The Impoverished “Asian Century”

Chandran Nair

2011-12-06




HONG KONG – By 2050, Asia will have more than five billion people, while the European Union’s share of the global population will decline from 9% to 5%. Annual economic growth in Asia over the past 30 years has averaged 5%. Its GDP is projected to increase from $30 trillion to about $230 trillion by 2050. The balance of power in the twenty-first century is shifting – in social, economic, and, arguably, political terms – from west to east.


Western anxieties about a loomingAsian centurystem largely from the precedent of twentieth-century geopolitics, in which the West dominated less-developed nations. But this dynamic is outdated, and Asia would suffer as much as the West from any attempt to emulate the British and American empires of the nineteenth and twentieth centuries.


As Asian economic growth has increased, consumption in the region has also risen. Multinational companies and Western countries – both of which stand to benefit greatly from Asia’s increasing consumption – have encouraged Asians to aspire to a Western standard of living, with its high energy usage, electronic toys, and meat-heavy diet.


Asian governments seem willing partners in this one-dimensional approach to development, and are eager to lead global economic growth. Yet it is neither desirable nor possible for Asians to consume in the way that Westerners do, and Asian governments should face up to this reality.


In previous centuries, Western economic growth was characterized by a comparatively insignificant minority having unfettered access to resources, and was thus built on fueling consumption. This was, after all, the idea behind colonialism, which succeeded economically by underpricing resources or even obtaining them for free.


But the planet simply cannot support five billion Asians consuming like Westerners. The earth’s regenerative capacity was exceeded more than 30 years ago, and we now use 30% more resources than the planet can sustain. Although we know this to be the case, the vast majority of Western economists and institutions continue to encourage China and India to consume more.


Asian governments must reject this trend, but, having been intellectually subservient for so long, it is not clear that they will. Western governments, for their part, must stop being intellectually dishonest. Indeed, they must openly acknowledge the impossibility of supporting demands for ever-higher material consumption in Asia without irreversibly changing our planet’s climate and resource pool. Trade relations are far less important than establishing a dialogue between the West and Asia that addresses how to live within limits.


For example, Western leaders concerned about climate change must understand that economic instruments like emissions trading are not a panacea. For Asia, resource management must be at the center of policymaking, which may include Draconian regulations, and even bans. Otherwise, resource shortages will push up commodity prices and create crises in food, water, fisheries, forests, land use, and housing, thereby leading to greater social injustice.


The West must help Asia to challenge the idea that consumption-led growth is the only solution, or even a solution at all. And Asia must adopt three core principles to avert environmental and social crises. First, economic activity must be secondary to maintaining resources. Second, Asian governments must take action to re-price resources and focus on increasing their productivity. Third, Asian states must recast their central role as being to defend our collective welfare by protecting natural capital and the environment.


All of this implies that Asian governments will need to play a far greater role than officials in Europe or America in managing both the macro-economy and personal consumption choices, which will require very sensitive political choices regarding individual rights, as well as policies that powerful business interests many of them Western – will resist.


Asian governments will sometimes need to set strict limits on resource use – and have the tools to ensure that society respects these limits. They should begin, for example, by stressing that car ownership is not a human right. The debate about rights must emphasize constraints, not the utopian definitions of Western politicians.


These policy options fly in the face of Western liberal-democratic orthodoxy. But Western policymakers should not react negatively to these sorts of policy choices made by Asian governments, nor misconstrue them as anti-capitalist or anti-democratic.


The West must realize that its consumption-led economic system has exhausted the world’s resources, and that it is not a viable option for most Asian countries, whose governments must employ different political methods to create more equitable societies.


Chandran Nair is the founder of the Global Institute For Tomorrow (GIFT) and Co-Founder and Chair of Avantage Ventures, a social investment advisory firm based in Hong Kong. He is the author of Consumptionomics: Asia’s Role in Reshaping Capitalism and Saving the Planet.



December 8, 2011 5:19 pm

IMF must play its part in any euro solution

By Lawrence Summers



European leaders will meet on Thursday and Friday for yet another historicsummit at which the fate of Europe is said to hang in the balance. Yet it is clear that this will not be the last meeting convened to deal with the financial crisis.



If public previews from France and Germany are a guide, there will be commitments to assuring fiscal discipline in Europe and establishing common crisis resolution mechanisms. There will also be much celebration of commitments made by Italy, and a strong political reaffirmation of the permanence of the monetary union. All of this is necessary and desirable, but the world economy will remain on edge.



Given that Europe is the largest single component of the global economy, the rest of the world has a stake in helping to avoid major financial accidents. It also has a stake in aiding continued growth in Europe and ensuring that the European financial system supports investment around the world – particularly as cross-border European bank lending dwarfs that of banks from any other region.



