Towards a co-ordinated macroeconomic expansion among Asian economies


November 13, 2008

By members of the Asian Economic Panel
The recession in the US and parts of Europe is likely to be severe and prolonged, and the Asian economies should take urgent and co-ordinated action to protect their economic growth in the face of recessionary conditions in the US and Europe.
Such counter-cyclical policies should include monetary, fiscal, and exchange rate action.  By undertaking such policies in a co-ordinated manner, the Asian economies will achieve much larger and much more durable results than they would achieve through unilateral action.  The leadership in east Asia rests with the largest economies: China, Japan, Korea, and ASEAN.  Many other countries in east Asia, south Asia, and Oceania are likely to join in the counter-cyclical policies.
The likely severity of the coming US downturn should be noted.  US households are deeply in debt after many years of negative saving.  Credit conditions for these households have tightened dramatically; a drop in spending is virtually certain. Declines in housing values and equity prices will probably reach $15,000bn from the peak.  Layoffs are on the rise.
All of this will result in a very sharp drop in consumption spending and private investment outlays.  The US will therefore likely experience a dramatic downturn, with severe spillovers to other parts of the world.  Those spillovers can include: falling exports from Asia to the US, a weaker dollar, and a withdrawal of credit lines from US banks and US investors in Asia.
The G20 will meet in Washington on November 15.  We recommend that the leading Asian economies arrive at that meeting with a co-ordinated Asian macroeconomic policy framework already in hand.
Macroeconomic expansion in Asia will not only help to sustain Asia's own economic growth and employment levels, but will also help to put a floor on the coming global slowdown.
Higher growth in Asia will also mean more sales of US goods in Asian markets, thereby helping to moderate the US and European recessions as well.  For this reason, co-ordinated macroeconomic expansion among China, Japan, and Korea will be highly appreciated in all other parts of the world.
The following steps should be undertaken in the nearest future:
1. Announce that China, Japan, and Korea will work closely among themselves, and with other countries in the region, to ensure that Asian growth remains robust even during this difficult period for the US and Europe.
2. Provide large swap lines between the three central banks, to augment the swap lines that the US Federal Reserve has recently extended to Korea and other countries.
3. Remove any kind of International Monetary Fund involvement from the operations of these swap lines.
4. Announce a joint fiscal expansion, appropriate for each country.  China, for example, will focus on urban infrastructure, public housing, and tax cuts.  Japan and Korea will identify their own respective high-social-return public investment projects and/or tax cuts.  The Japanese government may also purchase equities in order to put a floor under declining equity prices.
5. Announce a joint monetary expansion, such as another round of coordinated interest rate reductions.
6. Announce that all three countries will abjure from beggar-thy-neighbour exchange rate adjustments, and indeed will strive to keep their currency values relatively stable against a basket of dollars and euros.  In particular, the Bank of Japan will resist excessive yen appreciation and will call upon the Fed and the European Central Bank to support Japan in joint currency interventions if needed to keep the yen at or above 100 yen per dollar.
7. Establish a committee of senior ministry of finance and central bank officials of China, Japan, and Korea to set the coordinated package of counter-cyclical measures, and to monitor the ongoing crisis on a frequent, regular basis, and in-depth basis.
Members of the Asian Economic Panel
Jeffrey Sachs, Columbia University, USA
Wing Thye Woo, Brookings Institution, USA
Naoyuki Yoshino, Keio University, Japan
Yung Chul Park, Korea University, Korea
Bhanupong Nidhiprabha, Thammasat University, Thailand
Kang Chen, Nanyang Technological University
Geng Xiao, Brookings-Tsinghua Center, China
Yeongseop Rhee, Sook Myung University, Korea
Khee Giap Tan, Nanyang Technological University
Mahani Zainal Abidin, Institute of Strategic and International Studies, Malaysia
Donald Hanna, Citigroup, USA
Kaliappa Kalirajan, National Graduate Research Institute for Policy Studies, Japan
Maria Socorro Bautista, University of the Philippines
Ryuhei Wakasugi, Kyoto University, Japan
Sulayman Al-Qudsi, Arab Bank Group, Jordan
Keun Lee, Seoul National University
See-Yan Lin, former Deputy Governor, Bank Negara Malaysia
Ji Chou, Shih Hsin University, Taiwan
Fredrik Sjöholm, Research Institute of Industrial Economics, Sweden
Xiaolan Fu, Oxford University, UK
Kanhaiya Singh, National Center for Applied Economic Research, India
Liqing Zhang, Central University of Finance and Economics, China
Shigeyuki Abe, Doshisha University, Japan
Shuanglin Lin, Peking University
Kwanho Shin, Korea University, Korea
Yunjong Wang, S.K. Telecom, Korea
Wei Zhang, Cambridge University, UK

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