The Global Economic Crisis and the Obama Administration's Policies toward East/Southeast Asia

Date March 18, 2009
Speaker Richard CRONIN(Senior Associate, Henry L. Stimson Center)
Commentator KAWAKAMI Takashi(Professor, Faculty of International Studies, Takushoku University)
Moderator NISHIGAKI Atsuko(Senior Fellow, RIETI)


Richard CRONINRichard CRONIN
The conditions that led up to the economic crisis are an appropriate topic of discussion because it is important to understand not only where we are but also how we got here. For a long time, there have been two pan-Pacific economic models: the U.S. market-centered capitalist model and the East Asia model, which is relatively more state-centered and was pioneered by Japan. The East Asian emphasis on export-led growth has for a long time been a source of contention. However, the image that best sums up the relationship between the East and Southeast Asian development model and the U.S. version is the yin and yang symbol. You cannot have export-led growth without someone buying your exports. The differences in the two models are complementary up to a point, but the excesses of each model have created an unsustainable situation.

For forty years or more the United States has been improvising various strategies for dealing with periodic dollar crises while seeking to sustain not only its excessive consumption of foreign goods, but also its presence in Asia as a security guarantor. For their part, East Asian countries have sought to avoid the natural balancing role of free-floating exchange rates by buying and holding U.S. Treasury Bonds.

There is nothing fundamentally wrong with complementary systems in Asia and the West, but one of the reasons why the financial structure has broken down is because the U.S., in particular, promoted financial and monetary polices that led to financial crisis in Asia and the rest of the world. It is not that we need entirely new economic models, but we do need to restructure the systems that we currently have in place to restore balance and resume growth.

Structural issues have led to the global financial crisis. In the U.S., these issues include deregulation and poor supervision of both the financial industry and housing market. These factors are being exacerbated by the amount of money that is flowing to military actions like the Iraq War. In Asia, there was excessive dependence on China. For instance, in Japan fiscal reform proceeded slowly in the past due to the renewed ?economic growth that was fostered by unexpectedly high demand for Japanese exports in China.

It is also important to examine the U.S. response to the financial crisis under the Obama administration. Of course there are still many things unclear about the new administration, but on the issue of the financial crisis there are few options for the administration in terms of what it can do to recapitalize the banking system and stimulate renewed economic growth Lacking any clear solutions to a still spreading crisis, the Obama administration must pursue a variety of policies, choose the ones that are effective and discard the ones that are not. Unfortunately there is no way for the administration to create policy that helps only the right people.?

The administration needs to act quickly on housing. The housing market is in particularly bad shape right now, with little prospect for a near term revival. The focus for the moment is on stabilizing the financial system and fiscal stimulus. Critics are raising a lot of objections about bailouts and not all of them are Republicans; there are also centrist-to-conservative "New Democrats," primarily from the South and Midwest and "heartland" states in Southwest border states such as Arkansas, Tennessee, and Oklahoma. But the main concern of the Obama administration right now is whether or not it can pump enough money into the economy to support business and employment.

The Obama administration is using this crisis as an opportunity to improve education, social security and infrastructure in order to take U.S. policy in a radically new direction. Some of these measures may be wasteful in the short-term, but they still pump money into the economy. The long-term benefits are considerable, particularly if healthcare, education, and infrastructure issues are addressed. Until recently, corporate America has been opposed to any kind of universal healthcare system, but there would be a great economic benefit if the burden of the social safety net was removed from corporate America.

As long as the U.S. has existed, its political parties have pursued policies based on ideology. Whether it is a free market ideology or an ideology of state intervention, policy has traditionally been based as much on the characteristic optimism of Americans as the carefully calculated cost or benefit of the policy. The Obama administration is consciously seeking to reverse many of the George W. Bush Administration's policies, which it believes were overly ideological. Already the U.S. is rethinking the image it projects to East Asia with a view toward becoming more engaged and activist. Especially with regard to Southeast Asia, the groundwork for this policy shift was begun years ago at the working and middle level of the government, but it was never really acted upon until now.

The U.S. is going to be more involved in Asia in the future. Of course, the involvement of the U.S. at present is undermined by the financial crisis. For instance, one thing that it cannot bring to the table is money to bail out ASEAN economies. Regardless, the intentions of the Obama administration to become more involved in the region are clear.

