Asia's options in policy divergence
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By Gu Bon-sung
What will be the new normality in the global economy in the near future? Since the global financial crisis in 2008 all the central banks have pursued the same policy target to overcome the financial crisis as quickly as possible and to resurrect the real economy for prosperity.
Even if every economy was under different circumstances, its monetary policy was very much in the same vein and fully harmonized. It was a period of the global unity in policies, including the monetary one.
But now it appears a huge change is looming after the Fed implied an earlier-than-expected exit strategy even though underlying reasons for such a dramatic retreat from what has been laid out since 2008 remain unclear.
What is the key implication of the exit strategy from one of the most lenient and accommodative monetary expansions? It would be unnecessarily immense: for instance, rising interest rate, adjusted stock prices, tapering global financial flows or a fresh wave of protectionism, etc. It appears that those implications might usher in a period of policy divergence in the global economy.
The period of divergence is likely to be of great significance to emerging markets since the unity on economic and financial globalization in the past 30 years represented by GATT, WTO, and OECD have contributed to the economic development of emerging countries, in particular, the Asian Tigers, China, India and nowadays the Southern Asian countries.
First, with the emergence of divergences, the Asian economies are likely to be hit by less liquidity due to disharmonized monetary policy as the advanced countries are emphasizing their own self-interest in order to protect their own industries and consumers.
Second, the growth of consumer demand might be sluggish since the leading economies are likely to be more credit-constrained and more dollar-strapped if the monetary tightening continues.
Third, the emerging countries may be swamped with the structural problems since they are relatively lagged in terms of debt restructuring and public efficiencies, along with the inflationary pressures due to the rapid expansion of industrialization and urbanization.
Fourth, the growth-focused economic development might have undermined the income equality, the geographical disparity and the employment gap between the old and young generations. In a sense the emerging industrialized economies may need to re-consider and re-build their economic, financial and social policies by taking into account a new paradigm of divergent conditions in the global economy.
Furthermore, such reconsideration on a broader scale might be more crucial for the Asian economies whose growth have been heavily driven by the external demand, the continuous catch-up of technology, and the production of consumption goods.
In spite of those difficulties, the Asian conundrum is, for the time being, related to the fact that they may not purely rely on the domestic market and, more importantly, still need to strengthen their global competitiveness comparable to the leading players of the advanced economies. Furthermore, Asian economies are more likely to be competitors in the global market as mentioned earlier due to the similar strategy for economic growth and they are converging into the similar stage of economic development.
How can Asian economies resolve and prepare for the period of divergence of the global economy wisely and securely?
It seems that the key task in preparing for the new wave is to secure the currency stability through safeguard such as the foreign reserve or the foreign assets given the strong tendency for dollarization. Even if the accumulation of foreign asset may be difficult or it may not be appropriate given the high expectation on the dollarization, the accumulation of foreign assets can be the uttermost solution in the worst case.
Also Asian economies should identify a new engine for growth. Given the necessity of external growth constrained by limited resources, high population, and short-term development, Asian economies should try to improve their technological excellence over the advanced economies. It cannot be achieved in a short period of time through cheap labor or long hours of work. It requires fundamental reforms of education, incentives structure, as well as overhaul of the job market, even if it might incur the additional cost of innovation in transition. In a sense Asian economies should willingly utilize their accumulated national wealth for next generation to be more innovative and to be more globally competitive.
Additionally Asian economies should focus on the social safety net so as to smooth out the structural transition that might be led by lower exports, lower employment, and lower growth. The social safety net should be provided more effectively than before through improving the efficiency of the public sector. Reform of the public sector in a sense is the departure from the past when the public sector mobilized, directed, and led the economic growth, and is providing the full support for the private sector to be innovative, dedicated and risk-taking through fairness and transparency. Asians might be reminded of what saves the current economy and builds the new economy is taking one step at a time.
Ironically, it will be the very same first step that led to the economic development two decades ago, putting the region on a path toward an era of policy divergence.