18 Oct, 2011

New Era Dawns – East Tells West: Put Your House In Order

Imtiaz Muqbil

The Bangkok-based UN Economic & Social Commission for Asia and the Pacific convened a high-level consultation amongst the region’s ministers, central bank governors and senior policymakers between 11-12 October to formulate an Asia-Pacific perspective for the G20 Summit to be held in Cannes, France on 3 and 4 November 2011. The meeting reflected a growing anger at the fact that those who have had nothing to do with the global financial and economic crisis are suffering the most from it. It ended with strong calls for those who are responsible for causing it to do more to solve it. Asia-Pacific travel & tourism industry leaders meeting for ITB Asia and TravelRave in Singapore this week, take careful note.

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The past two decades have been largely dominated by Western institutions, corporations and individuals telling the East to fix its economic and social problems. No longer. A straight-talking report issued last week by the Bangkok-based UN Economic & Social Commission for Asia and the Pacific (UNESCAP) indicates that it is time for the world’s developed economies to start fixing their own problems, and for the developing countries to pursue solutions that may involve reversing course from everything that has been considered conventional wisdom heretofore.

In diplomatic terms, UN ESCAP describes this as a call for “greater transparency and inclusiveness in G20 deliberations in shaping a development-friendly global economic governance system.” In more forthright terms, the UN body which oversees the world’s largest population base, as well as the largest number of poor people, says that the world is on the brink of another economic crisis, those who have had nothing to do with it are suffering the most from it, and that those who are responsible for causing it have to do more to solve it.

That will not be easy. A globalised world means that everything is interconnected and interlocked — inflation, currencies, energy, agriculture, trade, financial systems, budgetary and balance of payments. Trying to fix one invariably has a ripple effect somewhere else. This has created a “Gordian’s Knot” of problems and led to a situation where there is a lack of “a clearer diagnosis of what we are trying to fix.” Indeed, the UNESCAP paper asserts, the developing countries will need to start acting to defend themselves against these externally caused problems that are largely out of their control. This could mean reinstating capital controls and curbing speculative activity, both of which have been largely created by “financial terrorists” sitting behind computer screens in cities such as London and New York.

Implications for Travel & Tourism

The ESCAP paper has significant implications for the travel & tourism industry, which has also been affected by global financial terrorism. Although the Asia-Pacific region has now become its own best source of inbound-outbound travel, it is still at the mercy of the international crises. Many industry travel leaders will be meeting in Singapore alongside ITB Asia this week to discuss the state of play. In the past, such events have been dominated by Western expatriate executives telling Asians how to fix their problems. Today, the Western expatriates have lost their lecturing rights. It is imperative for Asian NTOs, airlines, hotels, travel agents and other industry leaders to start pressuring their counterparts in the West to get their own governments to fix their problems.

Written from a thoroughly Asia-Pacific perspective, the UNESCAP paper minces no words. UNESCAP chief economist Nagesh Kumar is an Indian who has played a significant role since his arrival two years ago in getting the UNESCAP to reflect a more Asia-Pacific perspective. He and his team have undertaken a more introspective diagnosis of global problems since the last 2008-09 economic crisis, pinpointed the problems with much sharper precision and are now prescribing solutions that would have once been anathema to institutions like the IMF or World Bank.

High Level Consultation

The paper was prepared specifically for a high-level consultation convened by UNESCAP between 11-12 October, involving the region’s ministers, central bank governors and senior policymaker, to formulate an Asia-Pacific perspective for the G20  Summit to be held in Cannes, France on 3 and 4 November 2011. With only eight Asia-Pacific countries as members of the G20, the Consultation stressed the importance of making the region’s voice, especially that of its poorest nations, heard at the G20.

Said ESCAP Executive Secretary Dr. Noeleen Heyzer said in her opening address. “The Asia-Pacific region is leading the global recovery and is the most dynamic region in today’s world economy. It is time that we also begin leading the global discussions and setting their agenda – through a coordinated regional voice – and play an active role in shaping global economic governance and the ‘rules of tomorrow. The perspective of poor and the excluded countries needs to be factored in the global discussions given their outcomes affect all the countries irrespective of their size or income levels.”

