Dubai crisis underlines fragility of Asian recovery, say economists

The shock to global financial markets caused by Dubai World’s failure to make interest payments is a “timely reminder of the fragility of the (Asian) economic recovery,” a U.N. economist said on Monday. Tiziana Bonapace, chief of macroeconomic policy at the Economic and Social Commission for Asia and the Pacific (ESCAP), also forecast a V-shaped recovery for much of Asia, which is proving “resilient” to the financial crisis in the West.

The agency predicts 6.3 per-cent growth in the Asia-Pacific region next year after generally efficient response to the global crisis by regional governments who briskly deployed looser monetary policies and fiscal stimulus packages to sustain their economies, its year-end economic report said.

However, the long-term recovery remains based on the ability of Asian governments to wind down stimulus packages at the right moment, prevent asset bubbles and to find new engines of growth to replace several years of likely weak demand from Western economies, it said.

Dubai, for all its previous expansion, remains a relatively modest part of the global economic system, Ms. Bonapace said. “Systemically Dubai is not the United States — size matters in these crises.” She said the apparently widespread perception that Dubai could cause major global problems was alarming in itself. “What is worrying is the coverage of Dubai in the last few days,” she said, adding that signs on Monday showing the financial markets were starting to take the Dubai crises in their stride were reassuring.

Given the “very challenging task” facing policy makers in Asia in achieving a smooth transition from crisis mode to more normal growth, this is the right time to promote the regional support mechanisms for greater economic, trade and investment integration, Nagesh Kumar, ESCAP’s chief economist, said.

“The time has come to deepen and broaden these (trade and economic pacts) to reflect the shifting of the global growth axis towards Asia,” said Mr. Kumar.

The search for new sources of growth was both vital and difficult yet many opportunities existed to wean the region off an over-reliance on exports to the West, notably the potential demand from the 860 million people in the region living in poverty.

“If they can be pushed out of poverty to join the mainstream of consumers, the impact would be considerable,” Mr. Kumar said.

The update forecast the fastest growth for China with a 9 per-cent expansion in 2010 and robust performances from India — 7.5 per cent — and Indonesia at 5 per cent.