9 May, 2011

Curb Speculators, Promote Regionalisation, Says UN Asia-Pacific Economic Report

Imtiaz Muqbil

BANGKOK — Asia-Pacific economies are being urged to learn from the mistakes of unbridled globalisation and pursue greater self-reliance through increased intra-regional trade, connectivity and people movements. In a landmark annual report issued last week, the UN Economic & Social Commission for Asia and the Pacific (UNESCAP) blasts the destabilising role of speculative capital inflows and market speculators, and stresses that the world’s fastest growing region now has more than enough financial, manpower and natural resources to pursue more stable alternatives and stand on its own feet.

The report was presented at the Foreign Correspondents Club of Thailand by Dr Nagesh Kumar, UN ESCAP’s Chief Economist and Director of the Macroeconomic Policy and Development Division. Since taking up office in 2009, the award-winning economist has played a major role in challenging the conventional wisdoms about open markets and unfettered economic liberalisation and deregulation. Formerly Director-General of Research & Information System for Developing Countries, a New Delhi-based development policy think-tank, Dr Kumar is an unabashed advocate of  stronger regional and sub-regional self-reliance.

Also significant is that the entire core team which compiled the report, led by Aynul Hasan, was almost entirely Asian. It included Shahid Ahmed, Shuvojit Banerjee, Somchai Congtavinsutti, Clovis Freire, Alberto Isgut, Nobuko Kajiura, Daniel Jeongdae Lee, Muhammad Hussain Malik, Jorge Martinez-Navarrete, Margit Molnar, Amitava Mukherjee, Syed Nuruzzaman, Naylin Oo, Pisit Puapan and Marin Yari.

In essence, the report has a rich Asian flavour and reflects a growing frustration with the so-called socio-economic “solutions” that have been sold as panaceas to the Asia-Pacific region in the aftermath of the 1997 economic crisis. Hence, the report is both a sign of Asia pushing back as well as seeking to reverse the trend by getting the solution-peddlers in the West to fix their own problems first. The report will figure highly on the agenda of discussion at the 4^th UN Conference on the Least Developed Countries, (due to start in Istanbul on May 9) and next year’s UN Conference on Sustainable Development – Rio+20.

Critical Anchor for Global Recovery

The report says that the Asia-Pacific developing economies have recovered well in 2010 from the global financial crisis of 2008/09. “The dramatic V-shaped recovery witnessed in 2010 by the economies in the region was supported by massive fiscal stimulus packages along with renewed strength in exports. It helped the Asia-Pacific region emerge as a growth pole and a critical anchor for global recovery.”

In 2011, led by the region’s large developing economies such as China, India and increasingly Indonesia, the Asia-Pacific developing economies are projected to grow in 2011 at 7.3%, as the recovery process consolidates, the report says. This rate is down from the 8.8% growth achieved in 2010 which was high due to a low base, and partly due to the withdrawal of fiscal stimulus policies, adoption of tight money policies and sluggish recovery in the advanced economies.

It expects China’s growth to be 9.5%, India 8.7% and Indonesia at 6.5%. The economies of India and Indonesia stand to benefit from robust consumption and investment, while China should benefit from the Government’s measures to reorient towards a more consumption-driven economy.

Says Mrs Noeleen Heyzer, Executive Secretary, UNESCAP, “The Asia-Pacific region emerged from the global financial crisis as a growth driver and anchor of stability of the global economy. It now has the historic opportunity to rebalance its economic structure in favour of itself to sustain its dynamism with strengthened connectivity and balanced regional development and make the twenty-first century a truly Asia-Pacific century.”

Mrs Heyzer notes that there are challenges such as “rising inflationary pressures, the return of food and fuel crises that are threatening hard-won development gains, sluggish recovery in the advanced economies, and a deluge of short-term capital flows that are causing volatility in capital markets and other problems. Furthermore, the devastation wrought by the recent earthquake and tsunami in Japan provides another stark reminder of the region’s vulnerability to natural disasters.”

Food, Fuel and Financial Crises

Although UN Secretary General Ban Ki-Moon claims in his preface that the report “stresses the need to expand and diversify the productive capacity of the least developed countries in order to overcome their structural limitations and take advantage of opportunities arising from globalization,” the reality is that the report is full of references to the price that the Asia-Pacific economies have paid for blindly and unquestioningly going down the globalisation path, especially in the wake of the 1997 Asian economic crisis.

UNESCAP has warned of what it calls the “food, fuel and financial crises”. All of these are important to sustain the region’s economic develoment, provide jobs and lift the teeming milions out of poverty. However, it notes that clearly the volality and instability of food and fuel prices, as well as financial and currency volatilty, are largely the result of speculative activities, which must be regulated and controlled.

It says, “The key immediate challenge is to address rising food prices that are threatening to seriously undermine the process of poverty reduction. ESCAP projections reported in the Survey 2011 suggest that as many as 42 million more people could remain in poverty in 2011 as a result, in addition to 19 million already affected in 2010.

