Regional Business Systems and Private Sector Development in Asia - Coursework Example

BUSINESS IN ASIA Presented By Author name MMM385 Lecturer name University name Date Introduction The 2007-09 global financial crises are still affecting and will continue to affect the world economic order. The Asian currency crisis of 1997-98 was triggered by the Thai Baht attack in July 1997; it quickly spread throughout the country and spread all through Asia and even beyond. Unlike the previous crisis, Asian economies performed relatively well through the crisis when compared to other regional economies during the 2007-09 crisis. The United States was at the epicenter of the 2007-09 crises, it spilled over to Europe. The trade channel is what was mostly affected in the crisis but the Asian financial markets and the financial institutions remained sound. India, Indonesia and China had positive growth rates in 2009; this is against a backdrop of declining economies posted by most advanced nations and emerging market economies (Stephen 2009). Lessons from the 1997-98 Asian crisis and subsequent reforms helped them fare better in the 2007-09 crisis. The starting point of the 1997-98 crisis initially took place in the form of reduced corporate spending; this set the stage for the consequent growth. Lower corporate spending on fixed investments led to surplus account. The lowered spending increased the savings – investment gap; this permitted the region to be an exporter of capital. This research firstly focuses on the lessons learnt by the Asian countries during the 1997-98 crises and how this helped them to fare better during the 2007-09 crises (Stephen 2009). It also focuses seeks to find out the risks and opportunities ahead for the Asian economies in 2012 and lastly it looks at the opportunities and challenges for Australia arising from Asia’s structural transformation. Asia’s performance during the global financial crisis has highlighted its resilience. This resilience, in part, arises from reforms undertaken in response to the Asian financial crisis a decade earlier’ (Australian, Government, 2011) Do you agree with the above statement? Discuss your answer I fully agree with the above statement, Asian countries fared better in the crisis due to past lesson and subsequent reforms. Below are some of the way in which they achieved this. Less Private Capital Inflows Economists like Wade (2000) uphold the idea that the key reason behind the recent financial crisis are as a result of large private capital inflows surges leading to a blow up in credit boom (Moneta & Ruffer 2009). Asian countries were less affected by the crisis because the inflow of private capital was less compared to other regions so the credit boom had a smaller effect. The reason behind this is that the Asian countries had a significantly lower growth rate. Because of the earlier financial crisis in the 1997-98, this made the region less attractive for investment. Another reason is that they had a higher domestic savings; this ensured that the region was less dependent on foreign capital for sustainability. Most of the countries had also set a limit on foreign borrowing, this lessened the impact too. Effective mobility restrictions on capital Proponents of capital account liberalization recognized that what sets apart the greatest and the less affected countries by the financial crisis is because of capital mobility. Due to pressures from the world core economies, some nations opened and expanded their capital accounts (Moneta & Ruffer 2009). These Asian Nations restricted the movement of capital control by some measures. Capping capital flows can not only improve a foreign driven boom but also maintain some currency and financial stability. Asian Nations had effective capital control compared to other regions. Efficient allocation of less risky credit by financial institutions Financial institutions especially in the United States were reckless in the allocation of credit; institutions such as the Lehman Brothers gave credit to individuals who were not able to repay the debt. This led to very high percentages of non-performing loans in their books hence the bursting of the US house bubble. This was not the case in the Asian region where credit was allocated in a more disciplined manner. When the financial crisis was at its peak, the Asian region was not affected so much since their financial institutions were better compared to other regions. The region had the least numbers of non-performing loans (Moneta & Ruffer 2009). Other economies suffered greatly since most of their lending activities were centered on speculations such as the property loan, property was overvalued and lent against, when the market crashed, the property value dipped and people still had to pay for higher values though the houses were now almost the original price (Moneta & Ruffer 2009). Branson (2011) states that banks in other regions had low standards of regulations, supervision and disclosure; this was not the case in the Asian region. Disclosure, regulation and supervision standards Many economists are of the idea that the main reason behind the 2007-09 financial crisis was as a result of failing to strengthen banking regulation, supervision and disclosure. Inefficient standards in the banking sector may lead to inefficient and risky credit allocation. According to Branson (2011), Asian Nations had a higher banking standards they imposed a stringent and well-enforced