Prime Minister Kevin Rudd warmly welcomed China’s Vice-President Xi Jinping to Canberra as he spoke of the booming economic ties with Australia’s biggest trading partner. Mr Xi, who is tipped to succeed President Hu Jintao within two years, is the first high-level Chinese official to visit Australia since the jailing of Rio Tinto executive Stern Hu in Shanghai in March.

Foreign Minister Stephen Smith said Xi’s visit was a signal that the Australia-China relationship had matured to the point where problems could be worked through. He also mentioned that “some of the difficulties and tensions that we had last year really are now behind us and we’re both taking a long term view of the relationship”.

Australia and China had agreed in April 2005 to begin negotiations for a free trade pact and have had 14 rounds of talks since. The next round is scheduled to be held in Beijing by the end of this month.

Sources:
Australia, China sign major deals, push free trade [AFP, 21 June 2010]
Australia, China sign $12b worth of deals [TODAY Online, 22 June 2010]

The “New Economic Model” was designed to boost growth, create a high-quality workforce, and attract badly needed foreign investment. The model also aims to halt Malaysia ’s “brain drain” with measures to retain skilled professionals, and make markets more competitive by phasing out price controls and subsidies. The Malaysian economy shrank by 1.7% last year due to the global recession, clearly requiring a powerful change to prop up its economy especially in the face of strong competitors in the region like Thailand and Indonesia.

This controversial overhaul is currently met with much doubt and criticism, most notably from former Prime Minister Mahathir. Defending an affirmative action policy that favours the country’s bumiputera, he also questions Najib’s ability to deliver due to delayed implementation of electricity and tax reform policies.

Signs of resistance have also begun to emerge with the formation of a Malay rights group Perkasa (Strength), but their base of support is unclear. Malaysia’s next general election is due by 2013, but may be called as early as next year.

Sources:
Malaysia to Overhaul Racial Preferences in Dash for Growth [ChannelNewsAsia, 30 Mar 2010]
Too Early to Judge Najin: Mahathir [The Straits Times, 1 Apr 2010]
Good Idea, But can Najib Pull It Off? M’sia Wonders [The Business Times, 1 Apr 2010]

Photographs and images used on this website are obtained from publicly-accesible resources. No copyright infringement is intended.

OP-ED CONTRIBUTOR

By Peter A. Petri

Source: Lee Chee Chew

Last week, the IMF raised its semi-annual forecast of world economic growth for next year, from 2.5% to 3.1%.  The projections confirm that Asia is leading the global recovery.  This is good news: the last three such revisions were downward, and at the time of the last report in the spring many Asian economies were still in freefall.

But for policy makers, the beginning of the recovery means new, difficult choices.  The challenge is not just to exit interventions adopted in the crisis—which dominates the policy debate—but to replace these with structural policies that promote growth through the recovery and beyond.

The policies that stopped the freefall—huge stimulus packages in China, the United States and even small countries like Singapore, and massive financial bailouts in the West—were urgent, relatively easy to sell, and to a large extent forced by circumstances (particularly the fall of Lehman Brothers).

Sustained recovery requires tackling different problems, including especially current account imbalances between the United States, China and other economies.  As is now well understood, US consumers won’t drive world demand in near future; they need to be replaced in part by Asian consumption and investment.

The structural policies that will drive balanced growth in the future are less time sensitive than stimulus polices were, are more complex, and may be tougher to implement politically.  But the stakes are high; if rebalancing fails, the recovery could soon fade into anemic growth or even another crisis.

The good news is that imbalances have shrunk to sustainable levels in the crisis; the challenge now is to keep them there.

The arithmetic of this challenge is well within the region’s potential. A US current account deficit of 3% of GDP or less is generally considered consistent with balanced growth. Even when imbalances were at their highest before the crisis, only 1% of total Asia-Pacific GDP (about $300 billion) would have had to have been shifted from US consumption to Asian demand to eliminate excessive US deficits.

