Last year’s report discussed the arrival of the world’s worst
recession since 1929. DCi tried to explain the key causes and
how serious it might become, and the likely effects on East Asian
countries.
The cause was the unbridled rush to deregulate the private
financial sector by the Group of 3 i.e. the US, EU (European
Union) and Japan. Even Alan Greenspan the former chairman of
the Federal Reserve, stated that he thought that the private
sector would act using self-regulation to avoid activities likely to
cause international financial problems. He later admitted he was
wrong.
The financial regulators were either abolished or told not to
interfere, and their CEOs were replaced by people who fully
agreed with the deregulation policy.
It was not surprising therefore that the developing countries
criticized the Group of 3 for the damage they had caused to the
world’s financial system, particularly the BRICs (Brazil, Russia,
India and China).
This article will look at the consequences, the attempts to
avoid depression, and the need to introduce a new agreement to
guide global economic co-operation. The last agreement was the
Plaza Accord of 1985, signed by five countries — US, Japan,
Germany, France and the UK. Its purpose was to stabilize their
currencies so that they were all on the same playing field, so
Japan and Germany saw their exchange rates soaring and the US
reduced its exchange rate; this allowed the US to reduce its
huge current account deficit and the other two to cut their
massive surpluses. This worked until deregulation allowed the
big banks and other institutions to develop ways to maximize
their profits at other people’s expense. (Think the US and China
today!).
The problem with agreeing a new accord is that the G20 is
now responsible for developing this, and the developing
countries that are part of the G20 do not necessarily see eye to
eye with the old G3.
The developed countries and the top developing countries
had to use Keynesian remedies, i.e. using massive amounts of
taxpayers’ money to bail out those who were considered too big
to fail, but who were largely responsible for the financial mess.
The result is that these countries are all heavily in debt. The EU
has introduced austerity budgets of varying degrees, but US
President Barack Obama thought that his Medicare proposal was
more important than unemployment of over 10%, and lost the
mid-term elections dismally.
The revised Basle 3 agreement to regulate the banks appears
to cover key areas that led to excess, but the implementation is
ten years from introduction, which gives the banks time to
recover, and to use those years to salt away many more
gazillions!
The critical areas now are currency exchange rates and
foreign capital inflows. The US, IMF (International Monetary
Fund) and EU accuse China of deliberately keeping its currency
at an artificially low rate (it is aligned to the US$) and as the
US$ has fallen in recent weeks so has the yen. To prevent a
currency exchange war there is an urgent to develop a new
accord.
The foreign capital inflows (and outflows) caused the Asian
financial collapse in the 1990s. Since then Asian countries have
introduced stricter rules and claim to be able to cope with this
problem (cheap money, over-investment and financial collapse
when these foreign funds are hastily withdrawn). Regional
countries took action on this issue by introducing flexible
exchange rates, taxing foreign capital inflows and taxing foreign
bond holdings. Joseph E. Stieglitz, a Nobel Prize economist,
suggests that the only way now for Asian countries to ensure
economic stability is to curb short-term speculation, but to
allow long-term investment for job creation.
The G20 met in November to try to resolve these two
issues, and approve the Basle Agreement, but ended without any
binding agreement on the key issues, producing a wishy-washy
paper saying they all recognize the problems and will look at
them again next year — i.e., a cop-out.
The long-term result, if no binding commitments are made,
will be a collapse of the monetary system in force since the
Plaza Accord of 1985. The World Bank suggests a partial return
to the Gold Standard, but with a basket of currencies providing
the floor level, any of which can be used for international
payments.
ASIA
Most commentators agree that East Asia plus China and India
were the saviours from the recession. They had not followed
the deregulation of the G3, so their banks were stable and
although badly hit by the fall off in trade with them, they
increased their trade with each other and with Africa.
Meanwhile they introduced stimulus packages plus welfare
protection for those worst off. Moreover they don’t have the
debt problem of the G3 countries.
The ADB (Asian Development Bank) suggests that these
countries will have an average GDP (gross domestic product) of
around 6.5% in 2010. Readers of this annual round-up are aware
that ASEAN (Association of South East Asian Nations) plus
China and India have consistently had an average GDP of more
than twice that of the G3 for many years. They also have ample
currency reserves. The possibility of going into a depression
does not apply to these countries, but could happen to the US
and some of the EU .
South Korea and Singapore were the main countries in this
group to have a recession; the former because of its large debt
problems and the latter because of the collapse of trade and
shipping with the G3. However both came out of it very quickly
as trade picked up. Malaysia, and Thailand also went into a
recession, but less severely and also recovered quickly.
