As the financial crisis blooms into a global economic recession, Asia’s fragile political arrangements and democracies are coming under stress. Asian politics can be tumultuous at the best of times – throw in two wars in the Middle East, increasing concerns about economic dislocation in China and ongoing power struggles in Thailand and Malaysia, and the region’s political risk problems start to mount.
While great attention is being paid to the economic costs of the global recession, less attention is being focused on its political implications, and how economic and political events feed upon each other.
With economic indicators throughout the region having fallen off a cliff, some of Asia’s largest and most important countries could experience profound political impact.
South Korean industrial production declined 29% the last two months of 2008 and GDP is expected to be –3% in 2009, representing its most severe economic convulsion since the Asian crisis. Kim Jong-Il has, in response, predictably rattled his sabre by terminating all agreements with the South and testing another long-range missile.
Even though any progress made over the past two years in the six-party talks with North Korea has already evaporated, Kim’s latest tirade is the final nail in the coffin of the South’s Sunshine Policy and a prelude to what could turn out to be a reversion to some of the darkest days on the Korean Peninsula in memory.
The Shanghai stock market was the world’s worst performer last year (tied with Russia), down 65%, giving many Chinese investors their first lesson that capitalism has a volatile, destructive side.
Official growth projections for 2009 are in the 7%–8% range, but the reality is probably below 6% – China’s own version of a severe recession. Even the Chinese government now agrees that the 9% growth rate needed to keep the juggernaut afloat simply will not occur this year.
The Chinese government is doing its best to maintain the illusion that all is well in the national media. Left unreported are thousands of corporate bankruptcies and billions of yuan being paid in restitution through state coffers to millions of newly unemployed workers.
Given its interest in maintaining social order, the Chinese government is anxious to contain a rising tide of labour and political discontent in its hardest hit cities and rural areas at a time when ordinary citizens have begun to find a political voice.
When people’s bellies and pockets are full, they are less inclined to question authority. The opposite is true when times are bad. While wholesale political change is unlikely to occur, the political landscape is shifting organically to accommodate greater dissent as a means of reducing pent up social frustration. The government is taking the issue seriously and knows it will have to tread carefully, for the prospect of mass demonstrations looms on the horizon.
In India, foreign capital flows have all but dried up and consumer confidence continues to fall. Off-budget spending programmes are set to rise from 3.4% to 5% of GDP, exacerbating an already unsustainable fiscal imbalance. The drop in equity and property prices has strained the balance sheets of banks, non-bank financial institutions, and corporations alike. Despite rosy projections of 6%-plus GDP growth, it is more likely that GDP will rise by less than 5% this year.
Corporate governance has become a focus of concern since the Satyam scandal broke in January, raising questions among foreign investors about the nature of institutional oversight in India.
The coalition government that will be the result of the coming Congressional elections will be faced with the unenviable task of meeting rising expectations on the part of the growing middle class in India at this difficult time. Given constraints on the national budget, and the slow nature of Indian bureaucracy, the new government’s chances of making genuine progress on economic reform is likely to be as muffled as that of the current government.
The risk of a military confrontation with Pakistan simmers on the backburner given continuing Indian ire towards Pakistan for the Mumbai attacks in November. The deteriorating bilateral landscape will remain a source of concern this year, with prospects for improved relations likely to be elusive for some time to come.
Pakistan is facing the greatest threat to its sovereignty in its history. The colonial era border dividing Pakistan and Afghanistan – the Durand Line – effectively no longer exits, and has been replaced by a porous border in which Taliban and Al-Qaeda fighters move with impunity between the two countries.
The emergence of "AfPak" is a source of growing concern in Kabul, Islamabad, New Delhi and Washington. Pakistan cannot rightly call itself a sovereign nation without control over its borders.
The cession of control of the Swat region, which borders Afghanistan and is rife with Taliban, is evidence that Pakistan's delicate balance between democracy and theocracy is gradually being won by the theocrats. The government's ability to maintain the Pakistani people's allegiance to the state is being eroded by its challenges to provide for their basic needs.
It is ultimately an inability to meet its people's basic needs that is proving to be the greatest and most intractable challenge to the government of Pakistani President Asif Ali Zardari. Between the government's financial crisis, intramural squabbles within the cabinet, and the ongoing battle with Nawaz Sharif for political supremacy, Zardari's ability to simply focus on maintaining the sovereignty of the Pakistani state is in question.
Thailand continues to reel from the ongoing political saga of the battle between pro and anti-Thaksin forces, while foreign investment and tourism continue to plummet. With Thailand’s military less inclined to intervene (given its poor performance 2006 and 2007), and with the King believed to be quite ill and less able to wield influence, it is hard to see a rapid end to the political wrestling. Chances are good that the government that Thai Prime Minister Abhisit Vejjajiva will be in power only for a short term, and that the Thai economy will flounder in the medium-term.
All this comes at a time of increasing economic nationalism on a national, regional, and global scale that threatens to derail the prospect of a V-shaped global economic recovery in 2009. Given what is known today, that the depths of this global recession may only be reached this year, and given the undeniable linkages between the world’s economies, an L-shaped recession followed by a U-shaped recovery seems likelier.
Net private capital flows to emerging economies have nosedived from just under 7% of collective GDP in 2007 to about 1% today. Protectionist sentiment has combined with the freeze in the capital markets to stop the flow of foreign capital to the developing world in its tracks. This is most unfortunate given that developing countries need foreign capital today more than at any time since the Asia crisis to meet their basic infrastructure needs.
Yet cross-border risk appetite among banks, hedge funds, and pension funds is at a cyclical low and developing countries are competing for what limited funds are available. One important effect of this is that the public-private partnership model of development is on hold until further notice.
Developing country governments have once again been made increasingly dependent on bilateral and multilateral aid to advance the cause of infrastructural development. This aid is now declining in size as donor governments shift their spending priorities in response to the crisis, creating a vicious circle of dependency and vulnerability among developing countries. There are sure to be political consequences resulting from the inability to Asian governments to meet growing infrastructure needs.
The tremendous foreign exchange reserves that several Asian governments were able to accumulate during the commodity boom are now needed to sustain growth. For those countries that were not able to cultivate substantial reserves nor manage these reserves properly, the impact of the crisis will be all the more severe.
Given that a number of other Asian countries are in the throes of political change, it will be more difficult than usual to predict the outcome of pending elections in Indonesia, Malaysia, and the Philippines. History has shown that radical political movements arise when economic crises reach their depths. The question now is whether a largely democratised Asia will find demagoguery and fringe political movements appealing, or whether extremists will gain a greater voice in national political processes.
Asia is certainly better prepared to weather this economic storm than it was 10 years ago, but the risk of sliding back to old habits remains. Democracy remains a relatively new concept to many countries in Asia and it is unclear which among them will be able to sustain genuinely democratic transitions to power in a time of crisis. But there is reason to believe that, having gotten a good taste of democracy over the past decade, most Asians will reject extremism as they implement political change.
Daniel Wagner (managing director, Country Risk Solutions)