The most important issue right now in Asia is whether or not China will be able to cope with rapidly declining exports. Additionally, from the U.S. point of view, the question of whether China will continue to reap large dollar surpluses and recycle them into U.S. Treasury bonds to help finance the growing fiscal gap and hold down interest rates. I am pessimistic. In particular, I am pessimistic about China's prospects for sufficiently boosting domestic growth to compensate for the collapse of export markets. China's exports to the U.S. have fallen at least by half in the past few years. Considering this and China's falling exports to Japan and other parts of the world, one really has to question the ability of China to cope with the crisis.

It is going to be very difficult for China to continue expanding economic growth in the future. China is saying that it will spend whatever it takes to stimulate growth, but the basic structure of the Chinese economy is not geared toward domestic consumption; it is geared toward saving and infrastructure investment. It faces the following two problems with switching from savings to consumption: one, the more Chinese consume, the more Americans and others save; and two, the tremendous difficulty of rapidly boosting domestic growth in a country where 80% of the people do not have access to credit. Most farmers cannot invest in their land and most small businesses and enterprises cannot get loans. The money that is being spent by China is going toward state-owned industries and infrastructure.

There is a lot of excess investment in the world going into infrastructure that is not being carried out very wisely. Funds going into domestic infrastructure do not contribute to investment in other nations. This is an issue of concern for the U.S. and the world, because if the U.S. cannot get the financing it needs to get the economy moving again, the economy of the rest of the world is not going to progress either. And so when U.S. officials go to Beijing, the trip is very different from their trip to Tokyo. The U.S. is worried about how to manage its relationship with China, as opposed to Japan, where American officials are more concerned with how to get more cooperation and support for mutual goals.

The situation between the U.S. and China, combined with the economic situation of the rest of the world, is placing a large burden on Japan. The question for Japan right now is whether or not it can show political leadership. It is hard to be optimistic about this. Policy changes very slowly in Japan. Can Japan create policies that help its dire fiscal position? Clearly the U.S.-Japan alliance has to develop into a more comprehensive partnership, and now there is a real opportunity for this to happen. I have talked to many Japanese government officials, and we have a certain common understanding about what is necessary to help East and Southeast Asia, but cooperation and action is needed from both sides. I think we will see more cooperation in the future, particularly since the more controversial demands on Japan from the U.S. side are most likely to be less than they were under the Bush administration.

Interestingly, after flirting with East Asian regionalism Japan appears ready to join with the U.S. to revitalize APEC as the primary vehicle for U.S.-Japan-Asia economic cooperation.

There is now a real need to rebalance the U.S.-Asia economic and financial paradigm based on the moderation of the two previously mentioned economic models. We can re-stabilize the global economy and financial system through important and painful but not revolutionary changes to moderate our two economic models to bring about convergence that has long been predicted but yet to be achieved. Moreover, as the financial crisis progresses, domestic tensions continue to grow in Southeast Asia and China. The U.S. and Japan need to bring about more harmony in their economic models to effectively cooperate to reduce the growing danger of regional instability.

It is worth noting that the subject matter discussed today appeared in an article that was carried by the China Daily, which had a very positive headline that was substantially belied by its actual content. The article includes quotes from four prominent American and Chinese economic experts, including the Chair of President Obama's Council of Economic Advisors, who expressed cautious optimism about China's ability to substantially boost domestic growth and achieve the 8% GDP growth rate for 2009 promised by China's top leaders. Actually, the Chinese language version has additional paragraphs explaining the reasons for my more pessimistic comments. One has to ask what is going on. Why is the China Daily, a government mouthpiece, running an article with both happy-talk headlines and a bottom line at the end that is very pessimistic?

I am going to talk about three things: Iraq/Afghanistan, China, and the U.S.-Japan relationship.

I have just returned from Washington D.C., where the main concern that I heard about was the overstretched U.S. military. Funding for the revitalization of the U.S. economy is important. Withdrawal from Iraq may be key to helping the U.S. economy recover. Additionally, 17,000 new troops are needed in Afghanistan. Right now, Iraq is critical. If Iraq moves toward peace, the U.S. can provide more troops to Afghanistan and recover some of the money it has set aside for the war. Can the U.S. withdraw troops from Iraq successfully and on schedule? How will President Obama remove 90,000 troops and 40,000 vehicles from the country by next year? How much gear can be run through Kuwait when exiting? The government of Kuwait prefers the U.S. to be relatively quiet.

Richard CRONIN
It is hard to see a way out of Iraq in the near term, but I do not think that it is impossible. It has always been President Obama's belief that invading Iraq was not the best move for the protection of U.S. interests, and that we need to take a more strategic and pragmatic approach to our involvement in that country that involves engagement with Iraq's neighbors, none of which want to see Iraq fall apart. The Bush surge did do some good in Iraq, and that gives hope for the continuance of relatively low levels of violence. Furthermore, the Iraqi government has said that it does not want the U.S. there past 2010.

