March 9, 2009: Dr. Michael G. Plummer

(Click to Enlarge) Dr. Michael Plummer discusses the impact of the economic crisis on Asia.

The Financial Crisis and Asia: Implications for U.S.-Asian Economic Policy

(Washington D.C.) March 9– The current global financial crisis is damaging economies on both sides of the Pacific. Uncertainty is high: no one can predict when and how this crisis will end even as governments in Asia and Europe struggle to defend their economies from greater damage. In an East-West Center in Washington Asia Pacific Political Economy seminar, Dr. Michael G. Plummer of the Johns Hopkins University SAIS-Bologna program discussed the impact of the economic crisis on U.S. and Asian economies, the policy responses of regional governments, and recommendations to overcome the present crisis and prevent future dangers.

The financial crisis has caused havoc in world financial markets. Since last year, stock markets have fallen significantly, exchange rates have experienced large fluctuations, and many economies, including this United States and Japan, have gone into recession. Real GDP forecasts for the coming year continue to be revised downwards, with many Asian countries expected to post negative GDP growth rates in 2009. To mitigate these trends, regional governments have been experimenting with policies to limit the damage of the current crisis on their economies and the potential for long-term growth.

Dr. Plummer explained that the length and depth of current recessions will depend, among other things, on the policies that these governments adopt, noting that it is essential that governments act quickly and decisively and implement considered, expansionary fiscal policies. He noted that the U.S. Federal Reserve has done relatively well in this regard, having acted quickly and often and created a necessary stimulus plan, though the stimulus plan’s effects may take some time to be apparent. But no matter how quickly and appropriately world governments react, Dr. Plummer explained that historical experience demonstrates that the world can expect negative economic performance to continue for at least another six months. However, Dr. Plummer pointed to many positive signs in the current situation, noting that while things are not getting better, they are not getting worse either as the economy begins to show signs of stabilization. He argued that the economic situation should look much better by the end of the year.

In the meantime, governments in Asia face many challenges, including decreasing trade and foreign direct investment, languishing free trade agreements, stalled Doha trade talks, and protectionist economic policies. Japan, China, and the United States have all announced stimulus plans, bank interventions, and trade measures in the wake of the crisis. Dr. Plummer noted that China’s policies in particular have drawn world scrutiny as many governments see China’s economic powerhouse as the means to pull them out of their respective difficulties. The most important challenge, explained Dr. Plummer, is to not only overcome the current crisis, but to continue making the changes necessary to prevent future crises even after the current situation resolves.

Dr. Plummer argued that Asia needs to reduce its reliance on the OECD economies that consume the majority of its exports. As the current situation shows, Asian economies are extremely vulnerable to economic declines that decrease consumption in the United States and Europe. This will require Asian economies to stimulate domestic demand. Further, Dr. Plummer suggested that Asian nations need to work on deepening regional integration, as interregional trade has been dropping and cooperation between trade partners has also declined. The countries of Asia will have to work together to overcome the current crisis and readjust their economies to prevent and withstand any future difficulties.

The need for coordinated cooperation spreads beyond Asia into the international community as well. Dr. Plummer argued that even as globalization around the world increased, governance of the global economy has decreased. In particular, Dr. Plummer noted that there is no formal mechanism in place to address international approaches to crises. Currently, the coordination of the international response can take months, a detriment when a speedy response is required to stem a crisis. The creation of a formal economic problem-solving mechanism at an international level would be very useful in future problems. Further, Dr. Plummer noted that uncoordinated responses to a global crisis can lead to competitive policies, arbitrage, and imbalance. If the international community does not learn to coordinate its responses, then global reactions to economic downturns can make things worse rather than better.

In the short-term, U.S. and Asian governments must concentrate on building strong foundations for the future by coordinating their responses to this crisis, avoiding trade protectionism and “beggar-they-neighbor” strategies, and prioritizing a successful conclusion of the Doha development agenda. Dr. Plummer believes that if both sides of the Pacific can work together to overcome this crisis, then there is room for optimism, though it will be some time before the world can breath a sigh of relief.

Michael G. Plummer is professor of international economics at The Johns Hopkins University, SAIS-Bologna, and non-resident senior fellow of the East-West Center. He is editor-in-chief of the Journal of Asian Economics and director of the American Committee for Asian Economic Studies (ACAES). Previously, he held teaching and management positions at Brandeis University and the East-West Center. He has also been a Fulbright Chair in Economics (Viterbo) and Pew Fellow in International Affairs (Harvard University). His academic interests include international trade, international finance, and economic integration, especially in the Asian context and he has published extensively in these areas. Professor Plummer serves on the editorial boards of the Asian Economic Journal, World Development and the ASEAN Economic Bulletin.