Will Asia Rescue the West from Economic Slump?

Many analysts are putting trust in Asia to pull the West up from the slump into which it has fallen due to its profligate appetite for credit. In addition to production and trade, The Economist recently hoped that Asian consumers would become shopaholics, like their Western counterparts. Never mind that rampant credit-fueled consumerism was a major part of the problem facing the West.

But a dose of reality was injected recently by Minxin Pei, who doubted Asia’s ability to fill in for the West. Pei wrote in an article in Foreign Policy: “Even at current torrid rates of growth, it will take the average Asian 77 years to reach the income of the average American.”

The problem with most economist-driven expections of Asia’s ability to pull the world out of a slump is that such analyses ignore the crucial part that politics, and states, play in economic globalization.

But if lack of ability is one issue, so is a possible lack of willingness.

Political scientists and political risk analysts for decades have pointed out that international financial movements take place only within parameters allowed by states. Ian Bremmer of the Eurasia Group recently restated that observation, from the angle that post-financial-crisis state capitalism is now the main decision-making prism.

What this means is that competition between states will inevitably dampen Asia’s ability and willingness to clean up the mess left by the West. As I have argued in my book, India’s Open-Economy Policy, India’s political rivalry with China, whether in securing energy or in inward foreign investment, will be the first influence on its international economic policies. China’s assessment of the US and Japan will determine its foreign acquisitions. US interpretation of Chinese influence in the Middle East and Africa will also temper cooperation toward free markets.

On top, you have respective Buy American and Buy Chinese policies. These have stayed below maximum so far — but put all of these together and the expectation that Asian consumerism or dynamic growth will be West’s savior is just economic optimism, not political reality.

Is India’s Globalization Hurting or Not?

Over the last couple of months, each bad news from India has been matched by a corresponding good news. 

Since September 2008, foreign institutional investors have withdrawn over $8 billion from the Indian stock market. The key index, Sensex, has fallen by almost a third. At the same time, over 100 new foreign institutional investors have entered the market.

On foreign direct investment, September to December were particularly bad. Satyam’s fall compounded the fears. But in January FDI jumped to $2.7 billion, almost a 60 percent increase over the previous January. But it’s too early to tell if this is just a blip or harbingers a trend.

In the 12 months to March 2009, the rupee depreciated by 25 percent, a good news for exporters, including Indian outsourcing industry. But it makes the import of fuel and the general sustenance of subsidies difficult, and will result in overall decrease in tax receipts.

Elections are weeks away, so the government will not cut back spending. The government is also under pressure to offer extra tax reliefs to ease the impact of the global crunch. All of this will add pressure on the budget.

The final two good news is that inflation has come down drastically, now at a six-year low of 2.4 percent. And by IMF’s calculation, GDP is still expected to grow substantially, 5.25 percent in 2009-10 compared to much of the world. But then IMF’s predictions about global economic health have been pretty off the mark the last couple of years.

So, is India hurting or not? The overall verdict is a definite maybe. It cannot be claimed that India has been shielded. It also cannot be claimed that the future is rosy for India, since the global recession is not going away any time soon. This is the type of conclusion I hate to reach, but there is no other right now: we just have to wait and see.