East Asian Economy and the 2008/2009 Financial Crisis - Essay Example

East Asian Economy and the 2008/2009 Financial Crisis Introduction World economy is going through one of the worst phases at present because of the severe setbacks many of the countries faced in their economic growth. Irrespective of developed or developing countries, the current crisis has affected all of them one way or other. The crazy lending habits of the banks without assessing the financial capabilities of the loan seekers, the changing life styles of the public (spending all the money which they earn rather than saving) have contributed heavily to the current financial crisis. ‘The reasons for current financial crisis in America can be attributed to many things like, The Federal Reserve, is making credit cheap, Home buyers, who took advantage of easy credit contributed to bid up the prices of homes excessively. Congress, which continues to support a mortgage tax deduction that gives consumers a tax incentive to buy more expensive houses. Real estate agents, most of whom work for the sellers rather than the buyers and who earned higher commissions from selling more expensive homes etc’ (Bianco) The American people’s changing life styles are another biggest factor for the current crisis. The greedy customers accepted the offers (loans) from the financial institutions with both hands. They have approached the banks for everything and the banks were ready to help them without even assessing their backgrounds or financial capabilities. The financial institutions miscalculated that the global economy will never exhaust and whatever the goods and services sold in the market will bring profit. Such irresponsible allocation of resources in the market was the main cause of the current problem. The banks have given more focus to the goods or services sold rather than the goods or services bought. In other words, they were more interested in selling of their services. They never thought too much about the returns against the services they provided. Once the balance between the services and goods sold and bought were destroyed, financial crisis came into exist. The banks’ decisions and behaviours with respect to lending were not based on the economic theory of supply and demand. The supply must not be provided to all those who are in demand. It should be regulated to those who are capable of providing the return in time. The demand should be properly assessed before providing the supply or in other words the banks should have ensured that the customers (Demand) were eligible for the loan (Supply). Thus the disparities between supply and demand resulted in the current economic crisis. The crisis is so deep that only the economic reform policies alone may not bring the desired results. Many economists believe that the current recession may continue longer than anticipated. President Obama has taken lot of measures (Obama program) to counter the current crisis which has been brought mixed reaction from the economic experts. America and Britain like developed countries has suffered major setbacks while China and India like East Asian countries escaped without much damages. But the escape of East Asian countries from the current crisis seems to be a temporary one as many experts believe that Asia will have tough times ahead. This paper analyses the prospects of East Asian economy by focussing China as an example. Current financial crisis and Asia in general China, India, Japan, and Korea are some of the major countries in Asia. These countries escaped from the current financial crisis without many damages. In fact, most of the Asian countries have less affected by the current crisis compared to the European countries and America. “While European and American financial titans have teetered and collapsed, Japan’s giant banking groups have stood relatively unscathed. The growing global credit crisis, which threatens companies and consumers elsewhere, has yet to appear here, where the problem for years has been that the nation’s banks have too much cash, not too little” (FACKLER) In the recently concluded G20 summit held at London, the leaders of the member countries were very keen in hearing from the Indian Prime Minister Dr. Man Mohan Singh about how India has escaped from the current crisis without many damages. India never allowed the foreign private companies to take control of the Indian public companies which helped them to keep their economy in tact while the foreign companies collapsed. Another major reason for the Asian countries, which helped them to tackle the current crisis, is the life styles of Asian people. Unlike the European or American communities, Asian people have a habit of saving some money for the future. Most of the western public are keen in spending lavishly whatever they have earned rather than saving something for the future. Whenever they were in need of money they have approached the financial institutions like banks for loans and the banks were ready to help them even without assessing their financial