Commodity prices fell sharply in 2008/.9 as did freight rates
because of lack of demand and an over-supply of new ships.
Commodity prices have been on a rollercoaster ride through
much of 2009 and the first quarter of 2010. China initially
refused to sign a new annual price for the major commodities,
but agreed when the major suppliers offered a review every
three months. Despite this, the price of coal, iron ore, bauxite
etc are high again due to the increasing demand from China.
However freight rates for Capesize vessels have plummeted,
down 77% from its 2008 peak according to the Baltic exchange.
The bulk industry faces a huge number of new vessels in 2011,
which will outstrip the demand, which can only result in
cancellation of orders and/or the scrapping of older vessels.
The smaller bulk fleets in this region are also not having it
easy, for similar reasons but appear to be still viable and coping
with available cargoes by juggling their fleets, and tightening their
belts.
APEC (Asia Pacific Economic Cooperation) met in Japan in
late 2010. Two important issues were discussed: they agreed
that 2011 provided a window to complete the World Trade
Organization’s (WTO) Doha Development Round (stalled for
nearly ten years), and agreed to pursue a Free Trade Agreement
for the Free Trade Area of the Asia Pacific (FTAAP). The latter
includes more than half of global economic activity; they also
agreed to remove protectionist measures during the current
global economic crisis and to avoid sudden sharp moves in
foreign exchange markets.
However no concrete measures were enunciated as to how
these were to be undertaken and no penalties for failure to
comply. The WTO DDR is possible, but the FTA is only a wish
list.
 
NORTH EAST ASIA
China
China weathered the recession comfortably. Initially many
export-oriented industries shut down, and their inland workers
returned to their homes. However as the stimulus packages
began to work, trade stared to increase to Asian and African
states, and has now started to the G3, though still far below the
pre-recession period. Many of the displaced workers are
returning to the industrial areas, but not all as many found work
in their home areas, and prefer to stay with their families if they
can adequately support them.
However the West’s growing criticism of China’s currency
exchange policy, which effectively decreases its export costs and
increases its import costs, has become more widespread which
has led the emerging states to follow suit to regain their export
cost advantages. The threat of a currency war, which could
totally destabilize world trade is worrying many states — except
China, which denies any responsibility, and China is a member of
the G20 meeting expected to recommend new currency
controls.
At the same time China is encouraging industries to attract
more local spending, to obtain a better budget position balancing
trade against local consumption. But the imbalance is still too
large and China seems to be determined to continue its current
trade advantage.
China has consolidated its position as the world’s largest
exporter, passing Germany last year, and has grabbed market
share from many of its export competitors. It became the US’s
largest trading partner over Canada in late 2008. However
there is growing concern about subsidies from the government,
or organized by the government, for its exports, to the extent
that Obama has ordered some enquiries into energy goods, with
a view to taking it up with the WTO.
China has used its exchange rate to cut prices in selective
markets and has successfully obtained a larger share of what is a
shrinking market. For example, the US imports of knitted goods
increased 10% this year, whereas those from South America fell
around 20%.
China and the other BRICs are claiming that their dominant
position in world trading entitles them to positions within the
IMF and World Bank, including oversight on policy. The US has
stated it will not reduce its majority role, but is pressing the EU
members to give up some of their stakes to share amongst the
BRICS. It was recommended that the BRICs be given board
member status.
China’s increasing demand for major commodities forced it
to compromise on prices, and the supplying countries Australia,
India, Brazil and South Africa are all back to near full strength.
Finally, Shanghai’s booming container throughput has made it
the largest container port in the world in 2010, outpacing Hong
Kong and Singapore.
Hong Kong
Hong Kong’s increasingly close relationship with the mainland,
helped it to weather the recession, and as both the Yuan and
HK$ are pegged to the US$, which has declined rapidly over the
last few months of 2010, they have maintained their trade
advantages with the rest of the world.
China’s rich (the rise in the number of millionaires has been
quite spectacular) are flocking to Hong Kong and Macau, making
up for the loss in tourism from the rest of the world.
Hong Kong is still a key transshipment port for China, but
more containers are now being discharged at Shanghai and the
Pearl River ports such as Shenzhen, whilst bulk commodities are
distributed to bulk terminals as in Shanghai and the Yangtze river
bulk terminals.
It can be seen from Table 1 that Hong Kong’s recovery is
mainly attributable to that of China.
South Korea
South Korea was caught with large debts and suffered a stock
market collapse as the financial disaster occurred. It was the
first ASEAN country to go into recession, but a quick investment
programme and loans for exporters and SMEs (small and
medium size enterprises) resulted in one of the quickest
recoveries in the world, boosted by its trade with China, other
ASEAN countries and Taiwan.
