By Dinesh Weerakkody
Global equities have in the recent days fallen due to chain-fear spread over from the euro debt crisis. Investors have once more moved back into buying US dollar as a safe haven while the euro has tumbled to a four month low. Market attention is now focused on Greece forming a new government through coming mid June while the European Central Bank (ECB) have according to news papers stopped lending to some Greek banks. Spain is also being monitored for ‘cleaning up’ within the national banks. The inflation rate in the 17-nation euro area dropped to 2.6 per cent in April compared with 2.7 per cent the previous month and EU exports fell 0.9 per cent in March from the previous month’s 2.2 per cent gain. The ECB is set to halt further lending to Greece while waiting for its internal re-structuring. The new caretaker government for Greece would most likely hold an election in June and thereafter decide the fate of Greece as a continual member of the Eurozone. While the EU economies struggle to design new austerity measures to meet EU demands, the economic contagion continues to spread outside the Eurozone. However unlike in the past the source of crisis is from outside the Asian region. 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.
Global credit crunch
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, then 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 to cover external short-term debt, some of the smaller economies could run the risk of being overly dependent on foreign sources for their borrowing.
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 East incremental impacts must be taken into account from now on when developing countries devise policy responses to these emerging economic challenges post 2012.
Unlike in the West in most Asian economies the state will remain the single most important organizing unit of political economic, and security affairs, however many Asian Leaders will confront challenges on many fronts to promote 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.
(The writer has held senior positions in both the public and private sectors)