abilities to return it. Thus when the crisis comes at a totally unexpected time, the Asian people were prepared enough to face it while the Americans and Europeans were struggled. Current financial crisis and East Asia in general China, North and South Koreas, Japan, Hong Kong etc are the major countries in East Asia. Most of these countries have the history of facing a similar crisis in the recent past itself and hence when the current crisis appeared on the air, they were able to take immediate actions from the lessons they learned from the past. Japan has already suffered a similar financial crisis situation in the 1990’s and the lessons learned from that crisis have helped Japan to overcome the current crisis. Japan has adopted a strategy of like staying away from the global credit market. Japan is not depending global market for borrowing while their money is safely invested in treasuries outside. In the 1990s, Japan experienced a financial crisis after the bursting of a bubble. Although outside the scope of this paper, the seeds of the crisis might have been sown during the financial deregulation in the 1980s before the formation of asset bubbles. When the gap between competitive pressures in the financial markets and a "convoy" style of banking supervision and regulation that, in effect, ensured the viability of the weakest banks became unsustainable, the crisis erupted. In this regard, it may be argued that the crisis was accentuated by the formation and bursting of the bubble. It was an unprecedented crisis in terms of severity (The financial crisis in Japan during the 1990s: how the Bank of Japan responded and the lessons learnt) “Korea has experienced a currency crisis in1997 and sought assistance from international monetary fund (IMF). Before the crisis, most people believed that Korean economic fundamentals were sound and that a foreign exchange crisis was impossible” (Cho, p.2). It is evident that the current crisis has affected United States severely and hence the countries which depend the US market for selling their goods has suffered major setback. South Korea is one of the closest allies of United States and should have severe economic problems because of the collapse of the US’ markets. But they were able to overcome these issues by increasing their export to China like bog countries and succeeded in sustaining their economic growth up to certain extent. “Korean exports to China expanded 33.7 percent in the second quarter of 2008. China has been working to boost its domestic demand and it would be a good opportunity for Korea to capture a slice of the emerging market in China. Recently, without being unnecessarily disturbed by the crisis, Korea has set an ambitious target of increasing its exports to $500 billion by 2009” (Mishra) In 2003, Korean exports to China surged 48% to $35 billion, and China became Koreas No. 1 customer, absorbing 18.1% of all Korean exports (Jubak) “The banking sector plays a prominent role in Hong Kong’s economy. While the sector accounts for only 2.5% of employment, its share of nominal GDP has been rising steadily from 7.5% in 1997 to close to 12% in 2007” (Hong Kongs banks during the financial crisis). Hong Kong’s economy has a strong connection with the economy of the main land China. Any fluctuations in Chinese economy can affect the Hong Kong economy as well. But since China has not suffered much from the current crisis Hong Kong was also able to escape from it. Though the global crisis has affected the Hong Kong banking sector also, fortunately, the Hong Kong banks were sufficiently capitalised and have raised their provision levels and should thus be able to weather the crisis. From the above discussion it is clear that the Asia in general and East Asia in particular escaped from the current crisis up to certain extent. But we have not analyzed the main player of East Asian economy, China yet, and an analysis without China will never be reliable as far as East Asian economy is concerned. China’s economic growth China’s economy is huge compared to all the other East Asian countries and it is expanding rapidly towards attaining a stable proposition. ‘Last 30 years, the world has witnessed miraculous Chinese economic growth, averaging 8% growth in Gross Domestic Product (GDP) per annum. The economy has grown in all the segments more than 10 times during that period. The Chinese GDP has already crossed 3.42 trillion US dollars and it is still growing towards much larger propositions’ (Economy watch). In fact, China has already the second largest economy after the United States in purchasing power. Economic experts are of the view that China may surpass US economy in near future itself. China has the biggest man power in the world, which they are utilizing in a constructive manner. The tight political rule using iron fist, by the communist led regime, helped them to prevent agitations in industrial sector compared to many other countries. Lack of freedom serves as a blessing up to certain extent to the growth of Chinese economy, though it