Our calculations suggest that the implications of such rebalancing are also manageable.  Chinese consumption would have had to rise by less than a normal year’s growth. US exports would have had to expand by 9% and imports shrink by 6%,   Recent months have seen far larger percentage movements in demand and trade.

But the policies will need to reach deeply into national economies. They will vary considerably from country to country, and call for innovation and flexibility in design.

• The US policy mix would need to impose discipline on consumers and government to live within their budgets. And US exporters would need to dust off their Asian Rolodexes and compete in markets they abandoned in the past.
• China would likely raise the incomes of households at the expense of the flush corporate sector, create services and safety nets to encourage spending, provide financing for small firms, and scale up investments in education, health care and the environment.
• Japan might free up services, energize consumption and redirect its extraordinary technological capabilities toward growth markets such as products and services for ageing populations, and technologies for energy conservation.

And so on.  Each Asia Pacific economy has an opportunity and responsibility to drive its corner of growth.  Some will target households, others investment or infrastructure, and still others agriculture, resources or services. Exchange rate flexibility, including the gradual appreciation of the Chinese Yuan, would provide crucial support for the necessary changes.

That’s where international cooperation comes in.  The G-20, now the premier global consultative mechanism, is a promising platform with appropriate Asian ownership.  But the global process needs to be complemented by deeper regional cooperation.  Asia Pacific institutions—ASEAN, the East Asian Summit, APEC (which meets in Singapore next month) and smaller groups—need to step up to translate global goals into real projects.

New growth engines should be launched based on the region’s priorities and huge capabilities.  The economies of the Asia Pacific have converged markedly in their priorities, and virtually all emphasize these areas:

• Economic integration: efforts to create new types of trade, building on the region’s dynamic markets, global and regional trade agreements, and strategic investments in the infrastructure of transport and communications.
• Green economy: programs to support energy conservation, breakthroughs in “clean coal” and alternative energy, and energy efficient vehicles and transport systems.
• Quality of life: investments in education, health care, social safety nets, and infrastructure to connect regions and people left behind with centers of economic growth.
• Knowledge and productivity: initiatives in education and research, and policies such as deregulation, to drive gains in productivity.

Concerted initiatives in these areas would stimulate Asian demand, create markets for Asian manufactures, engage American resources and technology, and put Asian savings to truly productive use. The Asian Development Bank could be a catalyst with a new growth fund focused on infrastructure and other investments.

Many of these initiatives—and projects within them—have been widely studied and action plans are available.  Good pilot models exist, for example for rural health care in China, energy conservation in Japan, and regional integration in ASEAN.  The blueprints are ready; it’s time to start building.

By working together, governments can signal to markets that they mean business, will stand behind priorities, and will hold each other accountable for keeping growth on track. They can create a stable, forward-looking environment that is crucial for private investment, especially in uncertain times.

These are not usual times. The crisis and the reversal of the fortunes of East and West present an opportunity to reinvent the Asia Pacific economy.  All of us—not just academic, business and policy experts, but citizens—need to understand the choices. And we need to urge governments to make this a turning point, not only for the crisis, but for long-term global development.

***

Peter A. Petri  is the Carl J. Shapiro Professor of International Finance, International Business School, Brandeis University, and Senior Fellow, East-West Center, Honolulu.

N.B. This op-ed first appeared in Business Times on 9 Oct 2009

OP-ED CONTRIBUTOR
By Stephen King

We have reached a tipping point in global economic affairs. While there are some encouraging signs of recovery in the developed world, the real economic action is taking place elsewhere. For both cyclical and structural reasons, the emerging nations are set to dominate world economic activity in the years ahead. Although we have revised up our 2010 projections for most countries in the world, the revisions leave the emerging world looking particularly healthy: we now expect emerging nations to see economic growth of 6.0% next year (up from 5.3% last quarter) while the developed world will expand by only 1.8% (from 1.2% previously).

