Lee Hyo-sik is Finance Desk editor at The Korea Times. He manages finance-related stories on macroeconomics, banks, stocks, bonds, crypto etc. He is passionate about covering what's happening in Korea's financial industry and explaining it to both Korean and non-Korean readers. You can reach him at leehs@koreatimes.co.kr. Your insights and feedbacks are always appreciated.
Prosperity in Asia
By Lee Hyo-sik
By Koo Bon-sung
Eeconomist at the Korea Institute of Finance
The recent news about the global economy is rather divergent. The eurozone is forecasted to have a negative growth in 2013. The British economy is likely to lose its triple A rating, and even the central bank seems explicitly to agree with forward devaluation of its own currency.
Japan both economically and politically started to take unprecedented financial operations in order to boost its economy through a stiff devaluation of the yen.
China seems to tramp down inflation which is rather unusual and somewhat unexpected for the financial market participants.
On the other hand, the U.S. stock market index has reached the highest point in the last four years, even if the central bank pointed out the concern for maintaining quantitative easing more or less in the first time since the global financial crisis.
The mixed signals from different countries confuse us: where are we standing and what economic or political consequences will transpire in the future?
Going back to the financial crisis and the global efforts previously taken by both advanced and emerging countries, current dispersion and diversity in economic policies among leading countries could well be some sort of departure from where we have once been placed in the course of the crisis resolution on the cooperative basis.
In other words, policy divergence may give us a glimpse of some economic scene which is likely to turn up in the near future, and the clue for a new economic environment may be identified from looking closely at its underlying reasons, its effects on the economic landscape, and some of considerations not to be missed out.
First, the current divergence of economic policies among advance countries may be related to the fundamental question about how to maintain or recover their economic competitiveness.
Japan has experienced the sharp decline of manufacturing competitiveness in 2000s and has been further worsened by the steep appreciation of the yen since the global crisis.
It may be politically inevitable or unavoidable for Japan to take radical policy actions in order to reverse its shrinking economic position which had once led the global innovation and dominated the global product market during the 1980s.
Especially, the strong emergence of the Chinese economy and its undeniably faster and broader dominance in the global market not just in the cheap products but also the middle/upper-end ones must have been the biggest challenge for Japan which is still one of competitive manufacturing and technology-driven economy.
That is to say, it may be caused by the sharp rise and expansion of China in the global economy. Therefore, the global economy may be faced with the new wave of product competition led by between leading economies and emerging economies in the near future.
Second, the diversity in the economic policies may be caused by the new macro-economic environment.
Undoubtedly the globalization of the real and financial sectors contributed to sustaining the economic growth even if the U.S. economy had taken the role in importing the output from China or Japan, on the one hand, and the U.S. financial sector, in exporting the private capital to the emerging markets on the other hand while absorbing the sovereign funds to the U.S. government debt.
The imbalance between the real and the financial sectors could be the result of globalization. If the globalized harmonization or the sharing of roles in consumption and production might weaken due to the diversity of macro-economic policies, what sort of economic policies should be appropriate or effective?
If the global harmonization may either further weaken or get more difficult to achieve, then the future economic policy-making would focus on the domestic issues such as inflation, employment, or industrial policies.
Even though the financial regulation having been implemented since the global financial crisis is expected to be sustained, the economic policy coordination related to the real sector may not be so effective as much as happened in 2000s.
And the divergence and sometimes the conflict in economic policies may reduce the positive effect from trade and openness.
In the worst-case scenario may export-driven economies in Asia relying on the global market be hard hit by diminished demand, higher frictions and tighter regulations. In this respect the long-term consequences from new economic and financial policy stances undertaken by advanced countries may be cautiously monitored and somewhat confusing.
Third, the financial market may be undergoing the structural changes.
The global financial market has exhibited its long-term expansion with lower interest rates and accommodative monetary policies on the global basis due to cyclical or recurrent economic crises since the early 1990s including oil shocks, wars, collapses of communist regimes, Asian/Latin American crisis, etc.
But after the global crisis the U.S. economy has been most heavily stricken by the financial misalignment, followed by massive liquidity injections and, finally, started to gain its own competitiveness in energies, communication, technology and commodities.
Both financially and monetarily did other countries follow to take the same stances. On the other hand, the post-crisis adjustment showed rather divergent patterns. The EU economy was faced with the sharp appreciation of its currency, even if it was short-lived, but, thereafter, hit by the fiscal crisis.
The Japan economy continued to slide but sometimes showed the sign of recovery boosted by the global liquidity. The emerging markets including China, Brazil, and Australia, for instance, could take advantage of consumerism newly boosted by technology innovation and the new culture for communication in a technologically-integrated world.
Such an undiminished global consumption could have resulted in the sharp currency appreciation of emerging economies, but it had been rather latent due to the reversal of capital outflows from the emerging economies to the advanced economies, especially to the US. After 5 years later or so, the global economy started to notice such issues as Japan embarked on the massive intervention into the foreign exchange market recently.
Yet the Fed does not appear to be fully aligned with the quantitative easing policy by the Bank of Japan (BOJ) as the former becomes more cautious about its own domestic issues. Thus, it is of significance how the so-called currency competition ignited by the BOJ and the monetary policy of the Fed would affect the global liquidity, especially the size and direction of global capital flows in the near future.
For instance, the capital flows between advanced and emerging economies or between Japan and adjacent countries or between Asia and the US or between the US and the EU may exhibit a new pattern. Otherwise, two decades of global liquidity and long-term persistence of capital movement may diminish, and, as a result, the global financial landscape may exhibit a different path in terms of magnitude, maturity, and cycle from what we observed in the past 20 years.
Naturally, the current policy dichotomy or divergence would neither bring the collapse of the global financial system nor the global recession at a grand scale. However, the change in policies and their impact on the product and capital market will affect those economies where the globalization had played a large role in their economic development and interdependence in terms of technology, product, and competition.
It is likely to be Asia where the current divergence and competitive landscape will mostly affect. The new wave of post-crisis divergence will surely affect the future cooperation and competition among Asian countries.
Yet, the unnecessary competition either led by a single country or driven by multilateral interactions would neither benefit the regional economy nor the global economy as a whole.
The post-crisis prosperity can only be cultivated and shared through more consorted and cooperative efforts from science, technology, innovation and product development.
The Asian economies must recognize the potential outcome or latent risks from divergent economic policies or sometimes from egoistic policy agenda, but rather must look into unexploited areas for further cooperation and understanding in order to preserve positive gains from globalization, integration and interdependence in areas of both economies and financials.