cautious regulatory and supervisory banking system. The region learnt from their earlier financial crisis in 1997-98 and they put measures in place, this cautioned them from the effects of the financial crisis. Lower degree of currency and maturity mismatches of balance sheets Once investors lose confidence in the values of a country’s currency and its capital accounts coupled with currency and maturity mismatches, they shun the country and they will not invest. The main reasons behind these weaknesses in the balance sheet are weak banking supervision and regulatory standards. According to Branson (2011) the balance sheets of Asian corporations’ and banks were less mismatched compared to that of other nations. This instilled confidence of investors to invest in the region even when there was a financial crisis; this lessened the effect of the depression on the region. Less leveraged corporations Non-financial firms also contributed greatly to the financial meltdown. This was through their high debt to equity ratios, this is also known as leverage (Jayamaha, Grigg & Mann 2009). Asian Nations having learnt from their financial crisis in 1997-98 lowered their debt to equity ratios. This meant that they earned more from their goods since the profits that went to pay the debt was little compared to other regions. By the time the crisis was at its peak, the regions nations had so much capital in their banks that they used to counter the effects of the financial crisis (Jayamaha, Grigg & Mann 2009). Companies from regions with higher leverage ratios had reduced cash flows and hence failed or found it hard to pay their debts as a result of the financial crisis. This is a phenomenon that Wade (1998) calls refers to as high-corporate-debt followed-by debt-deflation (Jayamaha, Grigg & Mann 2009). Higher foreign exchange reserves Corporate and banking vulnerabilities were not the only contributing factors of the financial crisis, there were also macroeconomic aspects. Increases in capital inflows to the regions due to direct investments and trade appreciated the value of the currencies of the Asian Nations (Ahlstrom 2010). The countries in the region that had their currencies pegged to the US$ experienced an overvaluation of their currencies. Ahlstrom (2010) further states that for various reasons, the pegs were left in place and the currencies were not devalued despite the deteriorating current accounts. The export competitiveness of these countries were affected and in turn they ended up increasing deficits in their current accounts. In the event that this situation lasted, speculators would have preyed on the region and its overvalued currencies and they wouldn’t be able to defend them due to lack of foreign exchange reserves. The region averted this by attacking those currencies and their superior foreign exchange reserves ameliorated any speculative attack hence lesser effects from the crisis. What are the risks and opportunities ahead for Asian economies in 2012? Risks Leadership Leadership plays a very key role in growth and being able to sustain it. Persistence, determination and leadership are very critical in any economy that wants to excel, these are the key factors that instill confidence in investors. Governments should act in the interest of prime example is from Asia indicating that good policies, when combined with management and guidance that which is primarily focused on growth “pro-growth” and focuses on investment in the private sector, can drive a nation towards attaining double digit growth rates (Chandra, Lin & Wang 2012). South Korea and Malaysia are typical nations that have attained double digit growth. It is their leadership, with a strong focus on the private sector that played a major role in spearheading pro-growth. Dedicated teams of reform minded government individual are the ones who came up with the reforms needed to spur growth in the region (Chandra, Lin & Wang 2012). In order to sustain the level of growth and expectations from investors, the leadership of the nations has to be trusted by investors. This is a huge challenge that they face in that they have to get leaders who instill confidence in investors on the security of their investors. Regional cooperation No Nation can grow in isolation in the Asian region; this has been proven by North Korea lagging behind in development in the region because of isolating itself (Chin 2012). South Asia is facing the same challenge of market integration within the region having the lowest in the world in terms of intra-regional trade. Intra-regional trade accounted for less than 2 per cent of Gross Domestic Product (GDP) for South Asia region this is against a back drop of 40 per cent GDP from intra-regional trade for East Asia (Chin 2012). Barriers to trade and provision of services especially at the borders have disappeared in most areas of the world, but this is not the case in South Asia. Age old conflicts between countries some of which have lasted for over four decades have persisted and are becoming a hindrance in market integration efforts (Chandra, Lin & Wang 2012). Originally intra-regional trade in South Asia’s as a share of the total trade was 18 per cent. In 2000-2008, it fell to a meager 5 per cent of the gross trade (Chin 2012). The costs of trading across the borders in South Asia are very high. An example is that at the Petrapole-Benapole border between India and Bangladesh, trucks ferrying goods have to wait in excess