Fri, Oct 17, 2008 page8

• The financial woes are here to stay

  • By Bert Lim 林建山
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  The world is in a panic, trying to respond to the financial tsunami put in motion by the collapse of the financial system in the US and other countries. It has been called the first depression since the 1930s. Although the US government passed a US$850 billion rescue package on Sept. 26, it still isn’t enough to revive the US economy.

  A CNN report said that 59 percent of respondents to a CNN/Opinion Research Corp poll believed we are facing a global recession. On Oct. 8, the G7 financial heads simultaneously announced they were drastically cutting interest rates, while the UK government announced a £50 billion (US$86 billion) emergency bank bail-out.

  The effects of this financial crisis, which were initially limited to the parts of the securities and financial sectors affected by the US subprime crisis, have now spilled into international real estate markets as well as US commercial real estate and high-tech manufacturing.

  Internationally, it is even more worrying, as it will have an impact on consumer demand on a national or even regional level. Once consumption shrinks, we can expect the global economy to take a heavy blow.

  It is frightening to see how Iceland, a Nordic country praised as one of the more exceptional emerging economies, a few days ago declared it was on the verge of bankruptcy — the first sovereign country to raise a warning as a result of the financial crisis.

  This is no longer a matter concerning only individual manufacturers or industries.

  Most problems are still restricted to the securities markets and the financial industry. All rescue plans and measures, or interest and exchange rate adjustments, have been aimed at saving financial institutions and guaranteeing depositors.

  The fact of the matter is the third wave of the global economic crisis is gathering, as steeply rising unemployment rates are beginning to interact with another wave of inflation set in motion by sharp wage adjustments around the world.

  Global inflationary pressures — big news for almost a year — have shown signs of abating in the past two weeks as oil, food and metal prices have stabilized, but sharply rising risk during the third quarter is now pushing these pressures toward a second peak.

  The risks for the real economy brought by the explosion in metal, oil and food prices early this year has instantly been transformed into a political stability crisis in newly developing countries. This will of course have a substantial impact on the development of newly industrialized countries.

  By the end of the second quarter, the prices of several key products had slowed. As we entered the third quarter, workers in different countries felt the sharp increase in cost of living and demanded wage hikes that had been frozen for a long time.

  This set off a second wave of global inflationary pressures and it is estimated that global inflation will increase by more than 6 percent as a result.

  The central banks in several emerging economies have taken anti-inflationary measures, mainly by restricting the money supply, which immediately resulted in flagging confidence and slowing exports. The central banks in many advanced countries, including Taiwan, had to deal with a different policy problem: Relaxed policies aimed at stimulating export confidence created new inflationary pressures. In microeconomic terms, the greatest impact came from sharply rising unemployment figures, reaching almost 7 percent, which created three new global economic risks.

  First, the risk that “Chindia” will not be able to sustain their economic prosperity. An analysis by the Economist Intelligence Unit believes that China’s financial service industry policies are distorted, which has resulted in overinvestment in China’s real estate industry and basic raw materials sector.

  The extension has resulted in large amounts of bad debt and failed investments, which may implicate China’s economy as a whole.

  India has a big problem with a dangerously overheated economy. The Chinese economy is expected to experience several consecutive years of slowing growth, while India is running the risk of bursting the growing economic bubble. The development of these two countries will also crowd out Asian economic growth.

  In addition, the explosive growth of international commodity prices has had an impact on the speed of international economic growth, while at the same time destroying profit prospects for countries exporting staple products.

  This aspect of China’s and India’s problems are particularly serious.

  Second, a dangerous trend exists with the appearance of new trade protectionism. An increasing number of international conflicts over unfair competition resulting from asymmetric labor costs and exceptionally undervalued exchange rates have destroyed the global trade order.

  Third, the risk exists that regional political and economic conflicts will be expanded. The conflicts between Iraq and Iran and the US and Israel have been a major factor in global oil price instability.

  Spreading terrorist activities and increased border security and border controls are serious threats to international investments and trade developments, as well as to the cross-border movement of human resources and capital.

  The development of these negative situations and their possible extended impact are almost unbearable to a Taiwanese economy that is highly dependent on external trade. The government should immediately give up any thought of the economy taking a turn for the better in the fourth quarter and instead prepare for the possibility of three to five years of economic difficulties.

  The government and the private sector need a quick and ruthless plan to stabilize and revive the situation. What are these policies?

  Bert Lim is president of World Economics Society (WES) and director of the WES Lim Institute for Public Policy Study.

  Translated by Perry Svensson
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