“The challenge has to be addressed through a combination of policies at the national, regional and international levels including tariffs and tax policies, regulation of hoarding and speculative activity in food commodities, disciplining the conversion of food into biofuels, using buffer stocks in a countercyclical manner, and protecting vulnerable households through targeted subsidies.”

Speculators blasted

Repeatedly, the report blasts the influence of speculators, with a clear quote from Mrs Heyzer: “There is a risk that some Asia-Pacific economies could be destabilized by volatile flows of speculative capital.”

Among some of the other key quotes on speculation:

++ “In 2011 most economies are likely to see an increase in inflation. To some extent, inflationary pressures reflect a resumption in growth. Inflation also results from rising food and energy prices, which would have a particularly damaging impact on the poor and vulnerable populations. Furthermore, there are significant risks associated with the excess liquidity in developed countries, which is resulting in large inflows of speculative capital to Asia and the Pacific. This, in turn, is creating asset price bubbles as well as causing inflation and the appreciation of regional currencies.”

++ While economies in the (North & Northeast Asian) subregion look towards raising interest rates in 2011, a growing concern for the subregion is that rising interest rates are likely to attract an inflow of speculative capital from countries where interest rates are low, pushing asset prices higher and fuelling inflation.

++ Food prices have increased in various countries by up to 35%. While adverse climatic conditions have affected supply in many countries, increasing conversion of food crops into biofuels, export bans, hoarding and heightened speculative activity in food commodities backed by the massive injection of liquidity in the advanced countries have exaggerated the price surge. Rising food prices are having dire effects on the poor, and reversing hard won development gains.

++ International cooperation through the United Nations and the G20 should be stepped up to curb financial speculation in food commodities and to regulate the diversion of food for biofuels.

++ The other key channel through which policies have caused the dramatic run-up in food prices is the growing level of financial speculation. It is now increasingly clear that a significant portion of the increases in the price and volatility of food and energy commodities can only be explained by the emergence of a speculative bubble. The argument against the existence of such speculation is that the massive increase in the involvement of financial investors in the commodity markets is only in response to a rising market rather than being the driver of the price rises. However, a number of observations contradict such an interpretation of the current situation in commodity markets.

++ The dangers of commodity price changes due to speculation are two-fold: first, that the increase in prices above and beyond the situation dictated by supply and demand will lead to an added burden for the poor, and second, the increased volatility of food prices due to speculation will lead to the likelihood of more extreme falls in prices when the market misjudges the impact of supply curtailments.

++ There are significant risks associated with the excess liquidity in developed countries, which is resulting in large inflows of speculative capital to Asia and the Pacific. This, in turn, is creating asset price bubbles as well as causing inflation and the appreciation of regional currencies.

++ Governments have attempted to insure against volatile capital flows by building up foreign exchange reserves. But this may be inadequate. A vulnerability yardstick developed by ESCAP indicates that the reserves of a number of countries are lower than their overall exposure to these vulnerabilities.

++ Capital controls should be seen as important elements of the policy tool kit for reducing the volatility of the capital flows, as recommended by ESCAP previously. Some economies in the region have imposed capital controls over the past year, an approach which is now supported even by the International Monetary Fund. Developed economies should also support the imposition of such controls by taking measures that deter capital outflows, such as taxing them or requiring high margin requirements on foreign exchange derivatives that mimic actual outflows.

++ The region must also exert its influence, through the G20 and other forums, in the process of reform of the international financial architecture to make it more development friendly. Important proposals in this regard include: establishing a special drawing rights-based global reserve currency that could be issued counter-cyclically; a global tax on financial transactions to raise resources for achieving the Millennium Development Goals and moderate short-term capital flows; and international regulations to curb excessive risk-taking by the financial sector.

Stronger Intra-Regional Links

The report makes a robust call for building stronger intra-regional links, clearly an area in which the travel & tourism industry can play a major role.

It says, “On the trade front, the region could leverage its regional trading arrangements so that they become building blocks for the creation of a seamless, broader and unified Asia-Pacific market. In light of the large trade complementarities across subregions, a broader approach to regional integration which focuses not just on deepening integration within subregions but also in fostering trade links across subregions would be fruitful.

Some direct quotes from the report

Extending regional connectivity

Rapid growth in dynamic economies such as China and India can also benefit smaller and poorer neighbours as it helped in recovery of the region from the crisis. But this cannot be taken for granted. The rising tide of development opportunities will not lift all boats if these are separated by water locks. These obstructions can take the form, for example, of restrictive non-tariff measures, complicated and time- consuming customs procedures, differences in regulations, and poor transport infrastructure. As a result, the enormous opportunities generated by the more dynamic centres may stop at their national borders.

Intraregional trade

Intraregional trade among Asia-Pacific countries has expanded at a faster pace than their global trade bringing its share to nearly 52% in 2008. The analysis presented in the Survey shows that the potential of intraregional trade has not been fully exploited partly due to high trade costs and other barriers. The potential for greater trade is evident from the extent of complementarities between and within Asia-Pacific subregions – particularly between East and North-East Asia and South-East Asia, and within East and North-East Asia. Moreover, for four of the five ESCAP subregions trade complementarities were greater with other subregions than within the subregions themselves. Regional integration should, therefore, not just focus on deepening integration within subregions but also on fostering trade links across subregions.

