Getting Asia Back on Track
It's good news that Asian governments are turning on the money spigot to provide some nourishment for their parched economies. Demand in the U.S. for the region's products has dried up, especially in the all-important electronics sector. But making sure the public money is spent properly will be critical to fostering growth. Japan is an unfortunate example of how not to use fiscal policy to stimulate the economy. Tokyo went through one pork barrel package after another, yet all it has to show for the effort is a lost decade of economic growth and the biggest government debt burden in the developed world.
This is what should be done:
-- Put the money in the right projects. Taxpayers should make sure that their money isn't frittered away on projects designed to pay back political supporters. Corruption remains part of the construction industry just about everywhere. At a time of increased spending, anti-corruption efforts should be stepped up.
-- Stimulate domestic demand. The devastating impact that the U.S. slump has had on Asia is a brutal reminder that the region needs to decouple itself somewhat from the American economy. Building a domestic-led consumer economy is a priority. Asia is rich enough now that its consumers can be the engine of growth. China has a lot to teach the rest of the region. Since 1998, it has been pouring money into infrastructure projects as part of a Keynesian program to stimulate the economy, adding about two percentage points to annual growth.
The Chinese system is far from perfect, for it remains riddled with corruption and banks have yet to adopt market-based principles. But a domestic stimulus program has bought the country time--time that its leaders are using wisely to build a more competitive economy.
-- Clean up the financial sector. Asian countries are lucky that they have the flexibility to spend, thanks to years of fiscal probity. But as Japan and Latin American countries have shown, it's easy to squander those advantages. Asian countries are courting trouble unless they clean up the bad loans in the banking system and start in earnest to build a market-based financial system.