As recently as February, some economists were confident that
much of Asia—in particular China and India –—would
be able to avoid a deep recession even amid the current breakdown
of the global financial system and the resultant collapse of
international trade and investment. A rosy picture was painted
of a region that would fare much better than during the 1997
Asian financial crisis.
Asian Development Bank projections for 2009 show a 3.4 percent
decline of GDP in Asia (outside of Japan), down from 6.3 percent
growth in 2008. By contrast, IMF data show that even during the
peak of the 1997 financial crisis Asia continued to grow by around
3.7 percent!We need to discard the rosy picture and address explicitly
the potentially game-changing impact of the crisis.
An important characteristic of the current crisis is that the
more export-oriented a country is, the more vulnerable it is.
Korea—a leading exporter of memory chips, mobile handsets,
cars and ships—has been hit hard by the global downturn.
In February, Korean exports dropped as much as 26 percent from
a year ago and imports plunged 40 percent, dragging down industrial
production and investment, and increasing unemployment. For Taiwan,
another prime example of Asia’s export-oriented “global
factory” model, exports declined by 42 percent in January
compared with the same month in 2008, the second straight month
of such a steep decline. And what about China, a country whose
rise as the dominant global factory has catapulted it over the
last few years into the exclusive club of global economic powers?
The World Bank projects a 6.5 percent growth this year. While
this looks like a dream figure from a U.S. perspective, from
a Chinese perspective it actually represents a quite dramatic
decline from the 9 percent growth in 2008. Most importantly,
a 6.5 percent growth may be insufficient to cope with China’s
Of particular concern to the Chinese government is rising unemployment
for migrant workers and university graduates. The government
estimates that 20 million migrant workers lost their jobs or
were unable to find employment in 2008, and the picture may grow
worse in 2009. China’s Academy of Social Sciences reports
that 7.8 million graduates will search for jobs this year.
Of these, up to 40 percent —around three million—will
not find jobs. Pieter Bottelier, a respected China expert, projects
that, overall, 48 million Chinese may be looking for jobs this
year, while the number of newly created jobs is likely to be
less than seven million.
Take China. Driven by a rapidly expanding global economy, its
dependence on international trade has doubled since 1998, from
30 percent of GDP to as high as 60 percent in 2008. But this
year, both international trade and investment are falling off
the cliff. As the global crisis deepens and hits demand in the
U.S. and Europe as well as in emerging economies, Chinese exports
have suffered the biggest slide in a decade—26 percent
in February—while its imports fell almost 24 percent.
Coping with these fundamental external disruptions will require
profound adjustments. Hence the real question is, both for China
and for Asia at large: Will governments be able to use the crisis
as a broad catalyst for change? There is much talk that Asia
needs to upgrade its economies through innovation. Such a shift
in strategy is necessary to address the region’s vast needs
in food, shelter, medical services, and infrastructure, and to
counter its environmental degradation.
But as of now, Asia is still ill-prepared to mobilize resources
for economic recovery. As a share of GDP, the stimulus packages
announced in much of Asia are considerably smaller than in the
U.S. (8 percent), Japan (6 percent) and Germany (3 percent)—with
two exceptions: Singapore (3.2 percent) and China (7.1 percent).
What sets China apart from its Asian neighbors is that high fiscal
reserves and a very low level of debt provide ample resources
to continue priming the economy.
China is now big enough to shape things, both in Asia and globally.
But a relatively quick recovery could also undermine such efforts,
since so many vested interests (in state-owned enterprises and
the national security apparatus) are pushing for the status quo.
For China, the barriers remain stacked high against attempts
to use the crisis as a catalyst for change. For instance, the
freefall in global demand, combined with widespread excess capacity,
is giving rise to price deflation and reduced wages, which in
turn will constrain China’s own consumption. This could
well strengthen the hand of those in China’s leadership
who favor depreciation in China’s currency exchange rate
relative to countries with a less flexible labor market, which
includes the U.S. One option may be to peg the Yuan to the dollar
to maintain parity, in order to conserve China’s more than
$1 trillion investment in U.S. treasuries.
Let’s hope that leaders in Asia as well as in the U.S.,
Japan, and the E.U. recognize the urgent need for new strategies
and new economic growth models before this happens.