Intraregional foreign direct investment

Trade is closely linked with foreign direct investment (FDI). In the past, inflows to Asia-Pacific countries came from developed countries, but currently, an increasingly larger proportion is coming from other countries in the region, notably China, India, Malaysia, the Russian Federation, and Singapore as these countries have companies that can offer much-needed investment and technological expertise to lower-income countries.

Preferential trading arrangements

The Asia-Pacific countries have been very active in pursuing preferential trading arrangements in recent years and by end of 2010, some 170 such agreement were in place in the region. These agreements tend to be bilateral or subregional in nature and consequently, do not create a seamless, broader and unified Asia-Pacific market. However, they can serve as stepping stones toward achieving that goal.

Two important initiatives in that direction are the East Asia Free Trade Agreement (EAFTA) and the Comprehensive Economic Partnership of East Asia (CEPEA). In particular, CEPEA, covering about 80% of the region’s population and GDP, and with greater potential of welfare gains for the participants, could constitute the nucleus for an incipient Asia-Pacific-wide free trade area to which other countries in the region could accede in the future.

A complementary option would be a regional framework to link various subregional groupings in a preferential arrangement. As a broader regional forum with convening power, ESCAP could facilitate the emergence of such broader arrangements in the region. Considering the diverse levels of development in the region, the regional trading arrangements should not only include special and differential treatment provisions but also incorporate economic cooperation to narrow the development gaps.

Transport links

Rapid export growth has resulted in a sharp pick-up in maritime shipping. As of 2009, Asia had the world’s top five container ports – Singapore; Shanghai, China; Hong Kong, China; Shenzhen, China and Busan, Republic of Korea – which accounted for 23% of the world’s total container throughput. Much of the economic development has, however, been concentrated around major ports, leaving large hinterland areas relatively underdeveloped.

Although land transport networks have improved, moving goods can still be very expensive because of long distances, high operating costs for trucks due to poor roads and ageing vehicles, high transhipment costs, and complex border- crossing procedures. In addition, the Pacific island developing economies face high costs because their small populations and low productive capacities make regular liner services unprofitable.

The Intergovernmental Agreement on the Asian Highway Network (AH) and the Intergovernmental Agreement on the Trans-Asian Railway Network (TAR) signed under the auspices of ESCAP have contributed to infrastructure investment and also triggered several multilateral initiatives. For instance, the Asian Development Bank (ADB), in collaboration with ESCAP, recently initiated a project on the development of priority AH routes and TAR lines. To assist in the integration of networks, ESCAP is developing a third intergovernmental agreement, which focuses on dry ports across the AH and TAR networks.

Trade and transport facilitation

Many countries now realize the importance of streamlining trade procedures. Consequently, they are relying more on electronic data interchange, and are looking to institute national electronic single windows through which traders can submit required documentation, pay duties, and receive clearance. The national single windows considerably help facilitate trade but in order to be effective, it needs to be accepted by all trading partners. Many regional trading arrangements now cover trade facilitation within their scope.

The overall efficiency of transport depends on the harmonization of legal regimes through international conventions. In the Asia-Pacific region, progress in this area has been uneven. The 12 landlocked countries in the region have acceded, on average, to only four of the seven relevant conventions, with their transit partners acceding to an even fewer number, leading to territorial discontinuity, which significantly reduces the conventions’ effectiveness.

People-to-people connectivity: migration, overseas education, and tourism

People-to-people connectivity could help promote better mutual understanding, enhanced trust and greater respect for diversity, thus contributing to a culture of peace. The Asia-Pacific region is a growing source as well as destination of migrants for higher education and overseas employment, and is also experiencing rapid growth in tourism. While the majority of migrant workers in Asia and the Pacific leave the region, a significant proportion move within the region – most of them to neighbouring countries within the same subregion. Many of the subregions and countries in Asia and the Pacific have already taken some initiatives towards creating a legal framework for migration. North and Central Asia, ASEAN, and the Pacific have signed multilateral agreements, while some countries have established bilateral memoranda of understanding that establish guidelines and procedures for employment protection and the return of workers.

Financial cooperation

Asia and the Pacific has moved forward with regard to fostering regional cooperation through various initiatives, such as the Chiang Mai Initiative Multilateralization (CMIM), the Asian Bond Fund and the Asian Bond Market Initiative. However, most of these initiatives are in their early stages and have limited scope and coverage. The region should build on CMIM to create a well-endowed, truly regional crisis response facility by expanding its membership to cover other systemically important countries and increasing its pool of resources. Additional elements of a regional financial architecture, that ESCAP is currently elaborating on include: achieving closer cooperation between central banks, financial institutions and capital markets; creating a large infrastructure development fund, improving exchange rate coordination; and capacity-building for harnessing the public-private partnerships for investment in infrastructure.