Asean+3 stimuli
WHAT ARE WE TO DO
By TAN SRI LIN SEE-YAN
AT the recent Asian Economic Forum in Jakarta, I left with the impression that there is sufficient political will in the region to help itself; that firm leadership has since emerged to prevent a fait accompli. The way to go is to stay the pressure to stimulate, to reinvigorate the animal spirits, and to do “more rather than less” and to unshackle our entrepreneurs as fear overcomes greed. This is not easy given the gloom and constraints.
What’s happening today clearly debunks decoupling as a myth. Consider global consumer spending. In 2007, US private spending was about US$10 trillion and Euro-zone, nearly US$9 trillion. In Japan, the world’s second largest economy, private consumption was just about US$2 trillion and China, struggling to reach US$1 trillion.
Consumers in Japan and China combined spend less than one-sixth of what their counterparts do in the United States and Europe. So, no matter how rapidly Chinese consumers raise their spending, they can’t significantly offset the “loss” in the western world.
Look at it another way. Over the past 30 years, Asia has perfected its export machine such that by 2007, exports reached close to 50% of GDP, compared with only 17% in 1980. This business model has been so successful in bringing prosperity and rapidly rising incomes in Asia that private consumption as a percentage of GDP fell from 65% in 1980 to just above 45% in 2007. Much of this has to do with the US consumption binge.
Since World War II, US consumers had significantly improved their living standards; private spending averaged 67% share of GDP during 1975-2000, having risen steadily from 61% in 1960. Because of easy money, they consumed 72% of their gross earnings by 2007!
With the onset of recession at the end of 2007 and its aftermath, US consumption began to collapse due to the sharp falls in income and wealth.
With capital loss alone estimated at US$11 trillion in 2007, a permanent consumption fall of 3% of GDP can be expected in the United States. The US consumer at risk today has become a source of concern for Asia’s underlying recovery.
Japan
In the Asean+3 region (plus China, Japan and South Korea), China and South Korea are among the most aggressive “stimulators”. Ironically, it is Japan that really needs this, having logged its worst performance in 35 years in 4Q08, contracting at an annualised rate of 12%. For 2009, the World Bank expects GDP in Japan to contract by as much as 5.5%, regarded as not “off the mark” by the government (OECD says, by -6.5%).
After being in “deep-sleep” for 10 years following the collapse of the stock market and real estate prices in early 1990s, Japan is experiencing “stimulation fatigue”.
With public debt at 180% of GDP, Japan finds itself increasingly constrained from issuing more government debt to finance further fiscal stimulus measures.
It now has little choice (with the lost decade still a sore point) but to inject fresh stimulus. The expectation is for a new package equivalent to about 3% of GDP, doubling in aggregate the total spending to about 5% of GDP.
Indeed, this will be Japan’s worst since WWII. As far as stimulus goes, Japan is a veteran. Even prior to its problems of the 1990s, public works spending was twice as large in Japan as a share of GDP (6%) than in the US.
This was raised in the mid-1990s to a high of 8%, with Japan finding less worthwhile projects to spend on (bridges to nowhere actually originated here!), hence, deep Japanese distrust of fiscal spending and the ensuing rising public debt.
For the new stimulus, I will not be surprised if most spending on infrastructure is financed by the issue of revenue bonds, utilising private-sector funding.
Typically, the government bears a portion of the construction costs with the remainder financed by private initiative through issue of revenue bonds. Interest and principal will be repaid from revenue generated by the project. It is very much like Malaysia’s private finance initiative (PFI) involving public projects.
China
In East Asia, China is doubtless in the best position to withstand the impact of global recession. It has been painful and unemployment is a big worry. China’s social infrastructure is not sufficiently mature to absorb the shocks. Business and consumer sentiments in China continue to plunge. The World Bank last week forecast China will expand 6.5% this year (down from earlier estimates of 7.5% in the face of 9% growth in 2008).
It is expected to bottom out in the second half of this year. As the vast stimulus package kicks in, China is expected to recover to grow about 7.5% in 2010. There are downside risks here as the outlook still weighs heavily on the success of the United States and Europe and Japan stimuli.
Scholars and observers from China are generally optimistic about the outlook because: (i) the 4Q08 contraction of 6.8% reflected sharp inventory destocking following the collapse of global commodity markets and exports; (ii) the vast stimulus package (12% of GDP), not counting additional stimulative spending by local government (estimated to have the potential to double that of the central stimulus), should be able to generate visible multipliers especially in late-2009 and certainly, 2010; (iii) its fiscal position is strong; and (iv) the banking sector is relatively sound and healthy.
