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Friday 18 Aug 2017 | 07:42 | SYDNEY
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Asia's great decoupling disproven

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16 February 2009 16:52

The idea of Asia’s great economic decoupling from the US has gone from debatable to decisively disproven. Now the choice facing Asia is whether to try to decouple or push for leadership instead of mere linkage.

Before considering those options, let’s consider what happened to decoupling. Come back twelve months to February, 2008. The judgement of many then was that Asia could cut loose from a US economy toppling over the cliff. For the first time, Asia would be strong enough not to catch a cold when America sneezed. (Instead of a cold, we got a life-threatening moment and a giant contagion.)

At that time, the World Bank was relatively happy to endorse the decoupling sentiment, if not the term itself, because ‘it suggests isolation or separation’. The Bank said global growth prospects had deteriorated because of financial market turmoil and slowdown in America. But Asia’s economies would sail on.

The World Bank Vice President for East Asia and Pacific Region, Jim Adams, told me Asia would grow in confidence because it was less dependent on the US. This was an historic change in Asia’s mindset:

I think we're in a very, very different situation than we've been in historically and I think the region [Asia] has every right to be proud. And particularly I would emphasise we're a decade after the financial crisis. I think the improved policies are reflected in the fact that the countries are quite confident that they can manage this downturn in the US in a way that I don't think would have been possible ten years ago.

Twelve months on from that rosy decoupling moment, Asia is being headlined as the place where the crisis is hitting hardest. Destocking on a huge scale, a collapse in exports and weak domestic demand mean the scale and speed of Asia’s downturn ‘is breathtaking and broader in scope than the financial crisis of 1997-98.’ Asia acted decisively on the lessons of the crisis a decade ago. The determination never to be caught again meant Asia amassed huge savings. That Asian pot helped fuel the exuberant casino culture of the US banks.

It’s reasonable to assume that as Asia picks its way through the smoke and wreckage a new tacit consensus will emerge, just as it did a decade ago. One way for Asia to go would be to adopt the advice given about stimulating domestic demand and investing at home, rather than giving its savings to the US. Giving up the export-driven addiction would be one way of decoupling.

Much will depend on the health of America. For that, consult a voodoo witchdoctor or a passing economist. Consider the prediction of Professor Robert Reich (former Clinton cabinet secretary), now at Berkley University, who talks about the business cycle kicking into life in the next two years, but America facing perhaps a decade or more of anaemic growth.

If you're talking about simply getting the business cycle back on track, we're probably talking about a year and a half, maybe two years. If you're talking about a sustainable growth path — and when I say sustainable, I mean a growth that is not subject periodically to deep and perilous declines, and then even in growth periods rather anaemic growth — I think we are talking about maybe 10 or 12 or 15 years in which the Government has to reorganise the economy substantially.

A pale and wan America might send Asia off on its own. Or perhaps Asia will step up to leadership rather than de-linking. Professor Peter Drysdale makes a strong case that Asia is facing its moment of truth. It’s time, he says, for Asia to start taking a leadership role, pushing aside the rusty financial machinery with its European bias. So far, though, Asia has failed at every stage to exercise any significant prudential responsibility for the global system:

Despite the emergence of East Asia — China, Japan and the rest of East Asia through to Australia and New Zealand reaching out to India — East Asia could not step up to the mark because its regional structures are still not up to the task of effective global participation. The stage is still set for the wrong play — the trivia of regional FTAs and “mickey mouse” financial cooperation.’

Goodbye decoupling. For Asia the choice seems to be go-it-alone or leadership.

Photo by Flickr user macspite, used under a Creative Commons license.

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