Global Geopolitics & Political Economy / IDN
By Kalinga Seneviratne
SINGAPORE (IDN) – The last ten days of July saw the ‘Ballad of East and West’ coming alive as a stimulating debate unfolded on why Asian savings should not be blamed for the global financial crisis. Three Singaporean academics — an economist based in the U.S., an international law professor and a management guru – locked horns.
It all started in the Straits Times issue of July 20 when Prof Linda Lim, professor of strategy at the University of Michigan’s Ross School of Business wrote a long commentary arguing that East Asia needs to save less and spend more.
She argued that after recovering from the 1997-98 financial crisis, East Asian economies started running large current account surpluses, accumulating foreign exchange reserves as a buffer against speculative attacks. A lot of these surpluses were invested in U.S. dollar assets. "(These) cheap money fuelled ‘financial innovations’ such as sub-prime mortgages and risky assets, which led to a crisis", argued Lim.
She pointed out that the U.S. Fed chairman Ben Bernanke has identified a "global savings glut" as the cause of these global macroeconomic imbalances. Lim went on to explain that Asians save because of many reasons such as a lack of social safety nets, for retirement, to educate children and so forth. She thus recommended that financial sector reforms in Asia should create efficient and diverse financial instruments, so that less savings are required to earn target return for the investor.
On July 26 Straits Times published an email exchange between Prof Lim and Prof Tommy Koh, chairman of the Centre for International Law at the National University of Singapore. The latter hitting back at Lim for suggesting that Asians should spend more on consumption to take the world out of the economic malaise they are in.
"Mr Bernanke’s argument is self-serving and disingenuous. He is trying to blame America’s creditors when the fundamental problem is America’s unsustainable deficits." Koh argued. "It is greed that led Wall Street to deceive investors with those unsound instruments."
CULTURE OF THRIFT
He argued that Asians save because of a culture of thrift and out of prudence, but agreed that Asians must spend more. Yet, he qualified this statement by arguing that East Asians must spend more of their savings on education and training, housing and health care, on alleviating poverty and ensuring that every Asian has access to clean water, basic sanitation and a decent standard of living.
Lim replied that blaming greed is not sufficient to explain the cause of a financial crisis of such magnitude. When the interest rates are low and cost of money is cheap, greed drives people to look for unconventional means to satisfy their greed and go for "extraordinary innovations" she argued. Also Lim pointed out that U.S. will continue to receive Asia’s savings because it is a "safe heaven" in times of uncertainty and the preference for the U.S. dollar as the global reserve currency.
Lim argues that the bedrock of a market economy is consumer sovereignty and Asians should be free to spend on what they want — and if that means consuming better services so be it.
Koh hit back, arguing that "it is wrong to blame so-called cheap money for the excesses and sheer dishonesty of Wall Street. What happened was a combination of greed and a lack of regulation. Under the regime of the former president George W. Bush and Mr Greenspan, ‘regulation’ became a dirty word and ‘de-regulation’ a good word".
CONFRONT THE TRUTH
Observing that it is very convenient for Americans to blame others for their own problems, Koh told Lim that it is "intellectually dishonest of Mr Bernanke — and, I regret to say, many of my intellectual friends in Washington — to blame Asia for our high savings rate and for lending our savings to America".
Koh, one of those few Singaporean intellectuals who is not afraid to speak out his mind even if it means criticising the West, called upon the American intellectuals to confront the truth. "They should acknowledge that the fundamental problem is their low savings and high spending habits and their indebtedness," he argues. "It is morally wrong for the world’s No. 1 debtor nation to blame its self-inflicted problems on its creditors."
Koh pointed out that in the age-old Asian value system savings is a virtue. Spending and living beyond one’s means is not a virtue but a vice. "I think it is time for Asians like me to stand up and speak the truth (with love) to Americans. They should save more and spend less. They should live within their means. And, if they do not, please do not try to make savings into a vice and spending a virtue," advised Koh.
Lim replied saying that what she was trying to do was to challenge the Washington pundits, who believe it is up to China and the rest of East Asia to change their macroeconomic behaviour.
Lim pointed out that nearly a third of her colleagues at the University of Michigan and about the same proportion of her MBA students are from Asia, and she often refers to works of Chen, Huang, Lee, Park, Subramaniam, Wei and Zhang in her writings.
"I think we need to move beyond the notion that Americans have a monopoly of ideas. They do not — hence increasing representation of Asian voices in debating such issues."
Chipping into the argument, Prof Augustine Tan of the Singapore Management University supported Prof Koh’s argument that surplus countries like China, should not consume more, as the Americans do, but invest wisely in the future of their citizens by spending more on education and infrastructure.
"If any reduction in savings is to be achieved, it would more likely take the form of spending on infrastructure, education, the acquisition of resource-based companies abroad and so on, rather than in consumption leading to more imports from America and the developed world," he noted.
This argument between the East and the West is set to continue. There are frustrations felt in this part of the world that their voices are not being heard in the global media that is being controlled by Anglo-American media giants.
It is going to be balanced only by more Asians like Prof Koh speaking out their minds as the Asian media begins to expand its footprints globally — hopefully contradicting: "Oh, East is East and West is West and never the twain shall meet." (IDN-InDepthNews/06.08.2010)
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