By Feb. 6, the currencies of South Korea, Australia, Singapore and Taiwan had devaluated by 11.75, 7.58, 5.56 and 4.26 percent respectively and they are continuing to slide. Devaluation seems to have become the panacea for saving Asian exports.
The global economic tsunami has caused a serious downturn. The main reason behind falling Asian exports is the credit crunch, faltering demand and weakening purchasing power in Europe and the US. Many countries are now having a hard time and are beginning to save. This means that Asian countries are not to blame for their falling export figures. However, it is not very wise to rely on devaluation to try to stimulate exports that are falling as a result of weak foreign demand.
The result of this devaluation competition is that there will be no devaluation to speak of, as there will be no drastic changes in relative prices among exporting countries, thus greatly reducing the effectiveness of devaluation. Devaluation also means that the cost of raw materials and equipment imports will go up. This is not helpful to the development of Asia’s economy, which is characterized by its focus on export processing production. More seriously, once the devaluation atmosphere begins to build expectations, capital outflows will speed up and foreign reserves will shrink. The most serious consequence of this could be a monetary crisis that could break out at any moment. The 1997 to 1998 Asian financial crisis is a good example.
The way to resolve this problem would be to take the opportunity offered by the global financial crisis to improve the distorted structure with excessive Western consumption and Asian countries doing their best to keep production up to meet Western demands, while at the same time continuing to save to make up for Western spending.
In other words, the most important economic issue for Asia now is to find ways for its countries to collectively expand domestic demand and allow their people to share the fruits of past economic development. Asian nations are not short of cash. Among the top 10 countries with the most foreign reserves, which account for more than 60 percent of the world’s foreign reserves, seven are in Asia. The Asian economy’s biggest problem lies in high savings and low consumption.
Therefore, the best way is to expand domestic demand while strengthening regional economic and trade integration. Most important, the primary task should be to build a common currency unit, so as to stabilize the regional exchange rate structure and prevent a financial crisis from happening.
Asian countries must end their total dependence on exports to the US and Europe to stimulate their economies and end their reliance on devaluation as the way to boost exports. The results of the devaluation game will be that foreign reserves built up through years of hard work will be siphoned off by speculators.
Thus, the focus should gradually be shifted toward Asian consumer markets. This is the only way for Asia to be able to sustain its own development and eventually stand side by side with the EU and North America. It would also be beneficial to global economic development and a more equalized global income distribution. This is perhaps the most important lesson that Asia can take away from the global financial crisis, and it also offers the greatest opportunity for Asian regional economic development.
Chuang Yih-chyi is an economics professor at National Chengchi University.
TRANSLATED BY EDDY CHANG
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