of 100 hours to cross the border (Chin 2012). In Nepal it takes close to 200 signatures to be given the green light to trade goods with India, in India you require more than 140 signatures to trade goods with Nepal. Estimates put trade between Pakistan and India currently at US$ 1 billion. It is estimated that this could jump to US$ 6 to 10 billion, if divisions were removed (Chin 2012). Infrastructure Infrastructure is very vital in spurring and sustaining growth in any economy, it reduces time and monetary and labor costs to reach markets and consequently overcome the geographical limitations (Liu 2009). This enhances connectivity and adds to market integration and is the best solution to promoting growth. It is also a good way of addressing the rising inequality and differences between the Nations in the region. In Bihar in India, Ganga Bridge is a perfect example. The bridge has reduced time and costs for farmers in the rural areas to reach the markets in the largest city Patna in Bihar. As of now, South Asia has attained notable growth rates in spite of poor infrastructure (Liu 2009). This will not be the case in the future. Arms Proliferation The Asian region is witnessing arms in unprecedented heights. This has not been in the global scale since the period after the Second World War. On one hand, Pakistan and India are engaged in nuclear arms, on the other hand North Korea is hell bent on attaining nuclear war heads. In 1974, India detonated a nuclear bomb christened the “Smiling Budha.” Pakistan felt threatened of its arch rival and engaged in its own nuclear arms race. China and Taiwan are embroiled in tug of territorial waters and are also in conflict with Tibet over the autonomy of the country (Liu 2009). Tensions over territorial waters and North Korea threatening South Korea works against the regions vision of being an economic powerhouse. For the region to truly achieve its economic ambitions, then it has to put its house in order. Opportunities Agriculture When Bangladesh, Pakistan and India were part of the British Indian Empire, they traded expansively in agricultural products. As soon as they gained independence from the British Empire, they followed and adopted exceedingly protective trade policies, this was fuelled partly by age old conflicts with their neighboring countries coupled with religious tensions between the largely Muslim Pakistan and Hindu (Chandra, Lin & Wang 2012). The tariffs in Pakistan, India and Bangladesh were bound at forbiddingly high levels at times in excess of more than 100 percent, tariffs in Nepal and Sri Lanka albeit at a lower level compared to the others were still steep. The region is home to more than a third of the entire population on earth. This is an extremely huge market for agricultural goods and services (Chandra, Lin & Wang 2012). The farmers cannot even satisfy the agricultural market in the region. But in order to achieve this, trade barriers in borders and age old conflicts have to be solved in order to try and satisfy this insatiable market. Foreign Direct Investments Bangladesh has numerous opportunities for foreign direct investments (FDI) in important sectors, including, steel, power, fertilizer, tourism, hotel, and petrochemicals (Ahlstrom 2010). These are reflected in the massive inflows of FDI, this have increased $760 million in FY2007. Bhutan, one of the smallest and least developed nations in the world, is based on agro forestry. Hydropower exports to India have boosted Bhutan's GDP growth. There are massive investment opportunities in Bhutan in hydropower since it has massive hydropower exploration potential. Bhutan's hydropower potential and its attraction for tourists are key resources. The Pakistani Government has simplified the Foreign Private Investment Act, 1976, briefly it states that foreign investment shall not be taxed more on income in investment made in similar circumstances by Pakistani citizens (Ahlstrom 2010). This gives incentive to investors to invest in the country. Opportunities and challenges for Australia arising from Asia’s structural transformation Opportunities Financial Services Gateway Australia is strategically positioned as a hub for the Asia-Pacific region due to its sophisticated financial services sector (Liu, Li & Zhao 2008). It has liquid and deep financial markets coupled with leadership in the region in sectors such as structured products and infrastructure financing. With a skilled and multilingual workforce, highly developed and sophisticated business infrastructure and an efficient retirement savings scheme, Australia is well equipped to offer financial services to the region (Roach 2009). Insurance and finance is the fourth largest sector in Australia’s economy, it generates A$81 billion or 8.1% of real gross value. On top of this, Australia has assets of more than A$4.3 trillion, this is equivalent to roughly four times GDP. Its investment fund sector is also growing in leaps making it one of largest in the world with funds under management valued at more than A$1.3 trillion or US$850 billion (Roach 2009). Export Australian industries seeks to build on its capabilities capture emerging opportunities and investments in the Asian region and globally. Australian firms are seeking to strategically position Australia as the centre of excellence for management of funds. It is mainly focused on the Asia-Pacific region with its innovation and sophistication in the administration and provision