can be considered as a human right violation. Discipline in every segment of life forces the Chinese people to work or function, like a machine. ‘Business units have given independence as part of economic reforms in China which helped the development of Chinese economy. The government officials and the mangers got autonomy and they started to function more efficiently because of the reformation. These reforms contributed to the development of some kind of private enterprises and manufacturing units in China and the Chinese stock markets started to grow because of the economic reforms in the 70s and 80s’ (Economy watch) The article China’s Economic Rise—Fact and Fiction, by Albert Keidel (Policy Brief No. 61 July 2008), says that China’s economic performance clearly is no flash in the pan and its growth in this decade has averaged more than 10 percent a year and is still going strong in the first half of 2008. Keidel believes that China likely to continue their success and will eventually bring an end to America’s global economic pre-eminence” (Keidel) It is not concluded from the above discussions that everything under proper shape as far as East Asian economy is concerned in general and China in particular. The challenges and the future economic prospects of East Asia can be studied again by taking China as specific example because of the major role China is playing in controlling the East Asian economy. Concerns about the East Asian economy by analysing Chinese economic forecasts The increased opacity over the Chinese actions raised concerns in the minds of corporate companies who are willing to invest in Chinese market. The tight censorship on Medias, internet and freedom of expression has made it almost impossible for foreign companies or workers to operate in China. Chinese work culture and attitude towards aesthetic values is not digestible to foreigners working in China. These censorship and restrictions on freedom of expressions is one of the main weakness or dark spot of Chinese progress towards economic stability. At the time of writing this paper, one of the news paper report show that China is going to strengthen the internal safety measures due to the suspected public agitation campaign against the communist regime. It is difficult for a country to remain prosperous for so long by suppressing the public interests and freedom. ‘An Internet user in China searches for the word "persecution," likely to come up with a link to a blank screen which says "page cannot be displayed. The same is thing will repeat if somebody attempts to search for "Tibetan independence," "democracy movements" or stranger sounding terms such as "oriental red space time". (Wiseman) Amnesty has also reported that many people has been arrested detention for disseminating information about the spread of Severe Acute Respiratory Syndrome (SARS) over the Internet (Censorship in China, overview, 2008) Corruption is another major factor which retards the growth of China. Minxin Pei, director of the China Program at the Carnegie Endowment, says that the government failure to tackle corruption among Chinese officials threatens China’s future economic growth and political stability. He argued that the Chinese government has enough laws (around 1,200 laws, rules, and directives against corruption), the implementation is spotty and ineffective. He has pointed out that around10 percent of government spending, contracts, and transactions is estimated to be used as kickbacks and bribes, or simply stolen in China (Pei). It is difficult for the foreign investors to get approvals for their projects easily in a straight forward manner. They have to approach the bureaucracy and political power segments through the back doors in order to get the approval for their projects. Moreover the Chinese administration is afraid of a possible people’s agitations against corruption in the near future itself. Leadership is not keen in controlling the corruption in China because they were afraid that the reforms needed to prevent the corruption may result in some kind of political reforms which the government does not wanted to implement in order to safeguard their interests. . Investments intended in the infrastructure development, real estate development and financial services areas were looted by the government officials and political leaders which resulted in the failure of economic reforms to gather momentum as expected. China wont remain an export superpower forever. Food and energy shortages and the growing influence of multinationals like Wal-Mart could change everything. But China runs a huge trade deficit with the rest of the world. In 2003, China imported $23 billion more from Korea than it exported. China ran a $7 billion trade deficit with the countries of the Association of Southeast Asian Nations (ASEAN -- Vietnam, Thailand, Malaysia, Indonesia, the Philippines and Singapore among others). China importing a lot of the expensive high-technology parts that its cheap labour then turns into finished products. Add in the growing