By Juan T. Gatbonton

What is being billed as the worst economic crisis since the Great Depression of the early 1930s has spread to East Asia: Our economies will not be spared the global downturn.

Already Japan and much of Europe are in recession: America should soon follow. These lead economies are expected to contract even more in the New Year. The global credit crunch set off by Wall Street’s collapse is spilling over into domestic banking systems and squeezing capital resources for corporate investment.

East Asia better prepared

Whatever global growth occurs in 2009 will come from the emerging economies. The IMF says they’ll still average a positive 4.2 percent. And it still expects India to grow by 6.3 percent, China by 8.5 percent, as against 9.5 percent in 2008.

The Asean region enters the crisis better prepared than it had been for the financial crisis that started in Thailand in July 1997. Since then, structural and corporate reforms have strengthened individual economies. Nonetheless, soaring capital costs will impede their ability to finance development and carry out anti-poverty programs. The IMF expects the ASEAN 5—Indonesia, Malaysia, the Philippines, Thailand and Singapore—to grow by an average 3.5 percent in 2009. This is less than half our record 7.2 percent in 2007. Until the crisis struck, National Economic Development Authority had hoped we would meet our Millennium Development Goal of halving the country’s poverty rate by 2015.

Foreign direct investment inflows will weaken drastically, but the severity of the crisis’ effect on individual states will depend on their exposure to rich-country economies in exports and financial dealings. We derive some 17 percent of our export income from the United States and some 15 percent from the European Union.

The experts expect the full impact of the crisis to hit our country in 2009, in the form of falling exports, higher joblessness and slower growth. Overseas Filipino workers (OFW) remittances will shrink, and some of the new business process outsourcing (BPO) offices will close down. The economy is projected to end up with 4.3 percent growth in 2008 and 3 percent in 2009.

In October, electronic component shipments that make up two-thirds of all our exports slumped by 18.9 percent, the worst in seven years.

No help from China?

As one of the world’s largest—and fastest-growing—countries, China is widely regarded as a motive power of the global economy. Because of its sheer size, it must grow phenomenally just to feed the rising expectations of its 1.35 billion people. China’s exports have apparently fallen for the first time in seven years.

To soften the effects of the global slowdown, Beijing in middle November announced a stimulus package worth four trillion yuan ($586 billion) over two years. The money, equivalent to 14 percent of China’s GDP (Gross Domestic Product), is to be invested in infrastructure, transport, housing and environmental programs. GDP is the total value of goods and services produced in a country in a year.

Beijing also promised to cut taxes in the New Year—to generate investment, create jobs and stimulate consumption. The Chinese economy is so huge and varied it could function on internal demand, but the Chinese save as much as 40 percent of their incomes. Increased public investments will go into agriculture, social security, education and small and medium-size enterprises. If these pump-priming measures succeed, Chinese demand may resuscitate dying Southeast Asian export industries.

Time to look to rural economy

Taken together, the emerging picture is of economic gloom spreading across the Asia-Pacific—even if much of the region will suffer much less than the United States and Europe. For our country, the global slowdown follows a spurt of growth that has been the highest in 30 years.

Given the global recession, countryside development is our best option for generating jobs, easing mass poverty and setting social safety nets for those groups the crisis will disadvantage the most.

Fortunately, we have reserves enough to finance rural pump-priming. The expanded value-added tax alone brings in close to P70 billion in revenue.

Remittances from our OFWs are another key factor in maintaining domestic demand. Over January to September, they grew 17 percent year on year, hitting a record $1.5 billion in June. Remittances are likely to contract, as the crisis decimates OFW jobs in Europe, but new markets seem to be opening up in the Gulf states, which are awash with petro dollars. Public investment should focus on the rural economy—on infrastructure, agriculture and social services for our poorest regions.

Need for leadership never more acute

The Great Depression gave rise not only to Franklin Delano Roosevelt’s ‘New Deal’ in America. It also led to the rise of Adolf Hitler in Weimar Germany and set off the Second World War. This crisis is just as likely to result in epochal changes in the global balance of power and in the way economies are managed.

Michel Camdessus, former managing director of the IMF, sees this as Asia’s century. Whatever the storm to be weathered, the locomotives of history are now in Asia; domestic demand is increasingly the spur to growth. As Camdessus told the Management Association of the Philippines, both governments and corporations must resist instant solutions. They must see the crisis for what it is: an unprecedented mix of opportunities and risks for the wise and the bold.