In October 2010 Triple Crisis Blogger Kevin P. Gallagher interviewed Dr. Nagesh Kumar, Chief of the Macroeconomics division of the UN Economic and Social Commission for Asia and the Pacific. With capital controls and global economic rebalancing high on Thursday and Friday’s G-20 agenda, Kumar illuminates the specific challenges Asian-Pacific economies face and potential strategies for maintaining economic growth.
Gallagher: It must be interesting to be working in Thailand, the epicenter of the 1997 financial crisis, while formulating policies to prevent and mitigate financial crises in Asia in the aftermath of the current crisis. How has Thailand and the East Asia region in general been affected by the crisis and how does that contrast with the 97 crisis?
Kumar: When this crisis hit the world economy, everybody was impacted. Yet because the Asia-Pacific region had experienced such a severe crisis in 1997, Asian nations had made their financial systems relatively more prudent, so they were less severely impacted. So the financial system remained intact– there were no collapses of banks like in many Western countries.
The growth rate of course went down, but the redeeming factor was that the very large populous economies like China and India continued to grow robustly even in the peak of the crisis because their governments came up with very quick responses in terms of stimulus packages and expansionary monetary policy. So to some extent, the damage that could have been there was contained. And then from the third quarter of 2009, these economies began to recover and in 2010 they seem to be in a very good stage of recovery– which we are calling “reshaped recovery.”
But there are challenges, and there are downsides that we cannot overlook. If we do, they could be a problem in the future. One thing we have been saying at UNESCAP is that Asia is recovering in the short term but that in the medium and long run there will be a readjustment in the world economy where some of the demand that was driving Asia-Pacific’s growth (imports from the US and elsewhere that is now unsustainable)– may vanish. So there will be a shortfall in the aggregate demand for production and services of Asia-Pacific countries. And that means for sustaining the kind of dynamism that Asia-Pacific economies have displayed over the past 10 years, policy-makers will need to create alternative, new engines of growth. So we need to pay attention to that because once the governments begin to rollback these fiscal stimulus packages, you will see a vacuum that needs to be filled.
To that end we have made suggestions to the governments of the region. One is to focus on domestic consumption, social protection, paying attention to agricultural growth, to rural development and making financial services more inclusive, and to looking at new sources of growth and innovation like green growth– new technologies which make products cheaper.
Asia is actually a growth pole today. And so every other region also has a stake in Asia’s growth and dynamism. So that is why it is very critical that Asian governments move forward to take some steps in sustaining their dynamism.
Gallagher: So what you are saying is that the region needs almost a radical change in its development model, or at least a radical evolution. Asia is a region that built significant amounts of endogenous productive capacity to be able to export manufacturing, mainly to the West. And now you’re saying it needs to focus more on domestic consumption. What do you think the prospects for doing that are? And, is there a model, or is this something that the Asians will have to invent on their own? Where can we look for an example of this kind of consumption-led growth?
Kumar: Well, within Asia itself, you have several– because it’s a diverse continent– you have certain countries that have done very well in terms of creating a growth led by domestic consumption. For instance, India has been sustaining its very fast growth primarily on the basis of domestic consumption and investment. So this is one more route for other countries to emulate. India, in our assessment, looks like a very robust economy because of its dependence on exports, which especially to the West is very small– and so that is why it was hardly affected in the crisis (it was affected a little, but very marginally). The projections of the Indian government are 8.5% growth in this year. The IMF is far more gung-ho about India’s growth and is saying 9.5%, which may be a bit over ambitious. But, I think somewhere between 8.5-9% is certainly doable. The results for the last two quarters have come in, and the latest is 8.6%. Agriculture is also doing very well. So close to 9% is quite good.
Gallagher: Now, from a global imbalance-correcting perspective, the Asian countries are going to need to shift to more consumption-based economies. But the United States, Iceland, Great Britain, and others, are going to have to produce and export again. To what extent do you think this will cause a conflict whereby products from the North will be the most competitive products in the developing country markets that seek out that new level of consumption? How will Asian countries deal with such an influx, if this all say, the US exports deem to be more competitive than their domestic Asian counterparts? What kind of implications might that have?
Kumar: I think it is something that we have to grapple with. That US is purporting exports and savings, and then leading to a rise of protectionism in the form of tariffs and other measures against foreign imports. Already you are hearing lots of noise about protectionism in the West. So, one will have to see how it plays out, but there is no option for Asian countries but to expand domestic consumption and domestic demand. And, regional economic integration where there are very large possibilities existing and remaining to be exploited. For instance, with three of the four largest economies in the world in Asia