Global economic turmoil and the outlook for South and South West Asia
Wednesday, 21 December 2011
Atiur Rahman
The global economy only just coming out of the slowdown triggered by the 2008-2009 global financial crisis, is now facing fresh threat from the ongoing European debt crisis. While the 2008-2009 crisis was largely from irresponsible excesses in household and corporate sector debt levels, the European crisis has been triggered by unsustainable debt levels in the public sector. Growth slowdown in North American and European mature advanced economies is therefore likely to linger. Demand weaknesses in these developed economies are already affecting export-led output growth in the developing economies selling to these markets. Investment outflows from developed economies will also remain depressed by the prolonged slowdown, further clouding the growth outlook for developing economies. South and South West Asia (SSWA) region, suffering substantial growth slowdown in 2008 and 2009 (to 3.4 and 3.5 per cent respectively, from 7.7 per cent of 2007, need appropriate strategies, both internal and external, to cope effectively with the fresh threats to growth recovery. The first priority would be in learning the right preventive lessons from the recent global instability episodes. Countries in the SSWA region will be well advised to preserve balance and stability in their own economies, limiting both public and private sector debts to sustainable levels. Besides safeguarding stability within the region, this will enable SSWA to raise forceful collective voice in global forums against external spillovers of loose internal policies of large economies creating global imbalance and instability. Coming next in priority is the strengthening of thrust for domestic demand driven growth, with appropriate income and supply augmenting policies. This would entail widening of the publicly funded social safety net coverage for the weak and vulnerable population segments; providing some measure of support for the export sectors affected by slowdown in their traditional markets, and stimulating feasible pursuits of in all sectors, particularly emphasizing financing and other supports for the micro and small scale farm and non farm enterprises the under-served population segments. Bangladesh successfully used these approaches in sailing through the 2008-2009 global financial crisis with only mild slowdown in growth. Bangladesh Bank's ongoing financial inclusion campaign supporting productive pursuits of micro, small and medium scale enterprises has played significant role in simultaneously stimulating new output of goods and services, and the new purchasing power for domestic consumption thereof. Exploring alternative new export markets against the backdrop of demand weakness in the traditional markets of mature advanced economies figures importantly in terms of priority, towards upholding the export driven component of growth. Increase in South and South West Asia (SSWA) intra-regional trade can substantially compensate for decline in trade with the mature advanced economies in slowdown. The UNESCAP can assume a catalytic role in negotiating new win-win intraregional preferential trade and tariff arrangements between the SSWA countries. The massive investment needs for addressing the crippling deficiencies in physical infrastructure, listed last in this menu of priorities, is however as important or more so than the preceding ones; for all countries in the SSWA region. Here the obstacle is not that the region lacks the necessary investment resources, but that the needed resources are not being unlocked from the typecast traditional mould of deployment in very low yielding short term investments in Western currencies at huge opportunity cost of alternative much higher yielding longer term investments supporting crucially needed infrastructure projects. Since the onset of the global financial crisis of 2008-2009 we have been hearing a lot about utilizing part of Asia's massive foreign exchange reserve accumulations (nearly three trillion USDs) for the much needed buildup of physical infrastructure; but with little visible actual progress. I believe all countries in SSWA are in a position to set aside a portion from the investment tranche of their foreign exchange reserves for investment specifically in high quality financial assets related to infrastructure projects in the region. These investments in assets with somewhat different liquidity and risk-return profiles from conventional reserve assets can be handled through sovereign wealth funds at country level, or through a multilateral infrastructure fund at SSWA regional level. Proactive drive for concrete progress in these directions brooks no delay. ...................................................... The writer, Dr. Atiur Rahman, is Governor of the Bangladesh Bank
The global economy only just coming out of the slowdown triggered by the 2008-2009 global financial crisis, is now facing fresh threat from the ongoing European debt crisis. While the 2008-2009 crisis was largely from irresponsible excesses in household and corporate sector debt levels, the European crisis has been triggered by unsustainable debt levels in the public sector. Growth slowdown in North American and European mature advanced economies is therefore likely to linger. Demand weaknesses in these developed economies are already affecting export-led output growth in the developing economies selling to these markets. Investment outflows from developed economies will also remain depressed by the prolonged slowdown, further clouding the growth outlook for developing economies. South and South West Asia (SSWA) region, suffering substantial growth slowdown in 2008 and 2009 (to 3.4 and 3.5 per cent respectively, from 7.7 per cent of 2007, need appropriate strategies, both internal and external, to cope effectively with the fresh threats to growth recovery. The first priority would be in learning the right preventive lessons from the recent global instability episodes. Countries in the SSWA region will be well advised to preserve balance and stability in their own economies, limiting both public and private sector debts to sustainable levels. Besides safeguarding stability within the region, this will enable SSWA to raise forceful collective voice in global forums against external spillovers of loose internal policies of large economies creating global imbalance and instability. Coming next in priority is the strengthening of thrust for domestic demand driven growth, with appropriate income and supply augmenting policies. This would entail widening of the publicly funded social safety net coverage for the weak and vulnerable population segments; providing some measure of support for the export sectors affected by slowdown in their traditional markets, and stimulating feasible pursuits of in all sectors, particularly emphasizing financing and other supports for the micro and small scale farm and non farm enterprises the under-served population segments. Bangladesh successfully used these approaches in sailing through the 2008-2009 global financial crisis with only mild slowdown in growth. Bangladesh Bank's ongoing financial inclusion campaign supporting productive pursuits of micro, small and medium scale enterprises has played significant role in simultaneously stimulating new output of goods and services, and the new purchasing power for domestic consumption thereof. Exploring alternative new export markets against the backdrop of demand weakness in the traditional markets of mature advanced economies figures importantly in terms of priority, towards upholding the export driven component of growth. Increase in South and South West Asia (SSWA) intra-regional trade can substantially compensate for decline in trade with the mature advanced economies in slowdown. The UNESCAP can assume a catalytic role in negotiating new win-win intraregional preferential trade and tariff arrangements between the SSWA countries. The massive investment needs for addressing the crippling deficiencies in physical infrastructure, listed last in this menu of priorities, is however as important or more so than the preceding ones; for all countries in the SSWA region. Here the obstacle is not that the region lacks the necessary investment resources, but that the needed resources are not being unlocked from the typecast traditional mould of deployment in very low yielding short term investments in Western currencies at huge opportunity cost of alternative much higher yielding longer term investments supporting crucially needed infrastructure projects. Since the onset of the global financial crisis of 2008-2009 we have been hearing a lot about utilizing part of Asia's massive foreign exchange reserve accumulations (nearly three trillion USDs) for the much needed buildup of physical infrastructure; but with little visible actual progress. I believe all countries in SSWA are in a position to set aside a portion from the investment tranche of their foreign exchange reserves for investment specifically in high quality financial assets related to infrastructure projects in the region. These investments in assets with somewhat different liquidity and risk-return profiles from conventional reserve assets can be handled through sovereign wealth funds at country level, or through a multilateral infrastructure fund at SSWA regional level. Proactive drive for concrete progress in these directions brooks no delay. ...................................................... The writer, Dr. Atiur Rahman, is Governor of the Bangladesh Bank