Now is also a historic juncture for the International Monetary Fund. The focus of the policy response to the crisis must now shift from Brussels and Frankfurt to the IMF’s boardroom.



From the problems of the UK and Italy in the 1970s, through the Latin American debt crisis of the 1980s to the Mexican, Asian and Russian financial crises of the 1990s, the IMF has operated by twinning the provision of liquidity with strong requirements that those involved do what is necessary to restore their financial positions to sustainability.



There is ample room for debate about the precise policy choices the fund has made in the past. But, the IMF has consistently stood for the proposition that the laws of economics do not and will not give way to political considerations. At key points the IMF has offered prescriptions, not just for countries in need of borrowed funds, but also for those whose success is systemically important for the global economy.


Christine Lagarde, the head of the IMF, highlighted the seriousness of problems in Europe to members of the international financial community assembled in Jackson Hole in August. She pointed to capital shortfalls in the European banking system and the need for adjustment to be carried on in ways that were consistent with continuing growth. Now the IMF needs to speak and act on several fronts.



First, it is essential that Italy’s adjustment be carried out within the context of an IMF programme. After European authorities emphasised that Greece was fully solvent and able to service all debts in full, it is unlikely that they, acting alone, have the capacity to reassure markets. Moreover, there are profound intra-European political problems if northern Europe either does or does not impose conditions on Italy. It would be much better to outsource those traumas to the IMF.



Second, as the IMF deals with individual European countries, it needs to recognise more than it did in the past that they are embedded within a monetary system and community of nations with an increasing number of common institutions. It would be inconceivable that the IMF would lend money to a country whose central bank was not committed to an appropriate monetary policy, or that was ignoring contingent liabilities in the banking system. IMF support for any European country should be premised on understandings with the European Central Bank that controls that country’s monetary policy.



Third, when engaging with individual members of a monetary union, the IMF cannot assess the prospects of one member of the monetary union in isolation. If some countries are to enjoy reduced trade deficits, others must face reduced surpluses. If there is no clear path to reduced surpluses there is no clear path to reduced deficits and hence to solvency. More generally, the sustainability of any programme must be assessed in the context of realistic projections of the economic environment. The IMF must be careful not to approve adjustment programmes that are not realistic.


Fourth, the IMF has a responsibility to speak clearly about threats to the global economy. Even if debt spreads in Europe fall and modest growth is reattained, the global economy is threatened by the large-scale deleveraging of European banks. An improvement in the fiscal position of sovereigns will help but this is insufficient. If banks are not recapitalised on a substantial scale soon, there will be a large contraction of credit in the global economy.


After the summit attention will and should shift to the IMF. It must act boldly but no one should ever forget a fundamental lesson of all past crises. The international community can provide support but a nation or a region’s prospect for prosperity depends ultimately on its own efforts.


The writer is Charles W. Eliot university professor at Harvard and was Treasury secretary under President Bill Clinton

Copyright The Financial Times Limited 2011


Is the European Dream Over?

Ian Buruma

2011-12-08




NEW YORK – Were the Euroskeptics right after all? Was the dream of a unified Europeinspired by fears of another European war, and sustained by the idealistic hope that nation-states were obsolete and would give way to good Europeans – a utopian dead end?



On the surface, Europe’s current crisis, which some people predict will tear apart the European Union, is financial. Jacques Delors, one of the architects of the euro, now claims that his idea for a single currency was good, but that its “execution” was flawed, because the weaker countries were allowed to borrow too much.


But, fundamentally, the crisis is political. When sovereign states have their own currencies, citizens are willing to see their tax money go to the weakest regions. That is an expression of national solidarity, a sense that a country’s citizens belong together and are prepared, in a crisis, to sacrifice their own interests for the collective good.


Even in nation-states, this is not always self-evident. Many northern Italians fail to see why they should pay for the poorer south. Affluent Flemings in Belgium resent having to support unemployed Walloons. Still, on the whole, just as citizens of democratic states tolerate the government that won the last election, they usually accept economic solidarity as a part of nationhood.


Since the EU is neither a nation-state nor a democracy, there is noEuropean people” to see the EU through hard times. Rich Germans and Dutch do not want to pay for the economic mess in which the Greeks, Portuguese, or Spanish now find themselves.



Instead of showing solidarity, they moralize, as though all of the problems in Mediterranean Europe were the result of native laziness or its citizens’ corrupt nature. As a result, the moralizers risk bringing the common roof down on Europe’s head, and confronting the nationalist dangers that the EU was created to prevent.


Europe must be fixed politically as much as financially. It is a cliché, but nonetheless true, that the EU suffers from a “democratic deficit.” The problem is that democracy has only ever worked within nation-states. Nation-states need not be monocultural, or even monolingual. Think of Switzerland or India. They need not be democracies, either: China, Vietnam, and Cuba come to mind. But democracy does require that citizens have a sense of belonging.