In short, China’s determined stimulus has the capability to boost domestic demand, offset impact of falling exports, create new jobs, and over the next 18 months, generate a sustainable recovery of 7.5%-8% by end 2010.
Continuing growth will enable the government to strengthen its social safety net and broaden access to health care and education.
But there are concerns. Critics have called the stimulus “legless” in that it contains great potential, but its epic scale and scope make it difficult to effectively implement at the grassroots.
That is, job creation will be found wanting and the risks of crowding out private initiative (especially SMEs) are high. Second, continuing reliance on the investment-driven growth model would further favour industrial expansion to the detriment of the less buoyant services sector which badly needs attention.
Third, the needed structural adjustment away from excessive reliance on exports may likely be delayed. Fourth, the virtual size of the stimulus makes it difficult in the short run to generate the needed stream of worthwhile projects flowing at a sufficiently high rate, without lowering the efficiency of investment. Sub-prime projects will raise the risk of non-performance.
Finally, the stimulus risks worsen the steady build-up of excess capacity especially in manufacturing. Already, China’s investment share of GDP had risen to 43%.
At their peak, Japan and South Korea’s industrial investment averaged less than 40%. China has been investing more since early 2000 as a share of the economy than Japan and South Korea did even at the height of their industrialisation.
With the export crash, significant excess capacity has now emerged in China, so much so that by the year 2010 (even without the stimulus), the output gap will have reached 4% of GDP.
The vast stimulus will significantly widen this gap which raises serious problems of waste, oversupply and low returns. As I see it, China’s drive to recovery is still on “1st gear”.
Success will centre on its ability to significantly expand the services sector and get the Chinese to consume more to improve living standards. But, there are already indications that China is instead saving more. This dilemma cannot be easily resolved.
China needs to build a large domestic market. Its future stability depends on it. The drastic shrinkage of export markets has exerted enormous pressure on the government to redirect priority and incentives to strengthen domestic demand.
Friends in Shanghai and Beijing tell me that entrepreneurs focusing on meeting and building demand in the expanding domestic market are flourishing. A good number who are recently established now expect this year to be “their best ever!”. I believe them.
South Korea
The impact of the global recession on South Korea has been severe: exports now account for over two thirds of its near US$1 trillion GDP, up from one third at its last recession in 1998. Major markets are the United States and Euro-zone (with a combined share of 25%) and China (22%).
The core problem today is lack of aggregate demand. The Korean economy had already been slowing down since 2006. By the 4Q08, growth fell 4.5% (qoq), the worst since the Asian currency crisis.
Both private consumption and investment recorded negative growth, with a current payments deficit driven mainly by falling exports. Nevertheless, for 2008 as a whole, there was still growth of 2%-2.5%.
Prospects for 2009 remain poor – recent consensus points to a 4%-4.5% contraction. Both consumer and investor sentiment are weak and exports look bleak. Rising unemployment is weighing the nation down, and help from its weakened currency will be limited.
Korea still has much capacity to further stimulate (existing package is about 2.5% of GDP), and serious steps have been taken to keep credit flowing and to ensure its banking system is adequately pro-growth.
Success of East Asia’s fiscal stimuli as well as US leadership in aggressively pushing growth and job creation are crucial to South Korea’s recovery efforts. Unfortunately, its export driven growth model is too entrenched to be readily restructured.
The end game in South Korea will surely become more painful – more jobs will be lost and social unrest may delay any steady turnaround.
What are we to do
My worries concern beyond Asia. From my vantage point in Asia, the Euro-zone is somewhat in denial; its reluctance to respond firmly and decisively to the financial meltdown is astonishing. It is important for Asia that both the US and Europe act boldly and in sync to stimulate and combat a deepening global recession.
Asean+3 has reached a crucial turning point. The export-drive model has outlived its usefulness. East Asia badly needs a vibrant domestic engine to reduce excessive dependence on the vulnerable export market.
It has the capacity and resources (human and financial) to do this and it is in ITS collective interest to get this done with some haste through greater regional co-operation.
Indeed, the risks of doing less are far higher than the risks of doing more. East Asia badly needs a big push. The time is now.
·A former banker, Dr Lin is a Harvard educated economist who now spends time promoting the public interest. Feedback is welcome; email:
starbizweek@thestar.com.my.
