the political consequences of shifting regional economic power.

East Asia and the global crisis

What do the splendid reviews of developments in the Asian economies and polities tell us about how East Asia might nonetheless see this thing through?

There are two things:

·     one about what is playing out in the region;

the other about the global response and East Asia’s role in it.

In the region, apart from countries with leeway like Australia and Indonesia making the very best of a bad hand, the most important questions are about what has happened and what might happen in China.

The press lurches from breathlessly reporting of one disaster to another, and there are more of them to come. But among the best analyses we have so far are here.

The Chinese economy is likely to turn around much more quickly than the bulk of pundits predict, despite the mayhem in the rest of the world. There has been a huge boost to spending in China and there’s more to come. The problems in China are very different from those in America, Europe and Japan where stagnation will be more difficult to shake. China is an economy much more like Japan was in the Great Depression in the 1930s. Then, Japan released huge numbers of rural workers back to the countryside and cut wage costs in manufacturing dramatically while holding on to permanent workers there. In wage and price flexible Japan, output held up, formal unemployment hardly rose and Japan out-competed the industrial world in international markets. The Chinese economy has similar characteristics with the capacity to bounce back in the same way. These are the kind of responses and pressures that we might expect in China, good for bounce-back but difficult to manage internationally without massive global reflation. As Huang says, whether all that is sustainable beyond a few years will very much depend on whether the structural reforms, particularly in the financial market, are attended to and whether the world can get its act together.

Managing the international collective response to recovery from the crisis

And that brings us to the other critical issue: managing the international collective response to recovery from the crisis.

This crisis is as large a crisis as the Great Depression, measured in terms of the collapse in world asset values thus far.

First, let’s count the blessings. Times have changed. Policy knowledge has improved substantially despite the misdirected inclination abroad to dump on economists when cooler counsel needs to prevail. Government is bigger in the economy and better positioned to get things back on track. And the biggest weakness, the ill-shaped structure of global architecture to deal with the issues the world confronts, has had the right-shaped tin shed of the G20 delivered to it, from which we will  see a more effective and comprehensive response.

East Asia should support the G20

So if there’s one thing that East Asia can and should do urgently, it is to get behind its representatives in the G20 and forge an agenda on macro-stabilisation and financial reform that leads the way out of the crisis, as no other region is better placed to do it.

Europe must accept reduction of its over-representation in world affairs

And ‘disappointed states’ states of Europe need to be pushed into understanding and accepting the reality that their claim for over-representation in world affairs cannot be allowed to knock the long-term program of work through the G20 on the financial crisis and other global issues off course.

Peter Drysdale is Emeritus Professor of Economics and Visiting Fellow in Policy and Governance in The Crawford School of Economics and Government, Australia National University, and Co-Editor of East Asia Forum

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