Wednesday, January 27, 2010

Specter of an Asian double-dip recession

Asia's Economies Face Stimulus Downside As the global financial crisis triggered alarms across Asia, Singapore responded with a government program to aid its vulnerable workforce. The affluent city-state pumped US$3 billion into an employment protection program.

Under the Jobs Credit scheme, which was unveiled as part of the country's stimulus package to respond to the crisis, businesses were encouraged to retain their employees through training programs aimed to improve their skills.

This across-the-board initiative, where the government offered employers "wage support" for each employee, included small- and medium-sized enterprises and larger companies. The city-state was one of the worst-affected Asian countries, with its economic growth dropping from 6.7% to minus 11.5% as the global crisis intensified in 2009.

"The Singapore government used the crisis as an opportunity to train its workforce and provide better skills to improve competition in the medium term," said Gyorgy Szirackzi, a senior economist at the International Labor Organization's (ILO) Asia-Pacific office in Bangkok. "This will also help in the post-crisis stage."
This aid package accounted for a third of the $10.6 billion that the city-state's government spent as its stimulus package to soften the blow from the global crisis, which began in the United States in 2008.

Other East Asian countries followed this pattern of enhancing the quality of their local workforces affected by the crisis, albeit through different initiatives, Szirackzi told Inter Press Service. "Malaysia improved training of graduates who were about to enter the workforce. They concentrated on developing their IT [information technology] skills."

South Korea, on the other hand, gave a helping hand to its threatened workers by enhancing their foreign language skills. "The government implemented a program for young graduates to go abroad and learn a language to improve their fluency," said the
ILO official.
Such assistance to help skilled workers was with reason. These Asian countries had economies more integrated to US markets. South Korea and Singapore "were affected from the outset", states the ILO in a 2009 study. "In these economies, job losses in the financial sector took place immediately."

But as the crisis spread, its impacts were felt in other developing countries, with "millions of workers in key export industries in the region [having] been retrenched," the ILO notes. "Sales of labor-intensive manufacturing products, including toys and games, footwear and clothing are down sharply in the United States and Europe, as are higher value-added goods such as computers and related equipment and automobiles."

Countries like Thailand came to the rescue of some workers. Bangkok's financial package to boost its heavily export-dependent economy allocated funds to provide "skills training for retrenched workers", the ILO states.

The financial stimulus packages opened up jobs in other areas, too, as government money for infrastructure programs, ranging from road-building to improving drainage systems in urban centers, ensured more labor-intensive jobs.

These packages varied across East Asia. Indonesia and the Philippines had $7.1 billion and $7 billion, respectively, followed by Malaysia with $12.1 billion, Thailand with $39 billion and South Korea with $53.4 billion, according to a new United Nations report, "World Economic Situation and Prospects 2010".

Meanwhile, China, the region's economic powerhouse, dwarfed other countries with its stimulus package - $585.3 billion - or nearly 13.3% of gross domestic product (GDP).
Such government-led measures to expand "government expenditure on consumption and investment" have helped countries in East Asia reap some rewards, the UN report states. "The East Asian economies rebounded in the course of 2009 after suffering severe downturns in the aftermath of the [US-based] Lehman Brothers bankruptcy, when exports, industrial production and domestic investments weakened sharply."

The UN is consequently upbeat about its economic forecast for East Asia, predicting that the sub-region's economic growth will hit 6.7% in 2010, making it "the highest among all regions of the world".

During recession-hit 2009, the sub-region's economic growth was 4.1%, down from 6.2% in 2008 and 9.3% in 2007, reveals the 180-page UN report. "In fact, much of East Asia's growth in 2009 is accounted for by China, where GDP expanded by 8.1% compared to 9.0% in 2008."

Yet such a recovery has also given rise to a worrying question: When should governments turn off the stimulus package taps?

An early or untimely end to the stimulus packages could undermine the emerging signs of an economic recovery, the UN warns. "While the overall outlook for East Asia is favorable, the region faces several major policy challenges and downward risks, including a premature exit or sharp reversal of the expansionary monetary and fiscal policy measures that were put in place over the past year."

Particularly worrying is the specter of a double-dip recession, according to the UN report.

The labor market will feel the heat of such an early end to the financial packages, said Tiziana Bonapace, chief of the macroeconomic policy section at the Economic and Social Commission for Asia and the Pacific, a Bangkok-based UN regional body. "An early withdrawal of the stimulus packages could see some of the special programs implemented in the region that ensured employment being unwound."

Yet at the same time, governments will come under pressure from growing public discontent about the expanding public debt and that constant spending by governments is crowding out the private sector. By Marwaan Macan-Markar for Asia Times/Inter Press Service

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