1. Risks of New Global Downturn: Impact on Asia and Response  Lim Mah Hui (Michael)  State of the Global Economy, and Reflections on Recent Multilateral Negotiations  South Centre Conference, Geneva  February 2-3, 2012 1

2. OUTLINE  I – Major Risks Facing Asia  II – Economic Effects on Asia  III - Mitigating Policies – short and long run 2

3. 3 Economic Effects on Asia  Sharp drop in exports (2/3 to G3)  Slow growth, employment loss, poverty  Vulnerability in household balance sheet  Asset inflation (property, equity) fr continued excess liquidity  Withdrawal of credit by European banks  Shift in composition of investment flows from productive (bank lending, FDI) to speculative (portfolio investments)

4. Major Risks facing Asia  Slow Growth in US  Eurozone Recession  Hard Landing in China?  Volatility in Commodity Mkts fr excess liquidity, financialization, geo pol risks  Another financial crisis fr bank exposure to sovg debt >bankruptcies  Unknown consequences fr non traditional monetary policies fr AEs 4

5. Mitigating Policies – Short Term  Usual monetary loosening  Expansive fiscal policy – but countries with high fiscal deficit or current account deficit –less space, e.g. Malaysia, India, Philippines  Countries should keep whole range of policy options open 5

6. 6 Long Term  Present economic crisis, also crisis of capitalism and free market ideology  Good opportunity to redefine economic paradigm and discourse  In particular – the type and quality of growth and the role of the state

7. Major Lessons and What To Do- 1) Limits to Export Led Growth  Export Led Growth – necessary in initial stages but beyond a certain level – counter productive  Continuous foreign reserves accumulation means DE funding consumption in AE; own savings too high (china) or investments too low (Malaysia)  Need to re-orient to domestic growth or intra-regional trade 7

8. Growth and Inequality  Domestic growth constrained by lack of domestic consumption (China – 35% and Singapore 40% of GDP)  Related to falling share of GDP accruing to labor and rising share to capital 8

9. 2) Imbalance btw GDP share to labor vs capital (inequality)  In China, labor share of GDP dropped fr 57% to 37% (1997-2005) and consumption fell from 55% to 35%  In Japan, Canada and 12 European countries labor share fell from 56% to 53.7% (2001-2006) 9

10. Imbalance caused by Wage Repression  Wages lagging behind productivity  In China productivity increased 179% while wages rose 92% (2000- 07)  In U.S. wages also diverged from productivity increases after 1975 10

11. Wages and Productivity in China 1998 - 2010 11

12. Wages lagged behind productivity 12

13. Trickle-down theory of Growth Not Acceptable  Government - play role to ensure wages must keep up with productivity increases.  Practice of countries competing to attract FDI by repressing wages and racing to the bottom sh be replaced by coordination to address this problem 13

14. 3) Regional Cooperation More Urgent  Given the unwillingness of major advanced countries to institute meaningful reform in international financial architecture.  Regional cooperation in trade, in capital controls as to types of investments to encourage and types of investments to discourage, in industrial policies. 14

15. Enhancing Role of State  In industrial policy planning  Regulate and reconfigure of finance to serve the real economy rather than to promote Anglo-American model of speculative finance  Increase social consumption goods - health, education, public transport, clean energy, some with private sector partnership, rather than just private consumption goods 15

16.  THANK YOU 16