of funds products, Australia is well poised to export its services to the region. Investments Through government legislations, Australia is setting the basis for conducive investment opportunities, legislation was passed which will gradually reduce the withholding tax rate on certain distributions from the managed funds up from 30 per cent to a paltry 7.5 per cent as of 2010-2011 this will make Australia one of the most competitive in the world (Roach 2009). The Australian tax system is also undergoing a major transformation recognizing the significance of taxation for Australia’s global competitiveness. This will spur investments from the lucrative Asian region. The government has acquired Australia’s status as a permitted destination for investment funds under China’s Qualified Domestic Institutional Investor program (Jayasuriya 2009). Challenges Strong currency The Australian dollar is the third most traded currency in the world, though the Australian dollar is appreciation and is relatively strong at the moment (Liu, Li & Zhao 2008). This is not good news for exporters and investors likewise. This is pushing the price of Australian goods and services and as result hence reducing the demand. Mining boom Australia was able to avoid the negative effects of the global recession due to a mining boom that was fueled greatly by the sales of iron ore to China (Liu, Li & Zhao 2008). However good this is for the economy, it has repercussion for the economy, and reduced demand for the iron ore by the Chinese will have negative impacts on the economy. The Australian economy is too dependent on the Chinese economy (Liu, Li & Zhao 2008). Though in terms of bilateral trades this is good, economically one nation should not be so dependent on another nation. If this persists, the economic slowdown that the Australians avoided might just hit them. Higher unemployment ahead At the current rates, unemployment in Australia is around five percent (Liu, Li & Zhao 2008). This figure is bound to rise this year. The mining sector will be the least affected because of the strong demands from the Asian markets specifically China. Other sectors of the economy such as the service provision subsector will be mostly affected. Australia should be not so reliant on the exports to China. If for some reason there is a decline in economic activities in China, the ripple effect is going to be so great (Roach 2009). Roach (2009) further adds that Australia’s banking sector and manufacturing sector is not strong enough to compensate for the projected losses in income associated with the boom in mining. He further states that economy requires restructuring in massive proportions to continue benefiting from the boom and also so that the other sectors such as manufacturing, tourism industry and financial services to become more competitive, productive, and also so that the Australian economy becomes more balanced other than just relying one sector of the economy Conclusion The rise of the Asian region will offer unprecedented opportunities to Australia. This opportunity will go further and beyond the current iron ore mining boom that currently defines the greatest commodity exported. Increased earning will see a rise in middle level income families in the Asian region that have a greater purchasing power. Based on UN projections, the Chinese urban population is set to hit 220 million between the year 2012 and 2025. If you add in Indonesia and India, the combined total of the urban population projected to increase over the same period will be more than 400 million urban families. As their income rises, the Asian cities will be populated by an increasingly affluent population who has varied tastes and preferences. According to these projections, the region will most likely evolve into the global leader in terms of production and being the world’s largest consumer. The region will demand more and high quality goods like high end fashion, electronics and consumer durables all of which were a preserve of the wealthy in the society. The Asians will demand better services in terms of education, healthcare, recreation, travel and financial services both home and abroad. They will require better home, and leisure and all of the nice things that money can buy. Australia can take advantage of all this. For this to happen Australia will need to make several reforms but this should not only be limited to how the Asian market evolves. Even though there are pre-existing trade agreements with the Asian region, Australia should seek to deepen this ties, it should advance business-to-business relations and also at an individual level. It is repeat business that sustains any business venture be it educational, commercial or cultural foundations and this is what should be strengthened. Even though it is the responsibility of the government to facilitate all these relations, all Australians should be proactive and ensure that they are on the right side of history. Even though there are numerous challenges for Australia associated with the rise of the Asian region, the benefits and opportunities available for Australia greatly outweigh the challenges. It is upon Australia to strategically position itself. Reference List Andriesse, E. & Helvoirt, B. (2010). Regional business systems and private sector development in Southeast Asia. Asia Pacific Business Review, Vol 16, Issue 1-2, pp 19-36. Ahlstrom, D. 2010. 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