In The News

At Davos, Will Asia Be Seen as the Solution to or the Victim of Global Economic Crisis?

January 25, 2012

From January 25-29, the world’s most powerful leaders from the public and private sectors gather in the Swiss town of Davos to try to agree on measures that will eventually impact billions of people across the world. The event is being held against an unprecedentedly gloomy global economic picture.

Container ships

While many Asian nations have shown great resilience to the global economic crisis, the European slowdown is threatening their heavily export-dependent economies. Photo by flickr user OlliL.

The World Bank recently reported that the world economy will grow by only 2.5 percent in 2012, far below initial estimates of 3.6 percent. In Europe, leaders have yet to come up with a comprehensive solution to the eurozone crisis. As a result, World Bank forecasts for eurozone growth are now predicted to be at -0.3 percent, down considerably from a low but slightly positive 1.8 percent. In order to deal with this situation, IMF Managing Director Christine Lagarde recently called for a “larger firewall” against default in Greece, Spain, and Italy through a European Stability Mechanism (ESM).

While the World Bank predicts a positive growth forecast of 2.2 percent for the United States, problems in the eurozone are having an impact on U.S. growth. The Department of Commerce estimated that U.S. exports to eurozone countries dropped 6 percent in November of last year. In addition, a contentious U.S. election season could give lawmakers an incentive to move slowly on economic issues – including taxes and the budget – which could further impair the U.S. economy.

Within this high-risk context, there is no doubt that one of the focuses of the Davos discussions will be the risk of recession and debt crisis involving the world’s developed countries. The role of Asian and other developing economies in buoying world growth will be at the center of these discussions. Large Asian economies like China will certainly have a major say in the types of measures that need to be taken to save the eurozone and other developed economies to avoid recession. For example, China’s capacity and willingness to invest more in the European economy and to sustain Western countries’ exports will be high on the agenda.

However, latest reports indicate that Asian and other emerging countries may not be in the position to become the engines of economic growth that developed countries envision. While Asia still appears to host the most dynamic economies in the world and seems to be better positioned to resist or even mitigate the impact of the crisis, many Asian nations are facing domestic crises of their own in addition to dealing with the global economy crisis.

The World Bank recently said it expected India’s economy to grow by just 6.8 percent, down from 7.75. It noted that India is suffering from lower domestic demand and a slowdown in investment. It also stated that South Asia as a region suffers from “domestic policy paralysis and uncertainty about regulatory reform” that has kept the region from making “second-generation” policy reforms to spur growth.

China’s economy expanded by 8.9 percent in the fourth quarter of 2011, but as high and healthy as this rate may appear, for China, it is the confirmation of a slowdown that began at the start of 2011 and is expected to continue into 2012. This is underscored by a slowdown in China’s domestic demand. In December, China saw a remarkable 40 percent plunge in the rate of property investment compared to November, even as consumer spending and overall consumption lagged far behind overall growth.

Other Asian emerging economies – including Indonesia, the Philippines, Malaysia, and Vietnam – have less domestic risk, but are also exposed to the global economic crisis. Such economies are, like China, heavily dependent on exports. The crisis in Western countries, if worsened, could result in difficult times for these economies as the World Bank predicts that commodity prices could decline as much as 24 percent and global trade volumes could fall by more than 7 percent.

In this context, Asia’s economies may not be in a position to buoy global growth in the way that many developed country analysts would hope.

Unfortunately, the risks of the global economic crisis to emerging countries are not just economic, but also have important social and political implications. Many emerging Asian countries still have weak political institutions and poor governance. In societies where economic growth has fueled social and political stability, an economic slowdown would trigger increased risks of a socio-political crisis. The 2012 World Economic Forum Global Risks report notes that in these emerging economies, “social contracts may not be forged quickly enough to rectify increasingly visible economic inequalities and social inequities.”  Such inequalities could be exacerbated by further global slowdown.

At Davos, world leaders have two titanic tasks. First, they must contemplate ways to mitigate the global crisis, with a particular focus on stabilizing the eurozone. This is not only a matter of pumping sufficient capital into the system, but building enduring financial and governance institutions that can ensure future stability. But equally important, at Davos, the world’s most powerful public and private leaders have the difficult task of restoring trust, trust in the economic and financial systems, trust in the political and economic leaders, and, above all, restoring trust in the social contract that bring societies together.

Véronique Salze-Lozac’h is The Asia Foundation’s director for Economic Development Programs and Nina Merchant-Vega is associate director. They can be reached at VSalze-Lozach@asiafound.org and nmerchant@asiafound.org, respectively. The views and opinions expressed here are those of the individual authors and not those of The Asia Foundation. 

One comment on this post:

  1. The question is not if but when the E. China investment bubble comes crashing down.

Write a comment:

* Required

Comments are moderated. Please be polite and on-topic.

 characters available