One reason for going into Iraq was to make it possible to remove the U.S. military from Saudi Arabia, which could not be done as long as Saddam Hussein was in power. It was also believed that Central Asia was an important area for the U.S., and that it was necessary to increase the U.S.'s presence in that region. All countries going through civil wars eventually exhaust themselves, especially if there is some outlet for political participation. Iraq is no exception; I believe the situation in that country will calm down.

In regard to the pace and capacity of troop withdrawals, I remember when 200,000 U.S. troops were moved into Vietnam within one year. Things are different now, the U.S. military operates in a different way, but I don't think there is much of a capacity limit on moving equipment and troops. If there does turn out to be a limit that slows the withdrawal, I don't think anyone will criticize President Obama for this. You can only go as fast as you can go.

As for Afghanistan, no country has ever succeeded in pacifying Afghanistan. I do not think that anyone in Afghanistan wants to go back to the era of the Taliban, but in order to avoid that situation there needs to be a political solution. I am also optimistic about that country, but the real issue is Pakistan; Pakistan is the key to Afghanistan. The relationship between the military intelligence agency of Pakistan, the Taliban and Al-Qaeda is important. Pakistan has always preferred to deal with ideological groups like the Taliban in Afghanistan. There are two reasons for this. One, Pakistan does not want to see the revival of a movement to unite the ethnic Pashtuns on both sides of the Afghanistan-Pakistan border. Second, Pakistan does not want to see Indian influence in Kabul. This is why the Pakistan government has worked with the Taliban.

The Taliban is ideological and does not care about nationality. Beyond this issue, foreign policy efforts toward Pakistan should address the disputed Kashmir region, nuclear issues between Pakistan and India, and the country's ties to North Korea, Libya, Iran and so forth.

The possibilities for the U.S. to deal with Pakistan are limited, but in any case, problems in both the country and its region are not military problems and not really even political problems. They are problems of modernization. The societies in the region are ready for modernization, but are not experiencing it right now. On this particular issue I don't think the outside world is doing enough work.

Neither is enough being done to promote real development in Afghanistan and Pakistan. Real development requires fundamental policy reform, it does not mean small projects to dig wells and so forth. It does not really matter to the government of Pakistan, for example, that most of its population is illiterate. This is a direct effect of badly skewed wealth distribution. The leaders own a lot of property and do not really care about the rest, and so what is really needed is the development of a dynamic business center that can shift the political balance of power away from the military and feudal landowners.

The Chinese government estimates more than 20 million people work for foreign enterprises in China, where exports have been hit hard and many workers have been laid off. The IMF is now predicting 5% growth for the country this year. My concern is about China's economic power and how it affects the rest of the world. Because of its huge foreign reserve holdings, China's policies can have a great impact on the global economy. How much does the Chinese economy affect us? I am worried that, for instance, China is going to use its economic influence to disrupt the economy of Japan because of diplomatic issues like political visits to the Yasukuni Shrine.

Richard CRONIN
There is the possibility that China, as it has done in the past, will use nationalism as a vehicle for relieving public unhappiness with the government. I don't know how high unemployment has to get before it causes serious political instability in China. I do know that Chinese people are by and large not happy with their government. I do not think that using nationalism to rally public support will really help things because issues like Yasukuni are not really of great concern for most of the people. In any case, it is easy for Japanese leaders to avoid an argument with China over the Yasukuni Shrine. Just don't go to it.

What we need right now is a broader effort in the U.S. and Japan to understand what is really going on in China. That country no longer cares as much about military issues like escalation with Taiwan. The important issues now are now economic and political issues.

I believe that the purchase of U.S. Treasury securities by China may help the U.S. in the short term, but it will also give China leverage on future U.S. policies that it disagrees with. What do you think about this?

Richard CRONIN
Whether China keeps or loses T-bills depends on the situation within China. Nevertheless, I agree with what you said; I do think that it is a concern for the U.S.

The Chinese are now utilizing the fall in prices resulting from the financial crisis to buy commodities cheap. Of course, cheap is a relative concept, which assumes that prices will return to pre-crisis levels. If they do, China stands to profit.

It appears to me that Obama is choosing to focus on areas where Japan can easily contribute money. I have heard it said that Prime Minister Aso offered to pay the salaries of 80,000 Afghani police officers for six months in exchange for the chance to visit the White House before any other foreign leader. My opinion is that so long as Japan does not send the SDF to Afghanistan, the U.S. will continue to ask for more and more money. Is this situation healthy?

