People's Democracy

(Weekly Organ of the Communist Party of India (Marxist)


No. 8

March 01, 2009


How The US Is Pulling Down  Asian Economies

Jayati Ghosh

HOW short is public memory or, at least, the memory of those who hold forth to the public in the media. Only a few months ago, we were being sold complacent stories about the "decoupling" of Asia from the Western economies, by animated analysts waxing eloquent about how China and India had already emerged as alternative "growth poles" for the global economy. Anyone who contested that rosy picture was decried as a doom-driven pessimist who could not acknowledge that the world economy had fundamentally changed.

All that misplaced enthusiasm has now vanished and the same market analysts are now mouthing despair. Evidence is mounting that far from being an alternative growth pole, China has been very badly affected its exports are down and the consequent deceleration of growth has dramatically affected industrial employment. It even threatens to drag down the rest of Asia as the regional production chains now face stagnant or declining demand. So if anything, the Asian region is the worst affected within the developing world.



As a result, growth forecasts are being revised sharply downwards across the Asian region. According to the International Monetary Fund (IMF), developing economies in Asia, which as a group grew at 10.6 per cent and 7.8 per cent in 2007 and 2008 respectively, are now expected to grow at just 5.5 per cent, or 1.6 percentage points lower than what was projected as recently as November last year. The three growth engines in Asia, the ASEAN-5, China and India, also now seem to be badly affected by the crisis. The ASEAN-5 economies, which grew at 6.3 and 5.4 per cent in 2007 and 2008, are now projected to grow at 2.7 per cent in 2009 (down 1.5 percentage points from the November 2008 estimates). The corresponding figures for China are 13.0, 9.0 and 6.7 per cent (1.8 percentage points) and for India are 9.3, 7.3 and 5.1 per cent (1.2 percentage points). Moreover, the IMF has predicted a damaging immediate future for South Korea, with its economy projected to contract by four per cent this year.

Estimates from national sources and elsewhere are less pessimistic than the IMF, but there is consensus that outside the US it is Asia where the recession is biting most. According to official Chinese figures, more than 20 million rural migrant workers have lost their jobs and returned homes as a result of global economic crisis. By January 25, 2009 15.3 per cent of China's 130 million migrant workers had lost their jobs.



India too has made a feeble effort at estimating the impact of the downturn on employment. An official survey by the Labour Bureau focuses on eight sectors (mining, textile & textile garments, metals & metal products, automobile, gems & jewellery, construction, transport and the IT/BPO industry) to arrive at an estimate of job loss. In these sectors, it sampled units employing 10 or more workers. The survey covered 2581 of the sampled 3000 units.

Based on this limited sample, the total estimated employment in all the sectors covered by the survey went down from 16.2 million in September 2008 to 15.7 million during December 2008, implying a job loss of about half-a-million. The actual decline in employment, if coverage and methods were better, is likely to much higher.

However, the survey does suggest that employment fell in every month during this period. After September 2008, employment in all industries declined at an average rate of 1.01 per cent per month. A comparison of employment in export and non-export units indicates that employment declined at an average monthly rate of 1.13 per cent in the case of the former, as opposed to 0.81 per cent in the latter, pointing to the direct role of the global slowdown.



So the notion that Asia had "decoupled" from the West was clearly mistaken. This notion itself was ideologically driven: based on the view that the pace and nature of market-friendly reforms in Asia had strengthened these economies and delivered an "Asian century". When sceptics pointed to the East Asian financial crisis, they were countered with the view that 1997 was an aberration that resulted from "cronyism" or some such intangible and not from liberalisation and global integration.

Over the last two decades, the shift towards more open strategies has indeed transformed Asia's relationship with the rest of the world. While the region was earlier home to a few mercantilist, export-oriented economies like Japan, South Korea and Taiwan, in time every Asian economy, including the biggest, was looking for a market abroad, with some like China proving extremely successful in manufacturing and others like India in services.



Moreover, while Asia could be proud of a high degree of regional integration through trade and investment flows, this integration reflected not the decoupling of Asia from the rest of the world but the creation of an export platform in which multi-country production networks created products that were targeted at world markets. Production processes were segmented and each segment located at appropriate sites that generated intermediate products that were combined at the final location (such as China) to be shipped abroad. The other impact of the process of liberalisation and integration was a sharp increase in foreign investment. A concomitant of this inflow was the liberalisation of rules regarding the presence and operation of foreign firms, including financial firms like banks, merchant banks, insurance companies, hedge funds and private equity firms. Capital inflows in many countries in the region were far in excess of that needed to finance their current account deficits. In fact, some countries with current account surpluses were also recipients of large capital inflows.

Given such integration, it is not surprising that an Asia that was experiencing robust growth till recently has been affected quite adversely by the global financial and economic crisis. As the financial crisis unfolded, foreign financial investors in need of capital to cover losses and meet margin calls at home unwound their positions in Asia resulting in a collapse in stock markets in many Asian economies. Countries like China, India and Vietnam, which had seen their stock markets outperforming their global "competitors", were also the ones that recorded the steepest falls. The outflow of capital put pressure on many currencies, forcing Central banks to unwind a part of their reserves. A liquidity and credit contraction ensued. Foreign financial institutions that were located in these countries and were facing difficulties in global markets, had to downsize or close, leading to ripple effects in domestic economies. Domestic financial institutions exposed to sub-prime mortgage related assets recorded large losses. Finally, the global economic recession slowed export growth in these increasingly export-driven economies. All this generated an Asian version of the global financial and economic crisis, which is what the collapse in aggregate growth figures reflects.