WHAT ARE WE TO DO
By TAN SRI LIN SEE-YAN
AT the recent Asian Economic Forum in Jakarta, I left with the impression that there is sufficient political will in the region to help itself; that firm leadership has since emerged to prevent a fait accompli. The way to go is to stay the pressure to stimulate, to reinvigorate the animal spirits, and to do “more rather than less” and to unshackle our entrepreneurs as fear overcomes greed. This is not easy given the gloom and constraints.
What’s happening today clearly debunks decoupling as a myth. Consider global consumer spending. In 2007, US private spending was about US$10 trillion and Euro-zone, nearly US$9 trillion. In Japan, the world’s second largest economy, private consumption was just about US$2 trillion and China, struggling to reach US$1 trillion.
Consumers in Japan and China combined spend less than one-sixth of what their counterparts do in the United States and Europe. So, no matter how rapidly Chinese consumers raise their spending, they can’t significantly offset the “loss” in the western world.
Look at it another way. Over the past 30 years, Asia has perfected its export machine such that by 2007, exports reached close to 50% of GDP, compared with only 17% in 1980. This business model has been so successful in bringing prosperity and rapidly rising incomes in Asia that private consumption as a percentage of GDP fell from 65% in 1980 to just above 45% in 2007. Much of this has to do with the US consumption binge.
Since World War II, US consumers had significantly improved their living standards; private spending averaged 67% share of GDP during 1975-2000, having risen steadily from 61% in 1960. Because of easy money, they consumed 72% of their gross earnings by 2007!
With the onset of recession at the end of 2007 and its aftermath, US consumption began to collapse due to the sharp falls in income and wealth.
With capital loss alone estimated at US$11 trillion in 2007, a permanent consumption fall of 3% of GDP can be expected in the United States. The US consumer at risk today has become a source of concern for Asia’s underlying recovery.
Japan
In the Asean+3 region (plus China, Japan and South Korea), China and South Korea are among the most aggressive “stimulators”. Ironically, it is Japan that really needs this, having logged its worst performance in 35 years in 4Q08, contracting at an annualised rate of 12%. For 2009, the World Bank expects GDP in Japan to contract by as much as 5.5%, regarded as not “off the mark” by the government (OECD says, by -6.5%).
After being in “deep-sleep” for 10 years following the collapse of the stock market and real estate prices in early 1990s, Japan is experiencing “stimulation fatigue”.
With public debt at 180% of GDP, Japan finds itself increasingly constrained from issuing more government debt to finance further fiscal stimulus measures.
It now has little choice (with the lost decade still a sore point) but to inject fresh stimulus. The expectation is for a new package equivalent to about 3% of GDP, doubling in aggregate the total spending to about 5% of GDP.
Indeed, this will be Japan’s worst since WWII. As far as stimulus goes, Japan is a veteran. Even prior to its problems of the 1990s, public works spending was twice as large in Japan as a share of GDP (6%) than in the US.
This was raised in the mid-1990s to a high of 8%, with Japan finding less worthwhile projects to spend on (bridges to nowhere actually originated here!), hence, deep Japanese distrust of fiscal spending and the ensuing rising public debt.
For the new stimulus, I will not be surprised if most spending on infrastructure is financed by the issue of revenue bonds, utilising private-sector funding.
Typically, the government bears a portion of the construction costs with the remainder financed by private initiative through issue of revenue bonds. Interest and principal will be repaid from revenue generated by the project. It is very much like Malaysia’s private finance initiative (PFI) involving public projects.
China
In East Asia, China is doubtless in the best position to withstand the impact of global recession. It has been painful and unemployment is a big worry. China’s social infrastructure is not sufficiently mature to absorb the shocks. Business and consumer sentiments in China continue to plunge. The World Bank last week forecast China will expand 6.5% this year (down from earlier estimates of 7.5% in the face of 9% growth in 2008).
It is expected to bottom out in the second half of this year. As the vast stimulus package kicks in, China is expected to recover to grow about 7.5% in 2010. There are downside risks here as the outlook still weighs heavily on the success of the United States and Europe and Japan stimuli.
Scholars and observers from China are generally optimistic about the outlook because: (i) the 4Q08 contraction of 6.8% reflected sharp inventory destocking following the collapse of global commodity markets and exports; (ii) the vast stimulus package (12% of GDP), not counting additional stimulative spending by local government (estimated to have the potential to double that of the central stimulus), should be able to generate visible multipliers especially in late-2009 and certainly, 2010; (iii) its fiscal position is strong; and (iv) the banking sector is relatively sound and healthy.
