Asian growth in an American vaccuum

Issue 19 - Oct 2008

V Anantha Nageswaran

The US House of Representatives considered and voted on the Emergency Economic Stabilization Act of 2008—‘Paulson plan’ for short—for the second time in less than a week and approved it with a comfortable majority. It was so keenly anticipated by the financial markets that it was anti-climatic to see US stocks end in negative territory after the legislation was approved. In the larger scheme of things, the Congressional approval of the bill might yet turn out to be inconsequential.

The rejection by the House of Representatives of the legislation in the first vote was not so much a testimony to their lack of understanding of the gravity of the situation as it was a reflection of the poor credibility that the administration and Wall Street carried with the Congress and with the public.

In general, the reason why it has been so difficult for a sovereign government to come to grips with it is that the extent of leverage involved is unprecedented. Also, the leverage is not transparent. It is in contingent liabilities, it is scattered and it is both off and on the balance sheet.

In this environment, a well-conceived and fair legislation is essential not only to regain the trust of America but also to restore the trust of the world in America. Perhaps, that is still a task left to the new administration and the new Congress. Even so, the road ahead is long and uncharted. America could conceivably spend a good part of a decade trying to repair itself. What can Asian economies do, or what should they do, in such circumstances, not only to sustain economic growth but also to take advantage of the evolving geopolitics? Here is a first and small attempt to pose these questions and provide some pointers under two scenarios.

Note: The initial version of this article, in the first release of this month’s issue sent out over email contained some errors. These have been corrected in the version that is now available for download. The main error is “For America to export its way out of trouble, it is neither necessary not sufficient for the US dollar to appreciate depreciate against European currencies.” Sorry.