Risks of New Global Downturn: Impact on Asia and Response  Lim Mah Hui (Michael)  State of the Global Economy, and Reflections on Recent Multilateral Negotiations  South Centre Conference, Geneva  February 2-3,

OUTLINE  I – Major Risks Facing Asia  II – Economic Effects on Asia  III - Mitigating Policies – short and long run 2

3 Economic Effects on Asia  Sharp drop in exports (2/3 to G3)  Slow growth, employment loss, poverty  Vulnerability in household balance sheet  Asset inflation (property, equity) fr continued excess liquidity  Withdrawal of credit by European banks  Shift in composition of investment flows from productive (bank lending, FDI) to speculative (portfolio investments)

Major Risks facing Asia  Slow Growth in US  Eurozone Recession  Hard Landing in China?  Volatility in Commodity Mkts fr excess liquidity, financialization, geo pol risks  Another financial crisis fr bank exposure to sovg debt >bankruptcies  Unknown consequences fr non traditional monetary policies fr AEs 4

Mitigating Policies – Short Term  Usual monetary loosening  Expansive fiscal policy – but countries with high fiscal deficit or current account deficit –less space, e.g. Malaysia, India, Philippines  Countries should keep whole range of policy options open 5

6 Long Term  Present economic crisis, also crisis of capitalism and free market ideology  Good opportunity to redefine economic paradigm and discourse  In particular – the type and quality of growth and the role of the state

Major Lessons and What To Do- 1) Limits to Export Led Growth  Export Led Growth – necessary in initial stages but beyond a certain level – counter productive  Continuous foreign reserves accumulation means DE funding consumption in AE; own savings too high (china) or investments too low (Malaysia)  Need to re-orient to domestic growth or intra-regional trade 7

Growth and Inequality  Domestic growth constrained by lack of domestic consumption (China – 35% and Singapore 40% of GDP)  Related to falling share of GDP accruing to labor and rising share to capital 8

2) Imbalance btw GDP share to labor vs capital (inequality)  In China, labor share of GDP dropped fr 57% to 37% ( ) and consumption fell from 55% to 35%  In Japan, Canada and 12 European countries labor share fell from 56% to 53.7% ( ) 9

Imbalance caused by Wage Repression  Wages lagging behind productivity  In China productivity increased 179% while wages rose 92% ( )  In U.S. wages also diverged from productivity increases after

Wages and Productivity in China

Wages lagged behind productivity 12

Trickle-down theory of Growth Not Acceptable  Government - play role to ensure wages must keep up with productivity increases.  Practice of countries competing to attract FDI by repressing wages and racing to the bottom sh be replaced by coordination to address this problem 13

3) Regional Cooperation More Urgent  Given the unwillingness of major advanced countries to institute meaningful reform in international financial architecture.  Regional cooperation in trade, in capital controls as to types of investments to encourage and types of investments to discourage, in industrial policies. 14

Enhancing Role of State  In industrial policy planning  Regulate and reconfigure of finance to serve the real economy rather than to promote Anglo-American model of speculative finance  Increase social consumption goods - health, education, public transport, clean energy, some with private sector partnership, rather than just private consumption goods 15

 THANK YOU 16