Sunday May 10, 2009
RANDOM THOUGHTS By Neville de Silva
The Sunday Times (Sri Langka)
Better supervision and regulatory measures over financial institutions, some believed, would cushion this part of the world from the worst features of the meltdown in banking and financial circles in the West where it all started. That, it now seems, was wishful thinking. It does not appear to have taken account of the fact that the financial crisis which began last year came on top of other economic problems which compounded the situation. What it means is that Asia is not out of the woods, not by a long shot and more difficulties lie ahead before it gets better, if it does.
That is the impression gathered, listening to a stimulating discussion I sat through the other day at the 65th Session of the Economic and Social Commission for Asia and Pacific (ESCAP), a regional body of the United Nations based in Bangkok. It was a discussion on the financial crisis by a high-level panel that brought together several eminent persons from different disciplines and so provided the breadth of knowledge that an issue of this nature really needs, impinging as it does on every aspect of society and cutting across socio-economic lines. One of the critical factors that do not appear to have been seriously regarded by those who thought that Asia had somehow managed to escape the worst ravages of an economic crisis that has yet to run its course, is the trade relationship between Asia and the western world.
Asia’s trade integration with the economies of the west is relatively high- about 50% of the GDP of this region. Then consider this continent’s financial integration with western economies, particularly so with the US, which amounts to 40% of the region’s GDP. Earnings from tourism, remittances by expatriate workers from Sri Lanka, Bangladesh, Philippines and others and Official Development Aid also make up a substantial part of the GDP of several of Asia’s less developed countries.
As was pointed out in the course of the discussion, a one percentage point drop in growth in the United States would constitute a 0.6 percentage point decline in Asia’s GDP. As was stated last week the present crisis is different from any that has gone before. It is really a global crisis as it has a much greater impact economically and socially throughout the world than anything previously. It was also stated that this present crisis is likely to be deeper and of a long duration than any in the past. Moreover recovery would be much slower. One reason for this is that the crisis was born at the centre of the system and not on the sidelines and so it is going to be much harder to contain.
As I have already said this crisis was preceded by a food and fuel crisis when food prices skyrocketed and fuel prices reached unprecedented levels. Sri Lankan consumers are well aware of the difficulties that faced them during those hard times. True, food and fuel crisis now seems gone and prices have stabilized at lower levels. But who is to say that it may not happen again. It might be recalled that Asian countries came out of the financial turmoil of a decade or more ago by stimulating their export sector. It was an export-led strategy that helped Asia come out of that particular situation. But obviously that strategy cannot save them this time round for the credit crunch in the west and the significant drop in consumer spending especially on imported goods and what might be considered luxuries or non-essentials would not allow Asian countries to depend once more on increased export earnings for economic recovery.
The World Trade Organisation predicts that the volume of global trade which rose by 6% in 2007 and 2% last year will fall sharply by 9% this year. If so it would be the biggest drop in 40 years. It is said that in recent months exports declined in many Asian countries as import demand contracted in the industrialized economies. So labour-intensive export industries such as garments and textiles, footwear, toys, gems and jewellery were seriously affected.
That drop in exports would affect countries such as Sri Lanka which rely quite heavily on the garment industry for export earnings. If the withdrawal of the GPS Plus trade concession comes on top of this, the country’s import earnings could suffer badly. Sri Lanka is not the only Asian country with labour-intensive industries that face this situation. Bangladesh, Cambodia, China, India, Indonesia and Vietnam are some of the others. That is not all. Growth in Asia is also expected to slowdown perceptibly. Growth which recorded 9% in 2007 will drop to 4-5% this year. The prospects for the coming year are uncertain so that a question mark hangs precariously over 2010 as we move inexorably towards the target date for achieving the Millennium Development Goals.
The current prediction is that if one excludes China and India the rest of Asia will show no growth this year. Now here is the crunch. The jobless in Asia rose from 79 million in 2007 to 84 million in 2008. If that increase of 5 million in one year is considered unacceptable, then worse is to follow this year.
Asia’s unemployment this year is estimated at 94 million a jump of 10 million in one year. If that is bad news, worse is to come. Due to the current crisis labour in the informal sector such as tourism, construction industry, textiles and garments, small and medium enterprises, trade and retail are not only likely to lose their jobs but their wages are also expected to decline substantially. For those who still fantasize about achieving most of the Millennium Development Goals in the next five or more years, especially with regard to poverty, here is something to ponder.
A 100 million people will be pushed into poverty. That is in a region that still has 900 million people living under conditions of extreme poverty. There is more bad news. But I think this is sufficient for one morning.
The writer is a serving Sri Lankan diplomat.