The global economy is facing a very cheerless 2009. The OECD economies are sliding or already have slid into recession. Developing Asian countries face weaker demand for exports, lower flows of remittances and less investment. Lower energy prices may help some countries, but generally lower commodity prices hurt. The estimates of growth for 2009 fell as last year ended and the new one began. The countries more involved with international trade are clearly suffering the most with Singapore and Thailand expected to be in recession and Malaysia to eke out only slender growth. For some countries, the impact on growth may not seem horribly large, but these are moving targets and the bad news continues to come.
The impact of lower growth in Southeast Asia should not be underestimated. From an OECD or developed country's perspective, 3% to 4% growth doesn't seem so bad. From a Southeast Asian developing country's perspective, it is close to a growth recession and a policy disaster. Political expectations in Southeast Asia target growth well in excess of what is likely; 6% to 7% growth rates are medium-range targets in Malaysia and the Philippines. Political needs for growth relate partly to the commitment to lower poverty.
Over time, for most countries, the incidence of poverty tracks economic growth. A rough rule of thumb is that 1% growth in per capita national income in Southeast Asia results in a 2 percentage-point decrease in the incidence of poverty. In this region, perhaps 200 million people live on or under $2 per day, from a population of approximately 512 million. If growth slackens, large numbers of people will be affected: A 2% fall-off in growth could translate to 20 million people being left in or reduced to poverty. Most of these people will be living in the more populous countries: Indonesia, the Philippines and Vietnam. It is not just the poor that will suffer in a downturn. The middle class will see the loss of jobs and a fall-off in income and in their family businesses. Just as in the 1997-98 Asian financial crisis, the gains of past years are put at risk as businesses fail and trading opportunities vanish. In Southeast Asia, the middle class will make their unhappiness known in the political arena.
The fear of a growth slowdown is quite apparent in the response of monetary policy: there have been determined steps in most countries toward easing credit conditions and shoring up domestic demand. Policy makers rapidly changed from worrying about inflation (when oil prices were widely viewed as likely to stay above $100 per barrel) to fighting a world-wide credit crunch and falling demand. Even before the end of 2008, Singapore had increased liquidity; Indonesia, Malaysia, the Philippines, Thailand and Vietnam had all cut key monetary policy rates and taken other steps to ease domestic credit markets. These steps show a clear focus and flexibility-when conditions changed, so did policy. That monetary policy has been quick to react partly reflects real success in establishing independent monetary authorities. A relatively small group of people in each country has been able to respond to clearly changing conditions in a timely fashion.
Fiscal policy measures, in contrast, appear hesitant, small, and unlikely to have impact over the near term; certainly not commensurate with the economic slowdown we are seeing. Government spending, which could help support domestic demand, especially in the larger nations, is not yet being used to stimulate the economy. At the end of 2008, looking forward to 2009, fiscal policy in most countries was little changed in spite of the expected fall-off in growth. Only in the case of Thailand was there a clear, early public commitment to use fiscal policy to support economic activity and even there, political difficulties suggest implementation could be uncertain. By February of this year, across the region, some additional planning to use fiscal policy is starting to appear, but by no means everywhere. Asia is losing time.
Part of the problem reflects the decision-making processes. In the larger countries, such as Indonesia, the Philippines and in Thailand, changing the government's budget, and establishing a political consensus on what to do, is no easier than it is in the United States, which has seen months of delay on a stimulus plan.
One issue hindering Southeast Asian public spending is a fear of falling into "debt traps." Indonesia and the Philippines, especially, have had experiences of public debt weighing on public financial resources for years, restricting fiscal freedom and imposing real costs. The Asian financial crisis drastically elevated external debt levels for some countries. Over time, however, most nations have reduced their external indebtedness. Statistics for total public debt generally show the same trends. For Indonesia, Malaysia and Thailand, as of 2007, public debt as a fraction of GDP ranged from 35% to 42%. The Philippines is the one large nation that potentially is still dogged by past debt problems. While public debt has fallen in the Philippines in relation to the size of the economy, it was still 62.3% of GDP in 2007, well above its regional neighbors. Other than the Philippines, the larger ASEAN countries have fiscal freedom that was lacking earlier in the decade.
A second fear inhibiting the use of fiscal policy may be a legitimate concern over whether deficit spending will be effective. There has been an extensive debate about the efficacy of fiscal policy, especially with respect to long-term outcomes. But in a situation in which there is general weakness in the world economy, when excess capacity is growing, and when monetary policy in most countries is being directed at fighting contractionary tendencies, there should be few theoretical concerns. If ASEAN as a group moves to expand public spending, the impact is likely to be larger than if only some member nations do. Although, as a group, they are not their own most important markets, coordinated efforts will lessen "leakages" through imports. The general issue of fiscal policy and stimulus packages was on the agenda for the Special ASEAN Plus Three finance ministers' meeting, held in February 2009, in Phuket, Thailand; however, it was overshadowed in the press reports by other topics, such as the mechanisms for swapping foreign exchange to countries in difficulty.
