Unlike before the Asian region is better prepared for currency and balance of payment crises than it was a decade ago, having instituted wide ranging reforms, improved current account balances and built up a protective buffer of foreign exchange reserves. Notwithstanding all these measures, high levels of financial, trade and investment integration with the Western economies leave no country immune to the debt woes in the West. Therefore, the slowdown in the West arising from the European sovereign debt crisis will exert significant downward pressures on growth in the region with social consequences that are still unfolding.
There are a number of potential and economic vulnerabilities that raise serious concerns and need to be tracked carefully by the emerging economies in Asia.
The macroeconomic difficulties for most economies of the West, once again, will put pressure on the movement of short-term portfolio capital. During times of generalized international risk aversion, short-term portfolio capital exits developing countries. Hence efforts aimed at preventing excessive currency depreciation reduce the availability of reserves to cover external short-term debt repayments and current account deficits. Another potential vulnerability stems from the financial services sector although most Asian economies possess adequate reserve cover for external short-term debt at a macro level. However in some cases some of the smaller economies may run the risk of being overly dependent on foreign sources for their borrowing. The global credit crunch may result in governments coming under increased pressure in continuing to fund their development activities at high commercial rates.
Trade and Investments
A third source of vulnerability is the region’s dependence on trade and investments with developed countries. Even though regional trade has been growing impressively, it generally consists of raw materials, parts and components in the manufacturing sector. To a very large extent these exports are linked to demand for final consumer products in developed countries. The double dip recession in many developed countries will therefore before long find its way back to the region through a huge drop in trade, investments and tourism. The increasing spill-over effects of the Western financial crisis into the real sectors and its evolution into an economic recession, combined with long term challenges posed by climate change, and huge volatilities in food and fuel prices have all converged to pose a grave challenge for the Asian region. Due to the convergence of the political and economic crises in the West, Middle Eastern incremental impacts must be taken into account from now on when developing countries devise policy responses to these emerging economic challenges post 2012.
Role of the State
In most Asian economies the state will remain the single most important organizing unit of political, economic, and security affairs but will confront fundamental tests of effective governance. The first will be to benefit from, while coping with, several facets of globalization. The second will be to deal with increasingly vocal and organized publics. The elements of globalization—greater and freer flow of information, capital, goods, services, people, and the diffusion of power to non state actors of all kinds—will challenge the authority of virtually all governments. At the same time, globalization will create demands for increased international cooperation on transnational issues. All states will confront popular demands for greater participation in politics and attention to civil rights—pressures that will encourage greater democratization and transparency. This provides a unique opportunity for all emerging economies in Asia to reorient economic growth towards a long-term development path that is inclusive and politically sustainable. ( The writer is a former Chairman of the Employees Trust Fund Board of Sri Lanka)
Comments - 1
sangaralingham Thursday, 24 November 2011 08:31 PM
price to pay fall on future generation. too many lurching every country with no productivity hard work thrift will cause economic collapse then write off all deby become slaves to lenders
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