Part of the emerging nations’ dominance reflects ongoing struggles in the developed world. A combination of low interest rates, quantitative easing and loose fiscal policy has returned stability to financial markets and raised hopes that the worst of the crisis is now safely behind us. Nevertheless, some of the central problems of recent years have yet to go away. Banks no longer enjoy the funding of old. Households and governments are awash with debt. Developed economies remain on life-support systems imposed by policymakers.

While, then, there has been a welcome turnaround in the inventory cycle and we have been in the process of revising up many of our forecasts, we expect policymakers to maintain stimulus packages for a long time. In the US, for example, even though growth prospects have improved, the level of activity is set to remain very low, suppressing core inflation and keeping unemployment unacceptably high.

Over coming months, investors will doubtless focus on so-called ‘exit strategies’, assuming that the financial system is not about to suffer any more nasty financial shocks. We think the exit ‘sequence’ is of considerable importance. Tighter fiscal policy should ideally come before tighter monetary policy in a bid to ensure no sudden, and unwelcome, rise in bond yields. Co-ordination between fiscal and monetary authorities is, therefore, vital even at the cost, however temporary, of central bank independence.

The merry-go-round

The structural arguments in favour of outperformance by emerging economies are compelling. Low per capita incomes offer plenty of room for catch-up. Thawing political relations have allowed companies from all over the world to invest in emerging nations. Information travels around the world much more quickly and much more cheaply thanks to new telecommunications technologies, making the management of assets within the emerging world much easier than before. Trade linkages between emerging nations have increased rapidly in recent years. And banking systems in the emerging world have come out of the crisis relatively unscathed.

In the short term, however, emerging nations will also benefit from what we call the monetary merry-go-round. Low US interest rates typically encourage capital to flow into the emerging world. Attempts by emerging nations to limit the resulting exchange rate appreciation lead to offsetting capital outflows in the form of rising foreign exchange reserves which are often invested in Treasuries. Higher demand for Treasuries keeps yields low and, hence, leaves US interest rates low, thereby allowing the merry-go-round to repeat, seemingly ad infinitum.

The global cost of capital ends up being too low as a result. A hunt for yield develops. Before the credit crunch, this led to huge investments in mortgage-backed securities which, in turn, fuelled the US housing boom. Post-credit crunch, however, the hunt for yield has gone elsewhere. Investors are now keen on the emerging nations with their strong secular economic prospects.

The implications are simple. Emerging currencies will be under upward pressure, their asset markets should appreciate and their sources of growth should switch from exports towards domestic demand, thereby narrowing their currently high current account surpluses. In time, problems will arise, either in the form of higher inflation or the re-emergence of rapidly widening current account deficits but, at this moment, we are only in the foothills of the process. With no imminent upward move in US interest rates likely, the merry-go-round should be able to spin a few times more. China and India will continue to expand at a rapid rate: we project economic growth for these two giants in 2010 of 9.5% and 7.2%, respectively.

A raw deal

A switch from developed to emerging-led economic growth, combined with loose US monetary conditions, should pave the way towards higher commodity prices. Demand for commodities is now disproportionately focused on the emerging world: lower incomes per capita tend to be associated with much more incremental spending on infrastructure and the basics of human life, all of which are highly commodity-intensive.

Apart from benefiting some of the commodity producers in the emerging world (among them, Brazil, Russia and Saudi Arabia), higher commodity prices will also offer currency support to the likes of Canada, Australia, New Zealand and Norway. Meanwhile, for those countries still pondering exit strategies and faced with multiple years of debt repayment, we suspect currencies will be weak: the most obvious candidates are the US dollar and sterling.

Our asset allocation recommendations continue to thrive on the mountains of liquidity created by central banks and fiscal authorities around the world. Within our preference for risky assets, we favour corporate bonds over equities: low levels of activity will, in our view, lead to anxiety over long-run sources of corporate profits. Meanwhile, with liquidity flowing from the developed to the emerging world, we favour emerging market assets in general over their equivalents in the developed world.

***

Stephen King is the Group Chief Economist and Global Head of Economics and Asset Allocation Research at HSBC.