Is this possible in a supra-national body like the EU? If the answer is no, it may be best to restore the sovereignty of individual European nation-states, give up on the common currency, and abandon a dream that is threatening to become a nightmare.


This is what the more radical Euroskeptics in Britain think, having never shared the EU dream to begin with. It is easy to dismiss this as typical British chauvinism – the insular attitude of a people living in splendid isolation. But, in Britain’s defense, its citizens have had a longer and more successful democratic history than have most continental Europeans.


Still, even if disbanding Europe were possible, it would come at enormous cost. Abandoning the euro, for example, would cripple the continent’s banking system, affecting both Germany and the affluent north and the distressed countries in the south.
And, if the Greek and Italian economies face difficult recoveries inside the eurozone, consider how hard it would be to repay euro-denominated debts with devalued drachmas or liras.



Quite apart from the financial aspects, there would be a real danger of throwing away the benefits that the EU has brought, particularly in terms of Europe’s standing in the world. In isolation, European countries would have limited global significance. As a union, Europe still matters a great deal.


The alternative to dismantling the EU is to strengthen it – to pool the debt and create a European treasury. If European citizens are to accept this, however, the EU needs more democracy. But that depends upon a vital sense of European solidarity, which will not come from anthems, flags, or other gimmicks devised by bureaucrats in Brussels.



For starters, affluent northern Europeans have to be convinced that it is in their interest to strengthen the EU, as it certainly is. After all, they have benefited most from the euro, which has enabled them to export cheaply to southern Europeans. While it is up to national politicians to make this case, the EU’s governing institutions in Brussels, Luxembourg, and Strasbourg also have to be brought closer to European citizens.


Perhaps Europeans could vote for members of the European Commission, with candidates campaigning in other countries, rather than just in their own. Perhaps Europeans could elect a president.


Democracy may seem like a mad dream in a community of 27 nation-states, and perhaps it is. But unless one is prepared to give up on building a more united Europe, it is surely worth considering.


And who can say what is possible? Consider football clubs, the modern world’s most insular, even tribal institutions. Thirty years ago, who would have imagined that two of London’s most popular clubsArsenal and Chelsea – would have a French and a Portuguese coach, respectively, and players from Spain, France, Portugal, Brazil, Russia, Serbia, the Czech Republic, Poland, Mexico, Ghana, South Korea, Holland, Belgium, Nigeria, and the Ivory Coast? Oh, yes, they have one or two from Britain, too.



Ian Buruma is Professor of Democracy and Human Rights at Bard College, and the author of Taming the Gods: Religion and Democracy on Three Continents.

Copyright: Project Syndicate, 2011.


Last updated:December 8, 2011 1:59 pm

ECB launches new support for banks


The European Central Bank on Thursday announced a host of new non-standard measures aimed at supporting the region’s ailing banks.


The central bank will offer two new long-term refinancing operations, or LTROs, that will last for 36 months.

 

The central bank’s range of acceptable collateral, or the securities it takes in exchange for providing loans to banks was also widened, with ratings thresholds reduced and loans to small- and medium-sized enterprises made acceptable for the first time.


Europe’s banks have been locked out of traditional funding markets in recent months, unwilling and in some cases unable to tap investors for new liquidity. That has left many of them reliant on the central bank, but even with that support there have been concerns that some banks may run out of collateral needed to obtain ECB liquidity.


Speaking at a press conference after the ECB announced a quater point cut in its main policy rate to 1 per cent, Mario Draghi, president, said the measures announced were “meant to address the funding pressure.”


Mr Draghi noted that many banks remain unable to sell their debt into the market and face a large refinancing hump next year as government-guaranteed bank bonds mature. The worry is that banks may shrink their balance sheets and cut lending to the real economy, as one way of dealing with the funding freeze. “We are observing a deleveraging process by the banks,” Mr Draghi said, noting that “there are funding pressures” and “pressures on capital ratios.”


The first of the new long-term refinancing operations will be offered on December 21, and replace a previous 13-month LTRO announced back in October. The LTROs will provide unlimited longer-term financing for the banks.


“The measures should help significantly boost interbank liquidity and hopefully over time will reduce counterparty risk and spur further lending,” Andrew Wilkinson, economist at Miller Tabak & Co, said in a note to clients.


The cut in interest rates for a second consecutive month is a response to the region’s escalating debt crisis and darkening economic prospects and followed a cut of the same size in November, at the first governing council meeting chaired by Mr Draghi.


He said the decision was not unanimous.


“It was a lively discussion. Though one shouldn’t overplay the word ‘lively’. We are central bank governors after all,” said the central bank president.


