(Weekly Organ of the Communist Party of India (Marxist)
November 22, 2009
C P Chandrasekhar
AS the world looks to full stabilisation and a rebound from the crisis due to the efforts of governments, it is clear that it is finance rather than the real economy that has benefited more from those initiatives. In fact, the turnaround in the financial sector, which was responsible for the crisis in the first instance, has been faster and more noticeable than that in the real economy. What is more, as the popular concern about swelling bonuses for financial managers illustrates, the recovery of finance is seeing a return to practices that generated the imbalances that underlay the crisis.
is not true just at the level of individual
institutions or countries, but globally as well. Thus, the financial
has resulted in a revival of capital flows to emerging markets since
2009, even while the flow of credit to the real sector in the developed
countries is still limited. Much of these flows are concentrated in
emerging markets that have been less adversely affected by the crisis
other countries, and therefore promise quick returns to a financial
is yet to write off a large volume of bad assets. The surge is clearly
on itself inasmuch as it has generated an asset price boom in recipient
countries, encouraging further speculative flows. As the International
Fund’s Regional Economic Outlook released in October reports, “emerging
has especially benefited from equity market inflows, which have not
exceeded those to other regions, but have also returned to levels
before the crisis. External equity and bond issues by emerging Asian
have also returned to pre-crisis levels, a much stronger rebound than
in other regions.
Even inflows of syndicated loans have resumed to emerging
This turnaround is worsening an imbalance that was seen as being a medium-term influence that triggered the crisis of 2008: the imbalance in the distribution of global reserves. The surge in capital inflows to Asian emerging markets puts upward pressure on the currencies of these countries, which can ill-afford currency appreciation at a time when they are just recovering from the decline in exports that the recession generated. Such appreciation makes their exports more expensive in foreign currency terms and erodes export competitiveness.
surprisingly, central bankers have stepped in
to manage exchange rates and stall or dampen appreciation by buying up
and adding it to their reserves. According to the IMF, from March
September 2009, emerging Asian countries accumulated US$510 billion in
reserves, compared with US$69 billion in emerging Europe and US$17
reserves accumulate rapidly, central banks
look for liquid and safe assets. And since the dollar remains the
reserve currency and the
reverse flow of capital from developing to
developed countries had in the past been held responsible for the
liquidity, credit and consumption in the
What the recent Asian experience illustrates is that financial rather than trade flows often generate the imbalances reflected in the uneven distribution of global balance of payments surpluses and foreign exchange reserves. If those reserves are seen as contributing to a process that leads to a financial and economic crisis, then the fault possibly lies in the structures created by the financial policies of the developed countries rather than in the exchange rate policies of the developing.
is more the revival of financial flows has
been accompanied by tendencies the full import of which has been
ignored in the
complacence generated by the recovery in
Not surprisingly, the IMF reports that evidence for the year since September 2008 indicates that unlike the developed countries where bank credit flows froze in the wake of the crisis, bank credit growth in Asia has only slowed and that in some cases such as China it has in fact risen sharply. There are many benign explanations for this, including the strong balance sheets of the banks that have recapitalized themselves since the 1997 crisis and been more cautious in their practices. As the IMF puts it: “Unlike in Europe, Asian banks had little exposure to U.S. toxic assets, and the rise in domestic nonperforming loans has been modest, so the damage to their capital positions from the crisis has been relatively small. Moreover, they have been quick to replenish their buffers, raising more than US$106 billion in capital since fall 2008. As a result, the declines in their capital-asset ratios have been negligible; in some countries, capital ratios have even risen compared with pre-crisis levels. So as liquidity conditions improved, Asian banks were in a strong position to resume lending.” To this we must add the lower leverage in a restructured corporate sector that had burnt its fingers in 1997.
There is, however, some danger. Whenever credit remains high or surges because of easy liquidity, some of it flows into risky assets. This is visible in China, which was not a victim of the 1997 crisis and had not seen restructuring of the kind noted above. The evidence suggests that credit growth in China has accelerated since the beginning of 2009, facilitated by the government’s decision to relax informal quantitative limits on bank credit growth as a response to the growth slowdown resulting from the deceleration in export growth. The resulting credit boom raised the level of net new bank credit by 50 percent compared with its level 2008 as a whole.
Such credit has financed a surge in public investment which when mandated by government is not constrained by expectations of market demand and profitability. But it has also hiked private consumption and also private investment, particularly in real estate. According to estimates about 40 percent of the private investment undertaken in the first eight months of 2009 went into real estate. There is reason to believe that this is true in other Asian countries as well, where the liquidity resulting from the return of capital that had initially exited the country has helped sustain a regime of easy liquidity and credit with low interest rates.
Needless to say, a credit surge of this kind encourages speculation, leads to asset price inflation and runs the risk of fuelling a bubble based on loans of poor quality. This not only questions the sustainability of the resulting recovery but makes the growth process partially one that rides on a bubble. As and when governments seek to reduce their fiscal deficits and exit from the fiscal stimulus they chose to provide, this aspect of the growth process could come to dominate. If that happens, Asian growth would increasingly take on characteristics similar to those displayed by the developed industrial countries in the years before the onset of their financial crisis with real economy expansion being driven by debt-financed private (particularly housing) investment and consumption. Such growth is obviously vulnerable, since a credit surge cannot be sustained for long without undermining the confidence of lenders and of those willing to carry risk on their behalf.
It is in this background that statements of the role of Asia in leading a recovery need to be assessed. Even if a revival of domestic demand is reducing Asia’s substantially dependence on the markets of the developed world for its growth, that revival is based on a combination of debt-financed public and private expenditure. Fiscal conservatism may reduce the first, while the unravelling of a speculative boom may end the second. In which case the crisis may still be with us.