By Simon Tay

CRISES provoke changes. The initiative to bring together the world’s 20 largest economies last November was one change the global economic crisis instigated. The Group of 20 (G-20) summit meeting in September in Pittsburgh was only its third. But the G-20 has already emerged as the key grouping in the global crisis.

Why? How has it performed? What are the possible dangers?

The rapid rise of the G-20 is due largely to the absence of any other effective global organisation. The old G-7 consisting of the established powers no longer sufficed for it did not take into account the rise of China, India and Brazil. The established economies were no longer able to move the world without acting in concert with a number of players which weren’t in their club. Moreover, the largely Euro-American nature of the G-7 seemed too narrow.

The International Monetary Fund, which dealt with previous financial crises, was also overdue for reform. Its handling of the 1997-98 Asian financial crisis has been questioned, with some accusing it of having made matters worse. Moreover, with the epicentre of the current crisis in the United States and Europe, the IMF was placed on the sidelines.

Asia has undoubtedly gained from the G-20. Only Japan was a member of the G-7. Now China, Indonesia, South Korea and India – as well as Australia and Thailand, as the current Asean chair – are part of the G-20.

But has the grouping been effective? There are real differences between the member states on fiscal and monetary policies. The stimulus packages each introduced differed dramatically in size and scale, reflecting different underlying philosophies. The G-20 has also steered clear of some key but controversial issues like how the US and Europe propose to clean up their respective banks and the long-term role of the US dollar.

Instead, the G-20 has been taken up with other issues, where the interests of its members may not coincide with those of the world as a whole. Climate change, for example, featured in the discussions at Pittsburgh. There is a danger that large, powerful states might come to an agreement among themselves on this issue and then dictate to others.

Another issue the G-20 has taken up has been tax havens. It has issued black and grey lists to identify and pressure the countries it considers to be behaving badly in this area. The US, for example, has pressed Switzerland to release the names of American citizens who have deposited funds with UBS Bank, suspecting these depositors of having illegally avoided paying US tax.

No one should condone tax evasion. But the issue does not seem to have been directly related to the financial crisis that began with American banks.

Another area of divergence between large and smaller countries is that of free trade. Despite G-20 proclamations, many large countries have found ways to limit imports and protect their producers. The most recent example is the US decision to restrict imports of tyres from China. Such actions signal the diminishing belief in globalisation among countries with the largest markets.

Medium- and smaller-sized countries with open economies cannot afford this luxury. In Asia, such countries would include Singapore as well as Malaysia and Thailand. Similar countries elsewhere would include Chile, Holland, New Zealand and the Scandinavian states.

These countries have gained from the global economy. As medium- and smaller-sized countries, they have had to follow international trade rules, rather than make them or break them as more powerful countries can.

Some among them have been able to attend the G-20 but they are not fully within the group. The G-20 is now a permanent institution. Cooperation among the biggest powers is indeed important. But there is no guarantee that large countries will take into account sufficiently the concerns of smaller countries.

Rather than aspire to get into the G-20, medium- and smaller-size countries open to the global economy may be better served by organising among themselves. Working together, they might make their views better known to the G-20 and collectively have a weight that none of them would have separately.

The ‘G’ in G-20 stands simply for ‘group’. But with the largest and most powerful countries on board, it could just as well stand for ‘Giant’ or ‘Gulliver’. The smaller open economies might consider coming together as an ‘L-20′ – ‘L’ standing for Lilliputians.

In Jonathan Swift’s tale, the giant Gulliver could not be constrained by the Lilliputians who tried to tie him down with ropes. He snapped them like threads.

The Lilliputians should not hope to tie down the Gulliver 20. But they can hope to guide the G-20 to decisions that are best for the global system as a whole – and, in the process, prevent the giant states of the G-20 from stepping on them, inadvertently or otherwise.

***

Simon Tay is the Chairman of the Singapore Institute of International Affairs and the 2009 Schwartz Fellow at the Asia Society in New York.