Lee Hsien Loong

Leading View: New Trade Battles Threaten Recovery

Last year turned out better than feared. Decisive responses by governments, and the coordinated efforts of the Group of 20, succeeded in averting financial disaster and restoring confidence.

While the worst is behind us, global prospects will depend on governments drawing the right lessons from the crisis and taking effective and coordinated steps to address deeper problems.

What have we learned from this year of ups and downs?

First, we live in a completely global economy. There is no haven to hide from global storms. But this doesn’t mean countries, including smaller ones, can do nothing in a crisis. Governments can and must take steps to stabilize their economies, protect their citizens and prepare their countries for the recovery.

Second, Asia’s dynamism is intact. Notwithstanding the crisis, Asian countries continue to transform themselves. China is reorienting its economy toward domestic demand. It isn’t just stimulating consumption but pursuing major infrastructure investments to enhance productivity, especially in rural areas, while reining in industries facing major overcapacity.

India, too, has weathered the crisis reasonably well, though its economic liberalization is progressing much more cautiously. Hopefully, the Congress Party will use the stronger mandate it won in the 2009 general elections to pursue more vigorous reforms and growth.

The countries in the Association of Southeast Asian Nations are benefiting from these two economic powerhouses. Its 10 member states are steadily fostering an economic community in order to participate fully in Asia’s growth story.

Third, protectionism remains a threat to recovery and future growth. In times of economic doubt and high unemployment, we must expect workers to be anxious and countries to seek to protect their own industries and jobs. The political mood in the United States is hostile to free trade and Europe faces similar pressures.

Fortunately, so far countries have largely avoided self- defeating protectionist measures, or worse, trade wars. They must stay the course as unemployment stays high, and muster the political will to revive the Doha Round of world trade negotiations. The United States must exercise leadership, and other major players must be prepared to close the last gaps and seal a deal.

Economic integration and free markets remain the best strategies for prosperity and growth, for developed and developing economies.

Fourth, after having witnessed a spectacular failure of untrammeled free markets, we must not swing to the other extreme. Governments and regulators clearly need to improve how they set the rules, supervise financial institutions and monitor risks to the system as a whole. But human nature being what it is, we can’t prevent crises from happening. We can only hope to reduce their frequency and the damage they cause.

Legislating in haste to appease an angry public may easily produce perverse outcomes. Future regulations must seek to curb irresponsible behavior but they must continue to allow and encourage financial institutions to innovate and take measured risks. As Asian countries strengthen their financial systems, they should gradually open them up and liberalize them and work together to deepen regional capital markets.

Next year should see modest but positive growth. We have to use this respite to tackle deeper issues in the world economy. As the United States unwinds its reliance on consumption and debt, countries must find new sources of global growth. They must also spread the benefits of growth more widely among their citizens.

One important way is through education and training because knowledge, more than natural resources, is the basis for growth. An educated workforce will fend for itself better in the midst of constant flux and take greater advantage of new technologies and markets. In Asia, it will also command higher wages.

Countries must also work together to meet major common challenges, including climate change. The Copenhagen meeting was a disappointment but countries must persevere on what will be a long journey. Few countries can afford to reduce carbon emissions at the price of a drastic reduction in economic growth, especially not rapidly growing Asian economies. But all must strive for an agreement to slow global warming.

Progress on these issues depends on international cooperation, and presupposes a stable international order. In the Asia-Pacific region, stable ties between the United States and China are critical, and fortunately the two countries are off to a good start with President Barack Obama’s recent visit to China.

Elsewhere there are complex and vexing security concerns, especially the dangers of nuclear proliferation in North Korea and Iran, and the conflicts in Iraq and Afghanistan. These problems won’t be solved in 2010. But they have to be managed, so that countries can continue to devote their talents and energies to peaceful and productive purposes.

Your View

See Result