Review by DAVID TAN
davidtan@thestar.com.my
Nowhere to Hide: The Great Financial Crisis and Challenges for Asia
Authors: Dr Lim Mah Hui and Dr Lim Chin
Publisher: Institute of Southeast Asian Studies
ASIAN countries must not depend solely on being export-driven to generate growth but should instead focus on increasing domestic consumption.
Authors Dr Lim Mah Hui and Dr Lim Chin present a cogent argument why Asia should move away from being an export-oriented region in their book titled Nowhere to Hide: The Great Financial Crisis and Challenges for Asia. The authors say that the United States and Europe are no longer reliable markets for Asia.
“The US cannot go on accumulating international debt at the present rate without triggering another financial crisis. It has to narrow its chronic current deficit by either increasing its gross savings or reducing its gross investments,” the authors say.
The US is already buying less, as reflected by its improving savings rate, which rose from zero percent in April 2008 to 6.9% in May 2009. It is currently hovering around 4% at present.
Its current account deficit has also narrowed to about 3% of gross domestic product (GDP) in 2009 from 6.5% in 2006.
Neither can the European economy be relied upon as an export market for Asia, given the financial crisis in Greece, Spain, and Portugal.
This leaves the Asian domestic markets as the alternative for economic growth. But the authors point out that the ability of Asian economies to spend is capped by the people’s purchasing power.
In China, the population’s capacity to spend is restraint by the need to save for precautionary reasons.
“For instance, the poor are forced to save because of deterioration in access to health care, education, and social security,” the authors say.
Thus, if China wants to increase consumption as a driver of economic growth, it has to reduce income equality, improve social services, and provide social safety nets for the population.
Mah Hui and Chin argue that wages should increase to keep up with rising productivity to ensure adequate purchasing power.
Corporate savings in China can be taxed to help improve healthcare and social security services, reducing the need for excessive precautionary savings. This will also boost private and household consumption.
Asian economies with large foreign reserves should invest more in the region to raise growth, income, and consumption, and reduce dependency on the West.
To drive domestic consumption, Asian economies should not follow the Anglo-Saxon model, which is to turn to debt creation.
In Malaysia, there is reliance on increasing household debt to fuel consumption. About 55% of the country’s total bank loans are for private consumption and household such as residential and non-residential property loans (36%), passenger car loans (10%), credit cards and personal loans (7%).
In view that some 60% of the Malaysian population makes a monthly wage of about US$900, increasing consumption through debt creation could take it down the same path as the US, the authors say. “In fact, this is a policy challenge for most Asian countries, particularly China, which is attempting to turn to domestic consumption as an engine of growth,” they say.
Nowhere to Hide: The Great Financial Crisis and Challenges for Asia examines the origin of the crisis in the early eighties when US financial regulators were financially intoxicated.
This resulted in the removal of the Glass-Steagall Act, which separated commercial and investment activities in banks, prohibiting interstate banking so that banks do not become too big and take too much risks, and regulating the activities of commercial banks.
The deregulation led to the appearance of asset-backed securities (ABS) and collaterised debt obligations, which repacked and sold ABS with credit ratings, creating a category of subprime mortgages.
Subprime mortgages formed about 15%, or US$1.5 trillion, of total US housing loans from 2004 to 2006. These subprime loans, distributed worldwide, were fine as long as the US housing market continued to boom and interest rates did not rise.
When these conditions disappeared and the borrowers defaulted in 2007, the subprime crisis erupted in the US, leading inevitably to the global economic crisis.
The book also examines how long-term causes such as the imbalance between the financial sector and the real economy turned the US into the world’s largest debtor nation, with a current account deficit reaching more than US$800bil, or 6.5% of its 2006 GDP.
The US financial sector’s contribution to GDP from 1960 to 2006 rose from 14% to 20%, while the manufacturing sector more than halved from 27% to 11% of GDP.
From 1960 and 2007 the size of domestic debt grew 64 times from US$781bil in 1960 to US$49.9 trillion in 2007, while the GDP rose 27 times from US$526bil to US$14 trillion during the same period.
Mah Hui and Chin concludes the book with a call for capital controls to be reconsidered, as the free movement of capital results in the volatility of exchange rates, which in turn can undermine small economies and a country’s ability to pursue independent monetary policies.
The book also proposes that a Special Drawing Rights note, not pegged to any other sovereign state, be used as the international currency, which is one way of restoring global stability and equity.
The argument for government intervention in the economy, which the authors’ present in the book, occupy a middle-ground between two competing analyses of capitalism that were advanced in the first half of twentieth-century by two Austrian economists Friedrich Hayek and Karl Polanyi.
Hayek holds the view that depressions are cycles in a capitalist economy, which should be allowed to run its course without any intervention from the government, while Polanyi argues that the free market system needs to be regulated by a global governing financial authority, as it is prone to failure, which would lead to dystopia.
But how much government intervention should there be and in what areas should it intervene?
For example, should the Chinese government just play a role in improving healthcare and social security services to reduce precautionary savings and boost domestic spending?
Or should it also ensure that there is always full employment even during periods of depression to ensure that the working class have the power to consume?
Prior to the financial deregulation of the 1980s, government intervention in the UK’s economy to create jobs kept wages and inflation high, leading eventually to unemployment, deficits, and high interest rates. Should the government also intervene to create employment? These are some questions which the book leaves unanswered.
Nowhere to Hide: The Great Financial Crisis and Challenges for Asia is a reliable guide for the layman to understand the origins of the global economic crisis and how Asia should respond to the challenges.
