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“Growing interest in German ideas”

by Sebastian Paust
The exports of emerging and developing economies in the Far East are collapsing because of the global financial and economic crisis. Sebastian Paust, InWEnt’s new chief executive and previously Germany's representative on the executive board of the Asian Development Bank (ADB), discussed Asian points of view in an interview with Hans Dembowski. [ Interview with Sebastian Paust ]

How is the global financial and economic crisis affecting Asia?
To understand what is going on, you first have to consider the situation before the crisis. Many countries were quite successful in combining economic growth with fighting poverty. Since 1990, the number of absolute poor in the region dropped by a third to 600 million. It was projected that Asia – and by that I mean developing Asia, excluding Japan – would reach the UN Millennium Development Goal of halving poverty by 2015. The successful fight against poverty could basically be traced back to spectacular economic growth. This kind of progress is now under threat because exports have dropped and economic activity is slowing down. The consequence is fewer jobs and lower wages.

But the ADB’s economic outlook this year for developing Asia is still
quite good: it predicts a 6.5 % growth rate.

But that is insufficient if there is to be progress in the fight against poverty. Compare that figure with 2007, when the growth rate stood at nine percent. You must not forget that the vast majority of countries in Asia are still much poorer than in Europe and North America. Moreover, in smaller economies high growth rates really only reflect absolute volumes that would not look big in rich countries. Moreover, it is obvious that people in developing or emerging nations fall back into poverty much faster than those in developed countries, and poverty for them means hunger and destitution.

When the crisis began in autumn, it was said that Asia’s large emerging economies had become strong enough to remain untouched by trends in North America, Western Europe and Japan.
Unfortunately, that assumption turned out to be wrong. We now see that demand in the huge developing region of Asia is, so far, insufficient to compensate for the dramatic drop in exports, which have fallen by up to 60 %. Moreover, the global economic crisis is not only affecting exports. Foreign direct investments, which often flowed to the export sector, have dropped as well. The same applies to foreign portfolio investments, with tough consequences felt on stock markets. Migrants’ remittances have also fallen because workers are earning less in times of crisis or because they prefer to save money as a precaution. And a home-grown real estate bubble is about to burst in China. That bubble has nothing to do with the sub-prime mortgage crisis in the United States; it is rooted in unrealistic growth expectations in China. But the process will be painful nevertheless. The situation is serious indeed.

But Asian banks are not at risk so far?
No, they are not under immediate threat. The major economies of this continent – again, excepting Japan – are not particularly well integrated into the global financial system. This applies especially to China and India where the financial institutions are strictly regulated. But even Chinese and Indian banks are feeling the effects of the weak economy. One reason is that business has slowed for companies who borrowed money from banks in order to invest. Some of these clients now face payment problems. Even financial institutions that are fully solvent become more cautious in downturns, and therefore loans become less readily available and more expensive, putting further pressure on the economy.

What is needed in developmental terms now?
First and foremost, we need to convince people of the right policy approaches. The current crisis highlights the importance of social welfare systems, something German development agencies have long emphasised. Moreover, it is evident that strong institutions matter. More could have been done to spur rural development when the economy was humming along. On top of all that, recent events once more prove the
importance of regional integration, which would help countries to become less reliant on demand from rich nations. Needless to say, in my new position, I am very pleased with some of InWEnt’s particular strengths. They give us the opportunity to make valuable contributions to development.

Could you be more specific?
InWEnt has proven expertise in the fields of social security, institution building and agriculture. We have extensive knowledge of regional cooperation, not least thanks to our own experience in Europe. We provide advice to partners in a flexible and customised manner. Our work with alumni, our conferences and our dialogue sessions allow partners to network. That is very valuable, not only, but particularly so in terms of regional integration.

The West is to blame for the current crisis, but it is not adhering to the strict prescriptions the International Monetary Fund applied during the Asian crisis ten years ago. How are Asian governments reacting to that?
I would say that they have mixed feelings. On the one hand, Asian governments, in view of the difficulties I just outlined, hope that the West will soon be able to kickstart its economy. That would help Asia, of course. But on the other hand, Asians are expressing discomfort with the largely unregulated Anglo-American financial model. Time and again, they stress that, unlike in the Asian financial crisis ten years ago, the problems poor countries face today stem from the actions of rich countries – and they have a point. Appeals are being made to donors to rise to their responsibilities and live up to their promises regarding official development assistance (ODA). I find it intriguing that Asians are expressing growing interest in German and continental European ideas about a regulated market economy that takes into account social as well as environmental issues. We really have something to offer; people desire long-term stability and justice.

How do Asian governments view the IMF today?
The IMF's reputation has definitely suffered in Asia. Many people say that the policies it adopted in the late 90s only exacerbated the effects of that crisis and that the credit packages it offered were too small. But several countries have since done their homework, and their recent macroeconomic data look good. Many countries have built up large foreign-exchange reserves to prevent dependency on the IMF, and that is currently serving them well. However, many governments are now constrained to overstretch their budgets in order to assist the poor. The result is growing debt, and that is hardly different in Germany right now. However, given the generally lower standards of life in Asia, the negative consequences of budget deficits in the long run will hurt Asian people more.

What expectations do Asians have when it comes to multilateral policymaking?
It’s clear that Asian expectations of multilateral institutions, especially the G20, are growing. Asian leaders want the countries of the world to come together to introduce a more stable international banking and business architecture, especially if the alternative is lapsing into nationalistic egoism and protectionism. The G20 is a clear expression of the efforts of newly industrialising countries, especially China and India, towards a broader distribution of power and responsibility in international committees, even in institutions like the IMF. There is also the expectation, at least in the short term, that international financial institutions will provide massive financial support fast in emergencies.

Isn’t it problematic for institutions such as the IMF, as well as the multilateral ADB, to provide big financial packages to countries with poor governance? I’m thinking of Pakistan, for example.
These are not easy decisions. Our discussions on Pakistan at the ADB were quite controversial, and I am sure that was no different at the IMF. But what mattered most, in the end, was to prevent a country like Pakistan, which already has a difficult internal situation with a great deal of poverty, from going bankrupt. Moreover, we must not neglect geopolitics. Pakistan is a nuclear power that has a tense relationship with its giant neighbour India and it shares a long border with strife-torn Afghanistan. Such considerations contributed to the IMF, the ADB and others deciding to help Pakistan. It also played a role that the government under President Asif Ali Zardari was legitimised by elections, and so did the fact that anti-democratic forces are revolting against that government.