A major economic crisis -- characterized as the “Global Economic Crisis” -- has just passed with devastating impacts on many parts of the world. Throughout the world policymakers, policy analysts, and academicians are assessing
lessons learned, policy insights that we can draw from this major global shock, and the challenges and opportunities ahead for the global economies. The global crisis has, inter alia, shaken the global economic power structure and shifted it perhaps permanently in favor of Asia.
The outlook for the emerging Asia has become much stronger, consolidating the already held belief that the current century will belong to Asia. The rising Asia, while certainly a welcoming phenomenon creating more opportunities for the Asian economies including Bangladesh, the process need to be nurtured and should be inclusive in nature so that smaller countries like Bangladesh are not left behind. While the government must do its part, the international community particularly the emerging Asian giants would have to take greater responsibility in the transition process.
Asia has certainly done much better than what was expected earlier. Experience of Asia shows that despite continued dependence on exports to the Europe Union (EU) and North American countries, and a collapse of foreign trade, Asian economies have weathered the crisis much better than what was anticipated at the outset. Asian economies are certainly in a much better shape this time than at the inception of Global Crisis. Not only that, today Asia, led by China and India, is powering the engine of global economic recovery/expansion.
Against this background, Asian economic policymakers and strategists certainly need to reflect on the Asian experience and challenges ahead. Asia has always been the largest continent both in terms of population and land mass, and now it is also firmly on the way to regain its historical position as the largest economic region in the world. This outlook is certainly more inevitable in the post global crisis situation.
This outcome did not happen on its own. It happened because major Asian economies have much stronger economic fundamentals than their industrialcountry counterparts. Asian economies are characterized by: high savings and investment levels, key elements for sustaining higher economic growth; high growth in private sector driven domestic demand which has made these countries attractive destinations for foreign direct investment (FDI) from all over the world; strong balance of payments position characterized by high level of reserves and sustainable levels of current account balances (surplus or deficits as they may be); stronger fiscal position with adequate fiscal space to respond to the global economic crisis without giving rise to medium- and long-term debt sustainability issues.
Bangladesh’s experience with the global economic crisis, although, like other Asian economies, has been better than expected, it was also hit by the crisis, albeit at a later stage than envisaged earlier. More than 80% of Bangladesh’s exports are destined to the EU and the USA, both of which were severely impacted by the crisis and still struggling to get out of it. Our narrow export base, comprising mostly textile products, also made Bangladesh economy vulnerable to the crisis. Although initially many of us thought that, demand for Bangladeshi textile exports will be spared from the global crisis because of the so-called “Walmart Effect”, in the event Bangladesh was not spared. Both unit price and volume of textile exports to both destinations declined significantly, causing a significant reduction in exports and a general slowdown in industrial activity during at least two quarters of fiscal year (FY) 10. Continued strong domestic demand, supported by strong inflow of workers’ remittances helped sustain domestic economic activity despite sluggish export demand.
The government of Bangladesh also adopted stimulus packages to help the export sector and support the agriculture sector. The stimulus packages—amounting about 0.6% of gross domestic product or GDP (Tk. 34 billion) in FY09 and an additional 0.2% of GDP (Tk. 10 billion)in FY10—although modest in size, was designed to boost agricultural output, support the export sector suffering from power shortages, and diversify export destinations by providing incentives for exporting to destinations other than the EU and North America. The budget presented to Parliament also had an expansionary fiscal stance, primarily through much higher spending on development projects, higher allocations for health and education, and expanded social safety net programs. The Government was able to adopt an expansionary fiscal policy and also adopt stimulus packages, primarily through self financing, due to fiscal space that Bangladesh created in recent years through prudent macroeconomic management. Overall, Bangladesh has been successful in managing the global economic crisis and posted respectable growth rates of 5.5-6.0%.
Asia has certainly emerged much stronger after the global crisis and may be poised to regain the relative size of the global economy that it historically enjoyed in the mid-seventeenth century. Long-term economic outlooks prepared by several researchers/organizations for the Asian economies indicate that by 2050 Asia once again will account for 57% of global GDP, more than what it used to account for in 1825. Asia has already come a long way from the historical low of 15% of global share of output in 1950 to about 35% in 2010.
While this achievement and the ongoing transformation of Asian economies is certainly a cause for celebration, sustaining the gains and making the 21st century the Asian Century will require further managing the transition. Managing the transition period will require: (i) strengthening global economic coordination to avoid potential trade and currency wars which may threaten global economic stability; and (ii) sustaining the transformation of the Asian economies through rebalancing the sources of growth in major economies. These two issues are also linked and reinforce each other.
The reason Asian policymakers should underscore the importance of global economic coordination is because of the persisting and deteriorating problem of global economic imbalance arising from the very large and persistent trade account deficit of the USA, financed by a corresponding large surplus in the Asian economies. This is a “ticking bomb” and would need to be defused only through policy coordination. The global economic crisis has also weakened the financial position of the deficit country (United States) further and its capacity to undertake discretionary fiscal cuts in view of the weak domestic economic condition.