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(SINGAPORE) When Asian countries do begin the long and arduous trek towards recovering from the financial fallout, microeconomic policies need to be emphasised if the recovery is to be sustainable, said Finance Minister Tharman Shanmugaratnam yesterday.
'The scope for macroeconomic policy action to boost domestic economies and demand is actually limited,' said the minister to analysts and the media yesterday, at the Nomura Asia Equity Forum in Shangri-La Hotel.
'What really needs to be the focus is the microeconomic and social reforms to strengthen long-term consumption growth.'
The minister recommended microeconomic policies in the realms of reforms in social security, health insurance, and the removal of import tariffs for cheaper imports.
The need for a microeconomic solution is essential, given that the rumblings of the limits of fiscal spending have begun to be heard, even though governments have done well to lean towards expansive fiscal policies.
'In Asia, China and Singapore aside, few countries have had the fiscal buffer to engage in significant fiscal reflation efforts. Even in China, there are increasing concerns about the distortive effects of substantial short-term reflation,' said Mr Shanmugaratnam.
China had sought to turbocharge its economy with a 4 trillion yuan (S$852.5 billion) stimulus package and had cut its one-year lending rate five times within four months late last year.
The minister also defended the current account surpluses of Asian economies, which some parties have blamed for creating a global savings glut that led to artificially low long-term interest rates.
He debunked the idea of a savings glut by pointing out that global savings have been trending downwards since the 1970s to begin with.
According to the minister, the lowering of household debt to pre-bubble period levels in 2002, however, would be followed by a period of more staid growth because of the necessary increase in savings.
'A gradual increase from 4 to 10 per cent in household savings rate over the next ten years is achievable, but there will be lower consumption growth,' said Mr Shanmugaratnam.
Should this scenario play out, US GDP growth is expected to be 2 to 2.5 per cent per annum in the medium term, compared to 3.5 per cent over the last decade. On this side of the pond, regional growth will average 6.5 per cent compared to the previous 9.9 per cent.
In the meantime, the going will be challenging, even if the worst has already happened.
' We are not yet in recovery mode. The recovery for the next two years will be slower than previous recoveries and we cannot rule out setbacks from time to time.'
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