Tuesday, 20 March 2012

Changing World Economic Governance and the New Direction of East Asia’s Economy

Smart Community Model in Japan by using only clean technologies.  

Offshore wind farm in South Korea. Early in recent global recession, the South Korean government determined Green and renewable energy technology would be a key growth engine for the ROK economy. A number of Korea firms quickly embraced the mandate.  

I.                   Introduction
So far the world economy has fully recovered from financial crisis which originated from the subprime problem in the United States (US) at the end of 2007. The US and the European Union (EU) were badly hit by this crisis, leading to a global recession in other areas of the world, especially in Asia. Although recent global economic recovery seems hopeful, but a sustainable economic growth is under question due to the recent Greece’s debt default and possible sovereign debt's crises in other EU countries. Particularly, for Japan, its economic growth rate for 2010 is very low at 1.9% and government’s debt is more than double of its Gross Domestic Product (GDP) in 2009. In contrast, China and other emerging economies in Asia have very high economic growth rates in 2011 and this year 2012.  Furthermore, Japan is facing with some persistent challenges such as aging society, low birth rate, deflation, and a stagnant economy. Climate change is also a global concern and a sustainable economic development is needed by taking into account environmental measures which require international cooperation, for example the Kyoto Protocol. Economic growth is necessary, but a sustainable global climate environment is vital for every country in the globe. In this context, Japan is a leading country which can balance economic development and environmental sustainability, which contribute to a significant reduction of the greenhouse gas emission.

Within this global challenge and other pitfalls, Japan is trying to find a new direction for its economy. “How should we balance both being fiercely competitive in the global economy and contributing to an orderly market economy?”   

II.                Outlook of the Global Economy and New Architecture for Japan’s economy
1.      The Recent Outlook and the Changing Global Economic Framework

Despite the recent global financial crisis, the outlook of the global economy is still better than the 1990s.  The world output growth rate were 4.2% and 4.3% in 2010 and in 2011 consecutively, leading to a general assumption that the world economy is on a good recovery track. These figures also indicate that 2010 is the groundwork for global economic recovery and for “safe driving” (sustainable economic growth). However, there is a large output gap between the developed economies (i.e. Japan, the US, and the Euro area) and the emerging and developing economies (i.e. China and India). As for 2010, the economic growth rate for the advanced economies is only 2.3% while the emerging and developing economies are high at 6.3% (nearly three times higher than the advanced economies). For 2011, the total output growth rate for China and India is still higher than the advanced economies. As Japan is also in Asia, we can see that there is a shift of growth toward Asia (or shift in the driver of global economy to Asia). Therefore, the emerging economies (especially in Asia) are the lead runners of the global economy while the advanced economies are in search of new growth model to stimulate their stagnant economies. In order to have sustainable economic growth, prevention of asset bubble and irrational exuberance (over-expectation and overvaluation of the market) is necessary in order to have financial sustainability.
However, the global environment issues are the major concern for all countries in the world even though there is a strong need for economic growth after the financial crisis. The global temperature continues to rise with meltdown of the iceberg and the rise of the sea level. Recently, climate change has been the major agenda of discussion among industrialized nations and the developing countries (For example, the G20 framework) in order to find way to reduce greenhouse gas emission. Interestingly, Japan is the lead country in putting measure against climate change by announcing that it would reduce the greenhouse gas emission by 25% from the 1990 levels. So far, the main international agreement in fighting climate change is the Kyoto Protocol (adopted in 1997 and entered into force in 2005) which set limit for each signatory country in greenhouse gas emission. According to the figure released by the International Energy Agency (IEA) on 6 October 2009 on CO2 emission in 2007, Japan emitted the smallest amount of energy-related CO2 emission (only 4%) among the advanced economies and emerging economies. This means that Japan is the most efficient energy user among the industrialized countries.

Therefore, Japan has comparative advantage in developing green technology and is the only industrialized country in the world that can achieve a good balance between economic development and preserving the environment.

2.      The Global Economic Management
In global economic management, two important issues need be addressed appropriately and in parallel, namely economic growth with a sustainable manner through the financial stability (price stability is not enough), and contribution for future generation (reduction of greenhouse gas emission). Strong international cooperation is required in order to achieve these two goals. Both advanced economies and the emerging economies should have strong political will and equally share the burden of limiting their growth (reducing the greenhouse gas emission).

First, in order to have a sustainable economic growth, Central Bank’s policy on price stability is not enough and we need a sound macro-prudential policy in order to have financial stability. As noticed in the global financial crisis, loose monetary policy and price stability led to asset bubble, especially in the US’s mortgage market. So, price stability alone is not sufficient to prevent the vicious cycle (ups and downs) of the global economy. Furthermore, systematic risk should be prevented while checking the asset prices and financial system. We need to put in place financial stability goal through strong macro-prudential policy and good economic and financial governance.

Second, if we want to have timely contribution for our future generation, every countries needs to start from now in establishing clear environmental policies and CO2 reduction target. In order to accomplish this difficult task, all existing and new international agreements on environment protection (Kyoto Protocol and the Copenhagen Accord, and other frameworks such as the G20) should be immediately implemented and promoted without delay by adopting scientific approach in tackling global sustainability issues. In addition, both advanced economies and the emerging economies should take responsibilities and burden sharing of CO2 reduction.

3.      New Architecture for Japan’s Economy
Due to its matured economy which is the common challenge for industrialized countries, Japan is experiencing low growth compared to other countries in Asia, especially China. In comparison, China today is similar to Japan during the high growth period of 1950s-60s.  So far, China has achieved a significant economic development with high growth rate every year. Since 2011, economic size of China has already been bigger than that of Japan. In contrast, Japan has low growth expectation due to its demographic problem such as (aging society and low birth rate) and a massive government debt (218.6% of GDP in 2009). The persistent deflation and recent Yen appreciation is another blow for the Japanese economy although the Bank of Japan has tried to implement easing monetary measure in order to stimulate the economy.

However, not all conditions are adverse for Japan since it has high capability to develop state-of-the-art technology which contributes strongly to economic growth, such as solar energy, green energy, and production of energy-efficient cars (hybrid) and so on. In order to deal with the stagnant economy, it is important for Japan to have a grand strategy for the future, taking into account the capacity strengthening, the increasing awareness of the geopolitical risk, stabilizing social foundation through sustainable social security system and equality, and promoting its role in Asian integration (monetary and financial integration).

III.             Conclusion

Finally, as Asia is now the main driver of the global economy, flow of fund and the development of financial market in Asia is important to support economic growth in the region. So far, due to underdeveloped financial market, Asia has been exporting savings to Western countries, especially the US, and, in return, has been importing Foreign Direct Investment (FDI) from the West to develop its economy. Cooperation between Japan, China, Republic of Korea and ASEAN member countries is compulsory in order to promote regional financial integration and prosperity. Japan is taking leadership in this area through the idea of Asian Monetary Fund and now, the Chiang Mai Initiative Multilateralization with a total funding of 120 billion USD. At the same time, financial stability is compulsory to avoid another financial crisis.

In this context, good risk management policy is needed in order to consider the risk factors and the asset bubble. As for Japan and South Korea, there are responsible countries which can achieve equilibrium between economy and environment. A good exit strategy is required in order to get out of the challenges as stated earlier through fiscal consolidation and structural reform which should not be delayed. In the areas of advanced technology and renewable energy which is environment friendly, Japan has comparative advantage in these areas to further boost its economy.

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