Mr Draghi has hinted that a deal on Friday by politicians on a eurozone fiscalcompact” could pave the way for the ECB to intervene more aggressively in government bond markets – a step many economists see as crucial to resolving the crisis.


“I’m convinced that while today’s measures are strictly monetary in nature, Draghi is in the loop on what EU leaders will propose on Friday on the second day of the summit. His fiscal message has landed with great force on the desks of European leaders who know that the central bank is the linchpin in rescuing the region from sure collapse,” Mr Wilkinson added.


Highlighting tensions in the eurozone banking system, use of the ECB’s emergency lending facility rose again on Wednesday to €9.4bn, the highest since early March. With the overnightmarginal lending facility” incurring a penal 2 per cent interest rate, its heavy use over the past week has pointed to an acute problem somewhere in the financial system. The amount borrowed had been expected to fall after this week’s regular offer of seven-day liquidity.


The European Banking Authority is due to release final estimates for banks’ capital shortfalls later on Thursday, as regulators seek to fortify the region’s financial system against the eurozone turmoil. The EBA said in its preliminary estimate, released in October, that the region’s lenders need to raise a collective €106bn.


Additional reporting by Claire Jones in London
Copyright The Financial Times Limited 2011


Last updated:December 6, 2011 10:10 pm

Brazil’s rapid growth shudders to a halt

By Joe Leahy in São Paulo and Stefan Wagstyl in London

A woman inspects clothes on sale in São Paulo
A woman inspects clothes on sale in São Paulo: weakness in consumption stems from global market uncertainty

Brazil’s economy stalled in the third quarter of this year, demonstrating the vulnerability of the world’s emerging market growth engines to the eurozone crisis and the slowdown in the developed world.



Gross domestic product contracted 0.04 per cent in the three months ending on September 30 compared with the previous quarter as weakness in the industrial sector spread to Brazil’s once vibrant consumer.

 

Consumption is really slowing down – it’s no longer something that people feared might happen, it’s gradually being realised,” said George Lei, an economist with Nomura in New York.

The sharp deterioration in growth in Brazil poses political challenges for Brazil’s president Dilma Rousseff and comes as China reported last week that manufacturing activity in November contracted for the first time in almost three years.



China, Brazil and India, the three largest emerging economies, are all now slowing, according to their latest GDP figures.



The eurozone crisis is hitting confidence while economic slowdown in Europe and the US is undermining demand both for manufactured goods from emerging markets and for the minerals produced by resource-rich countries such as Brazil.


Other big emerging economies, notably Russia and Indonesia, posted increases in third-quarter growth, though even in these economies, the authorities see a looming slowdown.

Emerging market growth rates are forecast to remain much higher than in the developed world, with China, for example, predicted to grow at around 8 per cent in 2012.


The Asian Development Bank on Tuesday forecast east Asia’s economic growth next year would slightly drop to 7.2 per cent, with a worst-case scenario of 5.4 per cent.


But economists are concerned that will not be enough to rescue the world economy.


For Brazil, the fall in annualised growth in the third quarter to 2.1 per cent compared with a year earlier – the lowest quarterly reading since the third quarter of 2009 – is particularly pronounced, coming after 2010 when the economy grew 7.5 per cent.


The slowdown follows a series of interest rate increases in the first half of the year, as the central bank sought to cool overheating in the economy following a huge fiscal stimulus in 2010, when the ruling coalition was contesting a presidential election.


Brazilian industry this year was also hit by a strong exchange rate that undermined its competitiveness against imports, with car sales in particular collapsing since August.
The final blow was the eurozone crisis, which has begun to affect consumer sentiment.


.


“The slowdown in economic activity resulted from measures taken by the Brazilian government in order to maintain sustainable growth, the deterioration of the international economy, and the natural slowdown after 2010, when the Brazilian economy was rapidly recovering from the 2009 recession, said Finance Minister Guido Mantega.


President Rousseff has announced stimulus measures and the central bank has begun slashing interest rates to try to prevent the economy from slipping into negative territory in the coming months.


The deceleration affected all elements of the economy except exports and agriculture, with private consumption contracting 0.08 per cent in quarterly terms – the first decline since the 2008-2009 crisis.


Imports also contracted compared with the second quarter, down 0.37 per cent, compared with quarter-on-quarter growth of 5.3 per cent in the second quarter, indicating that Brazilians’ recent retail splurge is losing steam.


However, economists said the government had room to cut interest rates and introduce more budgetary stimulus measures.


This would drive a recovery in the second half of next year, with most economists predicting 3 per cent or lower growth for 2011 and just over 3 per cent in 2012.


“If the recession in Europe is deeper than we think, there could be a risk of technical recession in Brazil but nothing compared with what’s happening in the developed world,” said Marcelo Salomon, economist at Barclays in New York.

Copyright The Financial Times Limited 2011.