Revaluation push gains currency
Monday's sharp fall in Asian stock prices in response to calls for Asian economies to revalue their currencies highlights the region's dependence on external trade. Asian central banks have long intervened to manage currency appreciation pressure stemming from a development model that has relied on exporting at all costs. It has been a bargain for which developed countries have happily signed up, as it allows a never-ending supply of cheap goods to enrich their consumers.
The region needs to ask whether this arrangement, supported by currency intervention aimed at keeping exports affordable, is past its sell-by date. Maintaining artificially weak currencies may help Asia's export industries, spurring a regional economic recovery, but the political cost is rising. The latest pressure, in the form of a G7 statement, has convinced many that a major adjustment in international currency values is inevitable.
Export-led economic growth has been a successful model, lifting the region from poverty to wealth, but it has diverted attention from the need to stimulate domestic investment and demand. South Korea is the shining example of a country that, after the financial crisis of 1997-1998, reformed a statist banking system that aimed to foster national exporting champions at the expense of domestically focused industries. Yet, even after deep reforms, South Korea's economy depends on exports to markets such as the United States. Other Asian economies that took less bold measures during that period are in the same bind, only to a greater extent.
Trade with Europe and China is increasingly healthy, but friction-free intra-regional trade remains a distant prospect. The Asia-Pacific Economic Co-operation forum is still more of a talk shop than a platform for free trade. Asian economies' dependence on US-bound exports means no country wants to be the first - or only one - to abandon currency intervention.
Breaking this deadlock demands action from the region's two economic giants, Japan and China. Both have domestic considerations to take into account, and both should be allowed to determine the timing of revaluations, but others are less likely to follow suit unless these two countries move first. China, for its part, has to make sure that a freely trading yuan does not derail all-important reforms in its bankrupt banking sector and efforts to address rising unemployment.
Reducing reliance on exports to the US would defuse problems in several areas. Asia must realise that depending on one country as its engine of growth is unsustainable. The Faustian bargain has Asia funding America's mounting deficit with its burgeoning foreign reserves, when that money could be better deployed in the domestic economy under a more flexible macro-economic regime. On the political front, Asian countries would carry more weight if their policies were not perceived as mercantile in nature - that is, relying on exports and the stack of foreign exchange booty they earn.
The region's central bankers and economic planners have yet to signal any major shifts, but financial markets sense that the imbalances in the world economic system mean they have no choice but to allow currency appreciation eventually.
