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industries with subsidies and undervalued exchange rates. Recent estimates suggest that Asian currencies are among the most undervalued in the world. Stronger exchange rates would help shift growth away from exports and boost households’ real spending power. Mind the gap The gap between growth rates in emerging Asia and the G7 is forecast to rise to a record nine percentage points this year (see chart 4). But what of the future? Pessimists argue that Asia’s growth over the coming years will be much slower than before the global crisis because its main engine of growth, exporting to America, has broken down and it will take years to find a replacement. But this may overstate the importance of America to the Asian tigers. Between 2001 and 2006 (when America’s trade deficit peaked), the increase in emerging Asia’s trade surplus with America accounted for only 6% of the region’s GDP growth. If those exports cannot be replaced by domestic demand, growth will be slower, but not massively so. Besides, long-term growth depends on supply factors, not just demand. A country’s long-term “potential” or “trend” rate of growth—the speed limit at which GDP can expand without igniting inflation—is determined by growth in its labour supply and productivity. The global financial crisis should not noticeably reduce productivity growth in emerging Asia. Indeed, recent increases in infrastructure spending across the region could boost productivity by reducing transport costs, especially in places such as inland China. In America and many other rich countries, by contrast, potential growth rates are likely to fall over the next decade as soaring government debt and hence higher taxes blunt incentives to work and invest, the lingering credit crunch dampens investment, and increased government regulation deters innovation. All this could reduce productivity growth at a time when labour forces in these countries will be growing more slowly or even shrinking. The tigers are unlikely to return to their breakneck growth rate, which averaged 9% during the three years to 2007. But this exceeded their safe speed-limit. Emerging Asia as a whole might enjoy annual growth of 7-8% over the next five years, at least three times the rate in the rich world. The sharp downturn in Asia late last year painfully proved that the region was not immune to America’s downfall. But the speed and strength of its rebound, if sustained, show that it is not chained to Uncle Sam either. If anything, the crisis has reinforced the shift of economic power from the West to the East. Copyright © 2009 The Economist Newspaper and The Economist Group. All rights reserved. -105-
AIG, Fannie Mae and Freddie Mac The toxic trio Aug 13th 2009 From The Economist print edition American taxpayers are ploughing billions in. Will they get their money back? Illustration by S. Kambayashi FORGET the banks and the carmakers. The biggest bets that American taxpayers have made are on three less famous firms: American International Group (AIG), an insurer, and Fannie Mae and Freddie Mac, two mortgage-finance agencies. The state now owns about $170 billion of shares in banks. It has so far invested over $160 billion of equity in the toxic trio, and this number is likely to rise towards $300 billion. Include other kinds of help, such as loans, and the total pumped into the three firms could eventually reach $800 billion (see table), or 6% of GDP. “I had no idea what I was in for,” admitted Edward Liddy this month as he stepped down after a gruelling year running AIG. Americans must feel the same way. The case that was made to taxpayers last year for bailing out the three is intact. Through its derivatives activities and giant insurance business, AIG was so entangled in the financial system that it could have brought it down. Fannie and Freddie, which own, guarantee and help securitise about half of American mortgages, were judged as vital to a healthy housing market. Banks and foreign governments held buckets of their paper, too, in the belief it had implicit state backing. Defaults would have badly hurt relations with China, the largest foreign-government creditor. What has changed is the size of the bill. AIG’s bail-out has been revised upward four times as its losses have mounted. “They tried to put on a band aid and then realised they needed a tourniquet,” says Rob Haines of CreditSights, a rating firm. When the government first began to help the two mortgage agencies in July 2008, it said capital injections were “not something we expect”. That looks like a bad joke now. The question is no longer whether the trio will receive vast sums, but whether taxpayers will get any money back. -106-
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Politics this week Aug 13th 2009 Fr
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KAL's cartoon Aug 13th 2009 From Th
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Asia’s rebound has several causes
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democratic region. But Brazil’s l
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World trade and commercial aircraft
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Galileo, four centuries on As impor
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Correction: America's sex laws Aug
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SIR - You mentioned the slaughter d
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Professor of the history of art Sch
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Their arrival coincides with, and i
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and integrated well.) Peru has beco
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Clean energy in the Midwest Greenin
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The economics of natural gas Drowni
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meetings on health reform planned f
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Drought in Texas Not a cloud Aug 13
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Rich animals The dog will have his
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twice the national average. But it
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international institutions and the
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Energy v environment in Canada Bomb
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further sanctions. Yet it is doubtf
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egistered voters are frauds. Yet Mr
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Australia's opposition His own wors
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Taiwan's typhoon Taiwan's disastrou
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Banyan The Burmese road to ruin Aug
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Fatah and the Palestinians Fresh fa
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Iran and human rights The crackdown
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Page 148 and 149: Markets Aug 13th 2009 From The Econ
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