This is not to give license to any and all ideas to spend -- bridges to nowhere are still poor choices. But most large nations in Southeast Asia have some leeway to increase spending and to cushion the current slide of their economies. In these situations, it is often suggested that governments quicken their spending for infrastructure. This is particularly appealing for Indonesia and the Philippines where there are well identified needs. In both countries investment for infrastructure as a fraction of GDP has hovered in the 2% to 3% range, a fraction of what is needed to provide for roads, ports, safe water and electricity. Both countries suffer from uneven infrastructure service provision across the nearly 24,000 islands. Indonesia has recently announced that it will seek to spend for infrastructure as one way to support the economy.
Unfortunately, experience shows that new infrastructure programs are very difficult to start in a short period of time. In particular, "greenfield" infrastructure projects take years to move from idea to implementation. Partly that is good news; today's ASEAN countries are developing more robust, if somewhat cantankerous, democratic institutions. Government-spending programs require considerable political consensus to institute large-scale changes. Implementation demands more local-level consultations, all of which means that governments are more responsive to their citizens, but all of which requires time that is lacking in a crisis. If spending money quickly is important, infrastructure projects are not the best idea.
There are alternatives. A central concern with low growth rates is the impact on the poor. An estimated 200 million people face a $2 per day budget, mostly in Indonesia, the Philippines and Vietnam. While these countries are not rich enough to win any short-term "war on poverty" they are capable, in this period of economic distress, of devoting 1% to 2% of GDP to supporting the poor in direct ways, which could make a tremendous difference. Even in Vietnam, 2% of GDP would allow the government to give an extra $1 a day to the poorest 5% of the population. In Indonesia and the Philippines you could cover 9% to 10% of the population, and in richer Thailand you could reach the poorest 20% of the population.
Of course the situation is not so simple; governments cannot simply throw money at a particular group of poor people. There is little difference between people at the high end of the poorest 20% of the population and the people at the low end of the next group up. To help one without helping the other is neither equitable nor politically sensible. Moreover, simply giving money to large groups of people goes against most of the grain of current policy. But transferring money to the poor and near-poor is likely to be pretty efficient at stimulating economic activity. Arguably it is the poorer in the population who will not save the money, and who will immediately use the funds to buy local goods and services. The businesses of the middle class depend on the spending of the poor.
There are, moreover, targeted processes that can transfer money to poor people in a short period of time and accomplish other goals for the countries. Conditional cash transfers are perhaps the most important of these. These programs provide cash support to families on certain conditions, for instance, that children attend school and are taken regularly to health posts. This means that the program of income support to the families ensures that investments are made in children. Given the dramatic differences that early childhood learning and health care can make in lifetime earnings, this is an investment that will ultimately pay off for the countries. Programs of this type have been instituted in Indonesia and piloted in the Philippines. Conditional cash transfers are only one example of programs that can mitigate the impact of growing poverty, while also providing for greater economic potential in the future. The Philippines provides examples of community development guided by very strong civil-society organizations that have meant real improvements in living standards, especially in urban areas. Funds used in this fashion have a high multiplier impact: When directed to the poor, little money will be saved and most will be used to buy goods and services, thus supporting a broader economy.
In past periods of economic distress, calls to provide support for the poor have struggled to overcome a fear that funds would simply be stolen. Southeast Asian countries have uneven reputations for governance. However, the experience with social-safety nets, especially in Indonesia and the Philippines during the 1997-98 financial crisis, suggest that proper organization provides systems that can be accountable, although problems were surely noted. More importantly, technology is on the side of good governance. The spread of the Internet and the ubiquitous use of cell phones have sharply reduced the costs of tracking government actions. The growing strength of civil-society organizations provides a watch dog that governments increasingly have difficulty ignoring. Transferring funds to millions of people cannot be done without opportunities for theft, but we can do the job better than we have done before as a result of information technology advances.
Last year was abysmal for many in the developed world. The collapse of asset markets and commodity prices has made sure that these troubles will travel to Southeast Asia. But with this warning there is the opportunity to implement programs to protect the vulnerable and cushion the fall in overall growth. To date, however, most countries appear to have found it easier to rely upon monetary policy and a hope that the present crisis will pass quickly, than to truly marshal the fiscal resources needed to turn the economic tide. The year has started with the risk that, by December, we will have done little to help ourselves.
By David Jay Green
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