Asia faces the financial meltdown: Richard Grant discusses the position of Asia in the financial crisis and the implications for New Zealand.

• Author: Grant, Richard

We all understand something of what has happened in the global economy, starting in the United States and spreading out from there. If at first people were reasonably confident that their own country would escape some of the consequences of the turmoil, it is clear that day by day, week by week, the evidence has been other. Some less well-known examples are illustrative:

* the stock market in Saudi Arabia has declined by 60 per cent since the beginning of 2008--its capitalisation has dropped by US$180 billion;

* Singapore and Hong Kong are in recession;

* the daily rate for a bulk carrier dropped from US$230,000 to US$9000 in just two months;

* the global hedge fund industry lost US$100 billion in assets in October 2008 alone;

* Iceland is bankrupt;

* Indian motorcycle sales (a better indication of the strength of the economy than car sales) dropped 18 per cent in October 2008 over October 2007.

In this continuing turmoil on both financial and economic fronts, a tremendous has been written about the issue of the link between Asian economies and the rest of the world, and more precisely with the United States. The debate has been about whether the Asian economies have developed sufficient strength and resilience over the last decade to be less affected if the United States were to go into recession.

The question is whether Asia can continue to grow and prosper in the event that the United States has a downturn--as it has. Has Asia, in the jargon, 'decoupled' from the United States? Decoupling has been defined in the following way by researchers at the Hong Kong Monetary Authority in a working paper in March 2007. To be decoupled, Asian economies should have:

* exports sufficiently diversified to markets other than the United States;

* the setting of monetary policy sufficiently independent of the United States; and

* financial markets in Asia sufficiently uncorrelated with United States.

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That is a fairly tight definition and, on the face of it, one would have to say that Asian economies--as we look at them--have not decoupled from the United States. Exports will drop, including to the United States (although in the case of India, the European Union is a more important market than the United States).

Simple deduction

Monetary policy is not 'sufficiently independent' of the United States to see Asian currencies strengthen with the exception of the yen and possibly the yuan. In most cases the United States is currently strengthening against Asian currencies. And financial markets in Asia are in decline, although this decline is not as severe as that in the United States. And, of course, the simple deduction is that, in a globalised economy, it is hard to see that any country participating in it can escape the consequences of what is going on around the world.

The IMF, for instance, has reduced its estimate of global growth in 2009 from 5.4 per cent to 2.2 per cent in a very short time frame. Asia will drop from 7.6 per cent in 2007 to 4.9 per cent in 2009. Ominously, Robert Zoellick, the President of the World Bank, said in November that global trade would shrink in 2009 for the first time since 1982. And there is a question of availability of trade credits affecting the Asian region as it does other regions.

On the decoupling issue, others use different arguments, largely based on the percentage of net exports in the trade of Asian countries, which are generally low, and are, therefore, not...