Weaknesses in Asia

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Illustration: Volker Straeter

Weaknesses in Asia

by Jayati Ghosh

This is supposed to be ‘the Asian century’. The amazing success of China and of the Asian region means that people think that Western capitalism is dead. This is not like Asian capitalism, which will grow quickly and create a new economic balance in the world. Changes after the global financial crisis seemed to say this is true. Growth rates in Asia (and in the biggest economies of China and India) fell in 2009, just as they did in most of the world. But the recovery was fast and rates of growth stayed higher than in other places.

But the positive idea about the new growth in the East did not see that the bigger success of Asia was mostly because of a few countries: first, Japan and South Korea until the late 1980s; then, China in the 21st century. Chinese success comes from clever use of unusual economic policies by a very controlling state. And since the global crisis, the recovery and growth in almost all the big economies of Asia has been based on debt. Even in China, debt-to-GDP ratios have more than doubled since before the crisis. And in many other Asian economies certain forms of debt, especially in housing and personal finance, are at dangerous levels. In Asia – perhaps even more than in the Global North – the idea of recovery through lending private money has brought more weaknesses that could lead to another crisis in the future. This is already clear in India, where bad corporate loans are creating debt so big that companies can’t take on more debt to finance future projects This has become a drag on bank lending and on private investment, leading to reductions in investment over the past few years.

Unpredictable changes in global stock markets influence Asian economies even more. Before the global crisis, the flow of cash helped advanced economies and mainly new Asian markets. And when there was ‘easy money’ to help the financial crisis, markets across the world were successful again. Many new markets in Asia became the targets of betting on currency values, as investors moved in, with cheap capital. As a result, markets in South Korea, India, and Thailand have been unstable, and easily influenced by sudden changes.

The result of this situation when everyone expects prices to rise is a lot of foreign investments in stock and bond markets. In this situation, the smallest piece of negative news can lead to investors quickly taking their money out of these markets. This leads to currency losing value and internal financial problems. In other words, a small change in a distant part of the world can create a financial problem in Asia.

Jayati Ghosh, one of the world’s leading economists, is professor of economics at Jawaharlal Nehru University.

NOW READ THE ORIGINAL: https://newint.org/features/2018/07/01/the-next-financial-crisis

(This article has been simplified so the words, text structure and quotes may have been changed)