Richard CRONIN
It is not healthy for the U.S. to continue asking for money. I think that the Obama administration is going to put less emphasis on military contributions from Japan. This will reduce the opposition in Japan to the broadening and deepening of U.S.-Japan relations, but at the same time the U.S. is going to ask for a lot more in terms of financial commitments to counteract the global crisis. The Obama administration wants to acquire as much funding as it can for supporting crisis countries. I think that Clinton's decision to come to Tokyo and the decision to invite Prime Minister Aso to the White House were done for the U.S.'s own reasons. I have not heard about whether or not any bartering for the invitation took place.

Richard CRONIN, KAWAKAMI Takashi and NISHIGAKI Atsuko

Questions and Answers

Q: How do you expect APEC to function in the future? You said that there is a need to further develop the complementary economic models of the U.S. and Asia in the future. In working toward this goal, do you expect APEC to recapture its economic role?

Richard CRONIN
I think it was a grave mistake to make APEC into a security cooperation organization. The Obama administration does not view APEC the same way the Bush administration did. The challenge for the U.S. is to move cooperation in this region toward something constructive. The Bogor Goals of free trade and investment across the Pacific by 2010 for the developed countries and 2020 for the developing ones are not going to happen.

Officials in the U.S. need to get President Obama excited about APEC. Could APEC be an organization in which we all decide what we are going to do and not do in response to the economic crisis? Secretary Clinton has said that APEC is the number one vehicle for the U.S. in terms of its engagement with the countries of Asia.

Q: The economic system has clearly reached a point of instability. How do you restore America's economy? How do you restore the country's manufacturing ability? The problem is clear, but the solution is not. Do you have a solution in mind?

Richard CRONIN
We must remember that most of the issues we talk about are relative. It was not that long ago that the U.S. had a positive current account. In particular, the U.S. was earning a lot of money from its overseas investments.

In general, the global expansion of trade is a good thing. I think that there are a lot of actions the U.S. could take to make itself more competitive. I would start with education reform, I would invest in infrastructure, I would work to solve the issue of how the U.S. spends so much money on R&D but does not do as much as other countries to translate that investment into marketable products. All these things are a drag on growth. The U.S. can be more competitive. It needs to deemphasize the financial side of its global presence. Every state in the U.S. is deeply involved in international trade. The main problems are in specific sectors. I think that it says something that most U.S. graduate schools are full of Asian and other foreign students. There are underlying social reasons for the relative decline in the proportion of American students in the hard sciences, math, and engineering. The Obama administration has plans to address them.

In Japan, there are so many bottlenecks in society that could be alleviated. The country saves too much and it puts too much money into excess infrastructure. There could be policy changes in Japan that would open up trade and redirect investment to areas that would ease the problems of the trade imbalance. Again, we need some kind of convergence between the economies of Japan and the U.S.

Q: I have heard a lot about the human resource vacuum in the U.S., the idea that certain people cannot be appointed to political positions because they work on Wall Street and would have a conflict of interest. For instance, many experts on finance are working in finance and thus cannot advise the government. Can we really expect the U.S. government to take measures for drastic financial recovery? It seems to me that no one is working on such a policy now.

Richard CRONIN
The government needs to more heavily monitor the banking system. However, realistically a minimum of an additional 10,000 government workers are needed to do this. We should look at the way our financial system functions. We no longer need so many brokers who do not actually produce anything; they are just middlemen who skim off profits in the form of transaction costs. What we do need is more responsibility and accountability. We are in a period in which the government must really work to save capitalism. It is crazy how far we have strayed from a regulated system.

Q: What is the fundamental policy of the Obama administration for the G20 meeting to be held in London? When I read the joint statement of the G20, it was very unclear. The composition of the G20 is varied and the statement was a combination of all the countries' views, so I could not ascertain the U.S. position specifically. What kind of stance does the Obama administration want to take?

Richard CRONIN
The approach the Obama administration wants to take is one that puts an emphasis on stimulus. Many important U.S. allies do not agree with on this because they are worried about the long term consequences of such stimulus. They are saying, "We are already in debt, why does it make sense to borrow more money?" I am also a little worried about whether the U.S. can borrow the amount of money it wants and use it effectively toward economic recovery. The situation does not look good. But on the other hand, if the U.S. government's guarantee cannot be trusted, whose can be trusted? If this idea of using stimulus does not work out, there will be real calamity. However, I think that such a calamity is a worst case scenario. It will not come to that.

*This summary was compiled by RIETI Editorial staff.