The background paper prepared for the consultation went a lot further. It said, “A lot is at stake for Asia and the Pacific at the Cannes summit because, in an increasingly interdependent world, both the economic performance of the advanced economies of the West and the stability of international financial and commodity markets are global public goods affecting every single country in the world one way or another. An important reason why the region recovered relatively quickly from the global financial crisis and many of its countries continued growing at relatively high rates through it is that the crisis was relatively brief, for which the effective policy coordination promoted by the initial G20 summits deserves much credit. However, the current financial turbulence, the possibility of a double-dip recession, and the prospects of continued high unemployment and scant economic growth in the advanced economies pose risks for the region that are even more serious than back in 2008.”

Set of Recommendations

It adds, “As the November 2011 Cannes summit approaches, the global macroeconomic environment has entered a period of turbulence. At the beginning of the year a major cause for concern was a new boom in food and oil prices, which increased as much as 40 percent between June 2010 and February 2011. With the price of crude oil similarly increasing 56 percent between July 2010 and April 2011, it looked like the world economy was headed to a repetition of the disruptive commodity price boom that preceded the international financial crisis of 2008-2009. However, that risk subsided in the subsequent months, as the opposite risk of another recession looms large in the horizon. Amid the deteriorating debt crisis in the euro zone, the downgrade of the credit rating of the U.S. sovereign bonds, and persistently high unemployment rates in the advanced economies, forecasts for the second half of 2011 have been sharply revised downward, and the prospects for 2012 are highly uncertain.”

The Consultation ended with the adoption of a set of recommendations related to regional economic and social priorities, including commodity price volatility, food security and reform of the international monetary and financial system, to be communicated by the United Nations to France, the G20 Chair. The Asia-Pacific policymakers called on the G20 Cannes Summit to give a clear and strong message that achievement of the Millennium Development Goals (MDGs), narrowing development gaps and policies to foster balanced development must occupy a central place in sustaining growth in the years ahead. They noted that Asia-Pacific countries with large foreign exchange reserves can contribute to global growth by increasing domestic spending to address critical developmental needs, such as investing in infrastructure and promoting universal access to social protection.

One of the key issues of discussion was global financial crisis. The Consultation noted that this was triggered by the build-up of risks in the financial sector that escaped the scrutiny of supervisors. As a result, the Asia-Pacific countries have called for a comprehensive reform of the international monetary system. The Consultation urged the G20 to put forward credible proposals for regulation of the shadow banking system and for curbing the excessive risk-taking tendencies that are responsible for heightened volatility in the financial markets.

A copy of the full paper was made available to Travel Impact Newswire. It is available for readers free of charge. Please email <imtiaz@travel-impact-newswire.com> to get a copy. Meanwhile, here are some excerpts:

(+) It is important to keep in mind that international financial stability and a stable rate of economic growth in the major economies should be considered as global public goods because every country in the world, even the smallest and most remote, suffers in their absence. As a result, the Cannes agenda is not just the agenda of a group of 20 countries. Because all the non-G20 countries have a stake in what will be discussed there, it is very important to call for the leaders of the G20 to make their deliberations as transparent as possible and to facilitate a greater degree of engagement with non-members of the group. Given the global nature of the issues discussed, all these non-members are indeed stakeholders, and their voices – if they can be heard loud and clear – could contribute to keeping the G20 negotiators focused on the major responsibilities they have at hand.

(+) The Asia-Pacific region is facing the challenge of coping with a sharp deterioration in the global environment. Many economies in the region also continue to grapple with the challenge of inflation which has been high in substantial part due to global factors, particularly food and oil prices and foreign capital inflows. The measures likely to be adopted by developed economies in order to support growth will present further challenges for the region. Loose monetary policies in these economies may have led to buildup of asset market bubbles, exchange rate appreciation and inflationary pressures for Asia-Pacific. But in times of global uncertainty, such as during the current euro zone debt crisis, global liquidity tends to suddenly evaporate, as capital flows flock to safety assets such as US Treasury bills. This reversal of capital flows to the Asia and the Pacific region seems to be occurring at the time of writing, as currencies such as the Indian rupee, the Korean won, and the Russian rubble depreciated by 10% or more between August and October.

(+) The slowdown in growth in developed economies is the most critical short-term challenge facing the global economy. Slowing growth in these economies has a severe impact on the growth and development progress of developing economies, both in this region and in others. Therefore non-G20 members of Asia-Pacific have an overriding interest in ensuring that developed economy members of the G-20 prevent the occurrence of a new major financial crisis. In addition, they would benefit from the implementation by all the G20 countries of coordinated expansionary policies aimed at reviving the ailing global economic growth. For that purpose, increases in domestic spending by countries in the region that have large current account surpluses could contribute to supporting global growth while providing opportunities for businesses and employment in other countries of the region.