Authors: Dr Lim Mah Hui and Dr Lim Chin
Publisher: Institute of Southeast Asian Studies
ASIAN countries must not depend solely on being export-driven to generate growth but should instead focus on increasing domestic consumption.
Authors Dr Lim Mah Hui and Dr Lim Chin present a cogent argument why Asia should move away from being an export-oriented region in their book titled Nowhere to Hide: The Great Financial Crisis and Challenges for Asia. The authors say that the United States and Europe are no longer reliable markets for Asia.
“The US cannot go on accumulating international debt at the present rate without triggering another financial crisis. It has to narrow its chronic current deficit by either increasing its gross savings or reducing its gross investments,” the authors say.
The US is already buying less, as reflected by its improving savings rate, which rose from zero percent in April 2008 to 6.9% in May 2009. It is currently hovering around 4% at present.
Its current account deficit has also narrowed to about 3% of gross domestic product (GDP) in 2009 from 6.5% in 2006.
Neither can the European economy be relied upon as an export market for Asia, given the financial crisis in Greece, Spain, and Portugal.
This leaves the Asian domestic markets as the alternative for economic growth. But the authors point out that the ability of Asian economies to spend is capped by the people’s purchasing power.
In China, the population’s capacity to spend is restraint by the need to save for precautionary reasons.
“For instance, the poor are forced to save because of deterioration in access to health care, education, and social security,” the authors say.
Thus, if China wants to increase consumption as a driver of economic growth, it has to reduce income equality, improve social services, and provide social safety nets for the population.
Mah Hui and Chin argue that wages should increase to keep up with rising productivity to ensure adequate purchasing power.
Corporate savings in China can be taxed to help improve healthcare and social security services, reducing the need for excessive precautionary savings. This will also boost private and household consumption.
Asian economies with large foreign reserves should invest more in the region to raise growth, income, and consumption, and reduce dependency on the West.
To drive domestic consumption, Asian economies should not follow the Anglo-Saxon model, which is to turn to debt creation.
In Malaysia, there is reliance on increasing household debt to fuel consumption. About 55% of the country’s total bank loans are for private consumption and household such as residential and non-residential property loans (36%), passenger car loans (10%), credit cards and personal loans (7%).
In view that some 60% of the Malaysian population makes a monthly wage of about US$900, increasing consumption through debt creation could take it down the same path as the US, the authors say. “In fact, this is a policy challenge for most Asian countries, particularly China, which is attempting to turn to domestic consumption as an engine of growth,” they say.
Nowhere to Hide: The Great Financial Crisis and Challenges for Asia examines the origin of the crisis in the early eighties when US financial regulators were financially intoxicated.
This resulted in the removal of the Glass-Steagall Act, which separated commercial and investment activities in banks, prohibiting interstate banking so that banks do not become too big and take too much risks, and regulating the activities of commercial banks.
The deregulation led to the appearance of asset-backed securities (ABS) and collaterised debt obligations, which repacked and sold ABS with credit ratings, creating a category of subprime mortgages.
Subprime mortgages formed about 15%, or US$1.5 trillion, of total US housing loans from 2004 to 2006. These subprime loans, distributed worldwide, were fine as long as the US housing market continued to boom and interest rates did not rise.
When these conditions disappeared and the borrowers defaulted in 2007, the subprime crisis erupted in the US, leading inevitably to the global economic crisis.
The book also examines how long-term causes such as the imbalance between the financial sector and the real economy turned the US into the world’s largest debtor nation, with a current account deficit reaching more than US$800bil, or 6.5% of its 2006 GDP.
The US financial sector’s contribution to GDP from 1960 to 2006 rose from 14% to 20%, while the manufacturing sector more than halved from 27% to 11% of GDP.
From 1960 and 2007 the size of domestic debt grew 64 times from US$781bil in 1960 to US$49.9 trillion in 2007, while the GDP rose 27 times from US$526bil to US$14 trillion during the same period.
Mah Hui and Chin concludes the book with a call for capital controls to be reconsidered, as the free movement of capital results in the volatility of exchange rates, which in turn can undermine small economies and a country’s ability to pursue independent monetary policies.
The book also proposes that a Special Drawing Rights note, not pegged to any other sovereign state, be used as the international currency, which is one way of restoring global stability and equity.
The argument for government intervention in the economy, which the authors’ present in the book, occupy a middle-ground between two competing analyses of capitalism that were advanced in the first half of twentieth-century by two Austrian economists Friedrich Hayek and Karl Polanyi.
Hayek holds the view that depressions are cycles in a capitalist economy, which should be allowed to run its course without any intervention from the government, while Polanyi argues that the free market system needs to be regulated by a global governing financial authority, as it is prone to failure, which would lead to dystopia.
But how much government intervention should there be and in what areas should it intervene?
For example, should the Chinese government just play a role in improving healthcare and social security services to reduce precautionary savings and boost domestic spending?
Or should it also ensure that there is always full employment even during periods of depression to ensure that the working class have the power to consume?
Prior to the financial deregulation of the 1980s, government intervention in the UK’s economy to create jobs kept wages and inflation high, leading eventually to unemployment, deficits, and high interest rates. Should the government also intervene to create employment? These are some questions which the book leaves unanswered.
Nowhere to Hide: The Great Financial Crisis and Challenges for Asia is a reliable guide for the layman to understand the origins of the global economic crisis and how Asia should respond to the challenges.
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