GDP grew 5.5% in the third quarter this year, with
unemployment falling, whilst manufacturing, capital expenditure
and domestic purchasing all grew significantly, leading to the
experts to suggest an annual growth of 6.5% in2010 and at least
7.5% in 2011.
The draft state-to-state trade agreement negotiated by the
former Bush presidency has not been able to get approval from
the Senate and Congress because of their determination to get
the banning of US beef lifted and a greater allocation for US car
imports. The Obama team are generally favourable, but will have
to wait now until after the mid-term US elections, as two
government teams that time failed to reach an agreement. Later
on, after further discussions, state-to-state an agreement was
reached, but requires ratification by both governments.
Taiwan
The easing of tensions between China and Taiwan, due to
Taiwan’s President Ma Ying-you has had benefits for both
countries, through increased trade and tourism to Taiwan and
the transfer of technology and Taiwan businesses to the
mainland.
As a result table 1 shows a large increase in GDP for this
year continuing into next year.
China objected to the sale of arms to Taiwan, but their anger
was mainly aimed at the US rather than at Taiwan’s president, as
the sale had been agreed to before the recent change of
government. The Taiwan government has expressed some
concern at the annual increase in budget funds by China to
update its armed forces equipment, so it will be interesting to
see if President Ma seeks further arms from the US under its
agreement with the US to allow it to have a suitable response
capability to any belligerence from the mainland.
Japan
The rise of the Democratic party to power, for only the second
time since the end of the Second World War, was due more to
disgust with the Liberal party rather than to enthusiasm for the
Democrats, most of whom had no experience in power. Mr.
Hatoyama became the new prime minister through family
connections, but he did not last long because of his many errors
and poor performance. He was succeeded by Naoto Kan who
showed a much better understanding of policies and restored
some measure of support for his party. His predecessor’s
commitment to move US troops out of Okinawa, who have
been stationed there since the end of the Second World War,
and are unwelcome to the Okinawans, was in order to gain
votes for the upper house election. When he changed his mind
under US pressure, he was forced out of office.
However Kan also misjudged the electorate, when he hinted
before the upper house elections that there was a need to
increase the tax rate. His party lost control of the upper house
which they had hoped to win back. This resulted in a challenge
to his leadership by strongman Ozawa, a former head of the
party who had fallen out of power because of his suspected
unsavoury dealings. Surprisingly Kan won a very comfortable
majority, and has regained his support within the party.
Japan’s economy is currently mainly dependent on exports to
China, but their relations are under pressure due to
disagreement with China over joint claims for islands close to
both.
Surprisingly there have been quite a number of recalls of
exported cars mainly by Toyota, raising doubts about their
supervision of parts made overseas.
A final problem for Japan is that it did not suffer from the
financial problems of the G3, so its interest rates compared with
them is quite high. The result is that a lot of foreign capital
inflows have occurred, and therefore the Yen’s value has
increased quite severely, decreasing the returns from its
exports, particularly cars. Some car manufacturers are talking of
shifting their construction overseas. The consequences of that
on Japan’s unemployment would be drastic.
ASEAN
The whole of ASEAN returned to very positive growth in 2010,
though there may be some slackening off in 2011. Adjusted
rates for 2009 for ASEAN was only 1.3%, increasing in 2010 to
8% but dipping to 4.4% next year. The reason for the trading
fall-off next year to ASEAN emerging markets is partially
domestic, but mainly expected in slower growth from the G3 all
of whom want to lower their imports and increase their
exports, particularly the US in order to reduce its huge deficits.
Indonesia
Indonesia’s positive trade balance in 2010 is close to US$45 Bn,
which is forecast to increase next year, and is the only ASEAN
country expected to increase its real GDP in 2011. This, of
course, is due to the export of bulk commodities, which make
up the largest portion of GDP, though exports of LNG (liquefied
natural gas) are expected to fall as supply is diverted to the
domestic market.
Furthermore Sumatra has signed an agreement to construct a
250km railway line to connect two mines in Tanjung Enim to
Tanjung Carat port. Exports up to 35mt (million tonnes) should
start in 2014 rising to a maximum of 60mt.
Another deal in manufactured goods is in the pipeline for car
maker Hyundai of South Korea, to build a factory for internal
delivery and exports to other ASEAN countries.
The government has announced an economic corridor to
divide the country into six different zones with connections
from the five main Islands to Java, to improve economic growth.
Newly introduced bank regulations requiring commercial
banks to maintain a loan to deposit ratio of not less than 78%
will increase borrowing costs and higher food prices due to food
shortages in the region, and the volcanic explosion and tsunami
towards the end of 2010, will lower its end-of-year financial
position somewhat.