In short, China’s determined stimulus has the capability to boost domestic demand, offset impact of falling exports, create new jobs, and over the next 18 months, generate a sustainable recovery of 7.5%-8% by end 2010.
Continuing growth will enable the government to strengthen its social safety net and broaden access to health care and education.
But there are concerns. Critics have called the stimulus “legless” in that it contains great potential, but its epic scale and scope make it difficult to effectively implement at the grassroots.
That is, job creation will be found wanting and the risks of crowding out private initiative (especially SMEs) are high. Second, continuing reliance on the investment-driven growth model would further favour industrial expansion to the detriment of the less buoyant services sector which badly needs attention.
Third, the needed structural adjustment away from excessive reliance on exports may likely be delayed. Fourth, the virtual size of the stimulus makes it difficult in the short run to generate the needed stream of worthwhile projects flowing at a sufficiently high rate, without lowering the efficiency of investment. Sub-prime projects will raise the risk of non-performance.
Finally, the stimulus risks worsen the steady build-up of excess capacity especially in manufacturing. Already, China’s investment share of GDP had risen to 43%.
At their peak, Japan and South Korea’s industrial investment averaged less than 40%. China has been investing more since early 2000 as a share of the economy than Japan and South Korea did even at the height of their industrialisation.
With the export crash, significant excess capacity has now emerged in China, so much so that by the year 2010 (even without the stimulus), the output gap will have reached 4% of GDP.
The vast stimulus will significantly widen this gap which raises serious problems of waste, oversupply and low returns. As I see it, China’s drive to recovery is still on “1st gear”.
Success will centre on its ability to significantly expand the services sector and get the Chinese to consume more to improve living standards. But, there are already indications that China is instead saving more. This dilemma cannot be easily resolved.
China needs to build a large domestic market. Its future stability depends on it. The drastic shrinkage of export markets has exerted enormous pressure on the government to redirect priority and incentives to strengthen domestic demand.
Friends in Shanghai and Beijing tell me that entrepreneurs focusing on meeting and building demand in the expanding domestic market are flourishing. A good number who are recently established now expect this year to be “their best ever!”. I believe them.
South Korea
The impact of the global recession on South Korea has been severe: exports now account for over two thirds of its near US$1 trillion GDP, up from one third at its last recession in 1998. Major markets are the United States and Euro-zone (with a combined share of 25%) and China (22%).
The core problem today is lack of aggregate demand. The Korean economy had already been slowing down since 2006. By the 4Q08, growth fell 4.5% (qoq), the worst since the Asian currency crisis.
Both private consumption and investment recorded negative growth, with a current payments deficit driven mainly by falling exports. Nevertheless, for 2008 as a whole, there was still growth of 2%-2.5%.
Prospects for 2009 remain poor – recent consensus points to a 4%-4.5% contraction. Both consumer and investor sentiment are weak and exports look bleak. Rising unemployment is weighing the nation down, and help from its weakened currency will be limited.
Korea still has much capacity to further stimulate (existing package is about 2.5% of GDP), and serious steps have been taken to keep credit flowing and to ensure its banking system is adequately pro-growth.
Success of East Asia’s fiscal stimuli as well as US leadership in aggressively pushing growth and job creation are crucial to South Korea’s recovery efforts. Unfortunately, its export driven growth model is too entrenched to be readily restructured.
The end game in South Korea will surely become more painful – more jobs will be lost and social unrest may delay any steady turnaround.
What are we to do
My worries concern beyond Asia. From my vantage point in Asia, the Euro-zone is somewhat in denial; its reluctance to respond firmly and decisively to the financial meltdown is astonishing. It is important for Asia that both the US and Europe act boldly and in sync to stimulate and combat a deepening global recession.
Asean+3 has reached a crucial turning point. The export-drive model has outlived its usefulness. East Asia badly needs a vibrant domestic engine to reduce excessive dependence on the vulnerable export market.
It has the capacity and resources (human and financial) to do this and it is in ITS collective interest to get this done with some haste through greater regional co-operation.
Indeed, the risks of doing less are far higher than the risks of doing more. East Asia badly needs a big push. The time is now.
·A former banker, Dr Lin is a Harvard educated economist who now spends time promoting the public interest. Feedback is welcome; email:
starbizweek@thestar.com.my.