Asia key to solving crisis

The Straits Times
Nov 15, 2008 | 6:00 AM
Asia key to solving crisis
Concerted action by region can spur growth and help lift world out of slump
By Robin Chan

ASIA has a vital role to play in helping lift the world out the global slowdown, according to a panel of esteemed economists from around the world.

The 27-member group - led by renowned US economist Jeffrey Sachs and including Nanyang Technological University dons Tan Khee Giap and Chen Kang - said coordinated action could provide a shot in the arm for the global economy.

'Macroeconomic expansion in Asia will not only help to sustain Asia's own economic growth and employment levels, but will also help to put a floor on the coming global slowdown,' they wrote in a two-page statement.

The group, known as the Asian Economic Panel, said major regional economies should have a coordinated policy framework in place by this weekend's meeting of the Group of 20 economies in Washington, where the United States and Europe are expected to offer different proposals for sweeping reforms of the global financial system.

With the US and parts of Europe, including Britain, Germany and Spain, already in a recession that is likely to be 'severe and prolonged', the economists say 'urgent and coordinated action' is needed in areas of monetary and fiscal policy and exchange rates.

They believe this would lead to higher growth in Asia and enable consumers in the region to buy US-made goods and so help cushion a recession in the US and Europe.

China, Japan and South Korea are seen as the leaders of this initiative, which involves seven steps that should be taken to protect economic growth.

A committee of senior finance ministry and central bank officials from the three countries could coordinate the programme.

The steps include China, Japan and South Korea announcing that they will work closely among themselves and with other regional countries to 'ensure that Asian growth remains robust'.

Another is for the three major Asian central banks to provide large credit swap lines between themselves to expand the current swap lines the US has already extended to South Korea to supplement its shrinking foreign exchange reserves.

The International Monetary Fund should also be removed from any kind of involvement in the operations of these swap lines, as with limited resources at their disposal, they are likely to impose tough conditions on countries that make use of them.

The three countries should also announce joint fiscal expansion but with measures appropriate to their individual situations. For example, China could use public funds to build urban infrastructure and public housing or give tax cuts, while Japan could buy equities to impose a bottom on the share market.

They should also use monetary tools, like jointly slashing interest rates and stabilising currencies against a basket of the US dollar and euro to avoid their excessive moves from hurting other economies.

A coordinated response from Asia 'will achieve much larger and much more durable results than they would achieve through unilateral actions', said the panel.

The Washington summit, which began last night, was called after talks between US President George W. Bush and French President Nicolas Sarkozy.

How exactly it will lay the foundation for a reform of the global financial system is still unknown. Mr Bush has defended free-market principles despite Europe's call for tighter regulation. Asia will be represented at the summit by China, Japan, South Korea, India and Indonesia.

The Asian Economic Panel was founded in 2001 as a part of Columbia University's Earth Institute and think-tank Brookings Institution and brings together prominent economists from around the world who also write for the journal Asian Economic Papers.