Malaysia
Malaysia’s oil reserves are declining and on current usage would
run out within ten years, causing a loss of 6% of GDP at current
rates. This would be exacerbated by the need to import oil.
The government has the choice of starting to import some oil
in 2011 to maintain exports, but within about ten years it will
have to fully import all its needs. This will cause a considerable
increase in its current rate of budget deficit, if no remedial
action is taken.
At the same time the government has announced a ten-year
economic development plan to upgrade the country’s
performance at a cost estimated at US$444bn.
GDP for 2010 as shown in table 2 has resulted from a sharp
rise in external demand; but the table also shows a sharp
reduction in GDP due to falling demand from other Asian
countries, particularly China, as well as the G3.
The Philippines
Total exports in 2009 were only around 30% of GDP, compared
to Malaysia’s 95% and Thailand’s 70%. This is because of
remittance inflows from overseas. In July they increased by over
8% to US 1.62bn. Total remittances in the first eight months of
2010 were $11.3bn and this is expected to increase as the
Philippines overseas workers have been finding other countries
e.g. Canada, Japan and Singapore that will employ them knowing
that the US, where the majority of them normally go, could see a
slowing demand.
Exports of manufactured goods also increased by some 35%
year on year in July which was double that of imports, and this is
expected to continue through 2010. Hence the rapid recovery
shown in table 2.
The new President Benigno Aquino 3 has acted quite quickly
to reduce corruption and increase investment activity, which is
positive for economic continuance and, it is hoped, improvement.
Singapore
Singapore recovery from the recession was ‘V’ shaped, helped by
a recovery in transshipments and growth in its exports,
particularly in pharmaceuticals, but the latter is somewhat
volatile and may fall over next year.
Singapore’s entry into the gaming industry with two casinos
in early 2010 has rejuvenated the tourist industry, above
expectations. So although global trade is expected to decline in
2011 due to austerity measures introduced in the G3, China,
Japan and other parts of the world affected by the recession,
Singapore’s GDP in 2011 will still be very positive.
Thailand
Thailand is going through a difficult period, following the closing
down of large sections of the city by the Red Shirts from March
until May, with considerable loss of life as well as tourism and
the economy.
The Red Shirts seem to have legitimate grievances: the rapidly
increasing gap between rich and poor, corruption in government,
and government employees, with large numbers of the poor
barely existing above the poverty line. The government’s
promises of reconciliation have not been effective to date, with
handouts rather than reform, so further instability seems likely.
However the middle and upper classes are doing well.
Exports are up, foreign investment and currency inflows are
increasing, and the country has adequate foreign reserves. There
is concern over the currency manipulations by the US, China and
other countries in order to maintain their exports, as this had
increased the value of the local currency (Baht), thereby
reducing the value of Thailand’s exports. As a result the Central
Bank has raised taxes against incoming monies.
Thailand’s two bulk commodity shipping companies have
weathered the financial storm, but with existing low freight rates
expected to continue into 2011 (the Baltic Index reached a
14-month low last July), and plenty of new ships on the market,
they are trying to diversify but have managed to remain in profit.
Thailand’s manufactured exports in 2011 could show a
decline and the recent severe flooding in the agricultural areas
means that exports of rice, palm oil , cassava etc will also fall.
Vietnam
Vietnam has devalued the dong 3 times in the last 12 months,
most recently in August, as a counter to inflationary pressures
mainly due to food price increases and weak exports. It was
caught with massive debts and current account deficits when the
recession struck. However, continuing high FDI (foreign direct
investment) from other Asian countries and a large domestic
demand has kept it going.
Most of the FDI has been for investment in manufacturing
goods, which are not in much demand by the G3 in the current
situation. At the same time agricultural goods have seen a falling
export market as growth has fallen over the last decade, due to
outdated methodology. For example it is second only to
Thailand in the export of rice, but its quality is low grade, and
therefore commands only low prices.
The government has decided to introduce a major
programme to modernize its agricultural sector. It opened the
first high-tech agricultural park in April this year, with five more
to be completed by 2015, with a view to attracting foreign
investment and the latest equipment to increase top level grades
with much higher yields. This will provide a more balanced
export field with oil and manufactured goods.
A further challenge is that hydroelectric power plants provide
around 35% of the country’s needs, but because of the ongoing
drought some 17 hydropower reservoirs are now dry, causing
massive power shortages. At the same time real GDP for 2010
and 2011 are strong but underlying that is a negative current
account of around 9% of GDP and low foreign reserves.
Sources: UN, Economist, World Bank, IMF, IHT and the Bangkok Post)