Chinese demand for high-technology consumer products and, wham! Trade deficits with Korea, Singapore and Malaysia explode (Jubak) Along with the economic growth, the demand for chicken, beef, wheat and vegetables are also increasing in China, but the land available for cultivation is diminishing because of the heavy industrialization. A country which has around 20% of the world population, the above scenario is not comfortable. It is not feasible for China to depend other countries for their food requirements even if their economy is growing rapidly. China has exported petroleum products a decade before, but at present, they are the second largest importer of petroleum products after United States. As everybody knows the current stock of petroleum available is enough for maximum forty more years and hence the human world should find out an alternate solution for that immediately as most of the essential commodities and goods are moving on the energy we are getting from the petroleum products. “China is also suffering from a huge domestic shortage of electric power. Last summer, rolling blackouts shut factories in 21 of the country’s 31 provinces” (Jubak) Growing inflation rates (A state, in which everything will be expensive except the money), environment pollution and drinking water shortages are some other problems which retard Chinese progress. “China has the worlds fourth largest fresh water reserves, but rapid economic expansion is straining those supplies, with more than 400 cities facing severe shortages. Chinas unquenchable thirst may threaten growth and stability in the most populous nation on Earth” (Ramirez) United States is one of the major markets for the Chinese goods. Any problems in United States will thus affect the movement of Chinese goods to US markets. The US people are already started to cut down their spending on consumer durables which will affect the prospects of Chinese products in the US markets. ‘There are still inequalities in the income of the Chinese people, and this income disparity has increased in the recent times due to a liberalization of markets within the country. The per capita income of China is only about 2,000 US dollars, which is fairly poor when judged against global standards. In per capita income terms, China stands at a lowly 107th out of 179 countries.’ (Economy watch) All the above factors are major concerns for the Chinese economic developments in future even though they have escaped from the current crisis. Conclusions Asia in general and East Asia in particular, has escaped from the current financial crisis without many severe injuries. Some of the East Asian countries were already suffered similar financial crisis in the recent past itself which helped them to take effective measures as soon as the economic crisis erupts. India, China, Korea and Japan like major players of Asian economy have taken effective measures to counter the current crisis which was a lesson to the westerners. But many economic experts believe that the Asian countries might face severe problems in the near future itself if they fail to read the economic forecasts. China seems to be one of the rapidly growing economies in the world and many people believe that Chinese economy may surpass the US economy in the near future itself. But human right violations, corruption, censorship of media dissatisfaction among the public, water crisis, energy crisis etc seems to be the major areas of concern for the Chinese economic development. The destruction of American economy has diminished the prospects of Chinese products in one of the biggest consumer markets of the world, America. In short, it is difficult for the East Asian countries to sustain their economic growth pattern for a longer period as anticipated by many. Works Cited 1. Bianco, Katalina M., J.D.2008. “The Subprime Lending Crisis: Causes and Effects of the Mortgage Meltdown”. 28 August 2009. 2. “Censorship in China Overview” (2008) 28 August 2009. 3. Cho, Yoon Je. The Financial Crisis in Korea: Causes and Challenges. 28 August 2009. 4. “Economy watch, China Economy”. 28 August 2009. 5. FACKLER, MARTIN. 2008. “In Japan, Financial Crisis Is Just a Ripple”. 28 August 2009. < http://www.nytimes.com/2008/09/20/business/worldbusiness/20yen.html> 6. “Hong Kongs Banks During the Financial Crisis”. 2009. 28 August 2009. 7. Jubak, Jim.2009. “3 Big Threats to Chinas Economic Miracle”. 28 August 2009. 8. Keidel, Albert. (Policy Brief No. 61 July 2008), China’s Economic Rise—Fact and Fiction. 28 August 2009. 9. Mishra, Sandip Kumar. 2008. “Korea and the global financial crisis”. 28 August 2009. 10. Pei, Minxin. 2007. “Corruption Threatens China’s Future”. 28 August 2009. 11. Ramirez, Luis. 2005. “Water Shortages Are Potential Threat to Chinas Growth, Stability”. 28 August 2009. 12. “The Financial Crisis in Japan During the 1990s: How the Bank of Japan Responded and the Lessons Learnt”. 2001. 28 August 2009. 13. Wiseman, Paul. 2008. “Cracking the Great Firewall of Chinas Web censorship”. USA TODAY. 28 August 2009. Read More