(+) Most economies in the region have tried to protect themselves from the risks posed by volatile capital flows by building up foreign exchange reserves. However, intervening in the foreign exchange market by buying or selling reserves, is a limited tool to prevent the build up and potential burst of asset price bubbles. In addition, the standard tool to deal with the inflationary consequences of capital inflows, interest rate rises, could be self-defeating because it contributes to attracting more capital inflows.

(+) The Asia-Pacific region could receive major benefits from reducing its macroeconomic imbalances, provided that the additional domestic spending is used to support its social and economic development. Firstly, it is important to keep in mind that in spite of its fast economic growth, the region is estimated to be home to 862 million people living below the $1.25 poverty line, a figure that surpasses the population of the United States and the European Union combined.

(+) From the perspective of the non-G20 member of Asia and the Pacific, it is very important to assess how these reforms will affect poor developing countries that are highly dependent on external financing and whose domestic financial markets are at an early stage of development. Therefore an impact assessment needs to be conducted before imposing these regulations.  In addition, these counties have low institutional capacities and availability of trained professionals to implement modern financial regulatory and supervisory functions, and need help to build these capacities. While the representation of a larger number of developing countries at the Financial Stability Board was a step in the right direction, such step is insufficient to address the concerns of the low-income countries. Therefore, the FSB should be further expanded to include them. Finally, G20 needs to come up with credible proposals for regulation of the shadow banking system and curbing the excessive risk taking tendency that is responsible for heightened volatility in the financial markets.

(+) While these suggestions seem like steps in the right direction, what is lacking is a clearer diagnosis of what we are trying to fix. On close examination, it is clear that many of the problems of the international economy that the G20 is attempting to address – global imbalances and volatility of capital flows, exchange rates, and commodity prices – are linked, and that they all revolve around the core function of an IMS: the provision of international liquidity. Far from stable, such liquidity has been characterized by floods and droughts, growing unsustainably in the run up to the global financial crisis, evaporating abruptly in the fall of 2008, and experiencing additional violent swings in recent times – leading to the surge in food prices between June 2010 and February 2011 and the recent panic caused by the euro zone debt crisis.

(+) The creation of new international liquidity is transmitted to other economies through capital flows, exchange rate pressures, and impacts on international commodity markets. The problem is that current international institutions are not able to regulate and stabilize the volume of international liquidity, which ultimately depends on domestic considerations in a handful of countries. Moreover, such liquidity can change quickly in response to changes in perceptions about global economic prospects, such as during the global financial crisis or in response to uncertainty caused by the current euro zone debt crisis.

(+) A first line of defence, implemented at the national level, is the management of capital flows through various forms of capital controls. The IMF, in an important reversal of its traditional views on capital controls, has recently announced the development of a framework to help countries manage large capital inflows, which received a strong endorsement by the president of the European Union (Wall Street Journal, 2011). In this context, the developing countries of Asia and the Pacific could call on the IMF to provide them with technical assistance to implement the most effective forms of such controls. In addition, the Asia-Pacific region should continue developing its regional crisis prevention and response facility by increasing the scope and coverage of the Chiang Mai Initiative Multilateralization (CMIM) as discussed in ESCAP (2011a).

(+) Preventing a new financial crisis and sustaining the recovery are key priorities. In addition, the objective of reducing the large macroeconomic imbalances that still characterize the global economy is one that could potentially benefit the region because it requires surplus countries to increase their domestic spending, which could help them achieve broad developmental objectives such as infrastructure investment, expansion of minimum social protection floors, and enhancing energy and food security. Furthermore, by boosting their domestic demand, such policies could spill over to other countries in the region through trade and foreign direct investments channels.

(+) In the financial side of the economy, the G20 has barely make any progress in discussing a key issue that is at the root of the volatility in capital flows, exchange rates and commodity prices: the provision and regulation of international liquidity. Until this issue is properly addressed, the wild alternation of financial floods and droughts that characterized the global economy during the past decade is likely to continue in years to come. Therefore, it is very important that countries from the region defend themselves through the implementation of capital controls.