Manna in farm lands

By M Rama Rao - Syndicate Features

Economic integration in Asia is becoming increasingly important to global growth and managing shared risks in the region, according to a new Asian Development Bank (ADB) study.

The financial crisis of 1997-98 exposed the region’s vulnerabilities and gave new impetus to regional cooperation, says the study entitled ‘Emerging Asian Regionalism: A Partnership for Shared Prosperity’, which highlights what is at stake and lays the ground for further discussion.

While Asian economic integration is led by the market, to take full advantage from increased regional interdependence, Asian economies need to boost their ties through closer dialogue and policy coordination. To foster financial stability and economic prosperity, they also need to improve regional macroeconomic surveillance and work toward the creation of new regional institutions such as Asian Financial Stability Forum and Asian Secretariat for Economic Cooperation, the ADB study says, adding that Asian regionalism can be a stabilizing factor when shocks arise.

Asia is less integrated in finance than in trade but financial markets are now larger, deeper, and more sophisticated than they were a decade ago. With the growth of trade and financial ties, Asia’s macroeconomic interdependence has also increased. The region faces a challenging period ahead as global payment imbalances appear increasingly unsustainable as the financial turmoil unfolds and global economic slowdown deepens. Therefore, the authors of the study ask the Asian policy makers is to closely monitor global and regional developments, and to be ready to act together if region-wide responses are appropriate. The region also needs to cooperate to make development sustainable by protecting regional health and environment.

One thing is clear though. During the last 3 years, Asia's emerging economies have largely surpassed expectations, with aggregate GDP growth reaching a peak of 8.7% in 2007. And with increased economic growth, domestic demand keeps emerging Asian economies bustling even in the face of global financial turmoil and economic slowdown in the US, Europe, and Japan. For 2008, Asian Development Bank expects a somewhat slower but still strong growth. Its forecast is a 7.6 per cent growth rate with China chipping in around 10 per cent and India notching 8%. The large ASEAN economies are expected to expand about 5.6%, while the newly industrialized economies of the region will grow slightly below five per cent.

Since the US is white knight in shining armour, a prolonged slowdown in American economy will affect Asia. ADB estimates that a one percent reduction in US growth will see half a percentage point drop in Asian growth rates. Sub prime blues engulfing the west have the potential to create greater volatility and cause abrupt changes in capital flows or disorderly exchange rate adjustments.

Inflation is also going to be bugbear. As the Indian experience shows, the monetary authorities are face to face with a dilemma over what constitutes the right mix to control surging inflation without excessively slowing economic growth. Hardening of lending rates will bring in their own troubles upfront and may over heat the economy.

Against this backdrop what Haruhiko Kuroda, President, ADB, said in Seoul recently assumes significance. He believes rising energy and food prices are going to be a reality Asian economies will have to grapple with for some time to come. This is largely because of their high dependency on oil imports. The region produces less than 10% of the world's crude oil supply but consumes more than 20%.

Though global crude prices appears to be stabilising of late, domestic prices are unlikely to reflect the trend immediately at least. And if the governments remain true to their word and phase out oil subsidies, the domestic prices are bound to rule high. That will naturally affect consumption and growth in Asia this year and in 2009.

For decades, real food prices had been declining. By the end of last year, however, they were roughly double the 2002 level. Since then, prices have skyrocketed increasing the fiscal cost of food subsidies and current account deficits. According to Haruhiko Kuroda, the explosion in food prices is a threat to macroeconomic stability. More so as the increasing food prices become a political football. About one billion people in Asia spend at least 60% of their income on food. Should food become too expensive or scarce, the most vulnerable could begin to suffer malnutrition.

To avert such a situation, the only way out is to create safety net for the poor and vulnerable sections as a medium to short term measure and to push for agriculture sector reforms to boost crop production and per hectare productivity as a long–term way out. Put differently, concern for agriculture and farmer should translate into real-time action plan at the regional and national level.

- Asian Tribune -