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Ethos Issue 6, Jul 2009
The End of the World
(Economy) as We Know It
Adeline Aw, Lee Chor Pharn and Wee Shu Lin
THE CHANGING LANDSCAPE OF
GLOBAL DEMAND: POSSIBLE SCENARIOS
The interplay and depth of these legacy
effects will determine the likelihood
and extent of revival in the growth
engines of Chimerica. While the current
crisis has certainly increased the range
of possibilities facing the world economy
over the next ten to twenty years, we can
extrapolate these legacy effects to derive
three possible scenarios for the future of
the global economy.
Scenario 1 : Wounded Beast
In this scenario, the world emerges
relatively unscathed from the economic
crisis of 2008–2009 as coordinated
government efforts succeed in stabilising
the global financial system. Financial
innovation, in turn, manages to outpace the tightening in regulation, allowing
households and firms to attain easy
access to credit. Consumer and business
confidence are restored in the major
developed economies, and the exportled
"Chimerica" engine revives.
The pick-up in export earnings
accelerates the urbanisation process
in many emerging Asian economies,
resulting in larger numbers joining
the urban middle class in Asia. While
wealth and buying power increase
in these urban centres, the pressures
associated with urbanisation, such as
infrastructure shortages, also intensify.
The demand for raw materials and other
resources to support infrastructure
grows strongly, but reduced investments
in supply during the 2008–2009
downturn create severe upward pressures on resource prices. In addition,
speculative activity, occasional supply
disruptions and seasonal shortage add
to the volatility in resource prices.
This scenario is not a return to a stable
status quo. A quick revival of Chimerica
means that there will be less will to deal
with the structural imbalances that
led to the crisis in the first place. The
persistence of these imbalances and the
intensification of demand on limited
resources and commodities increase the
likelihood of asset bubbles and crashes,
and volatile, unstable growth over the
long run. Business cycles, which have
already become shorter over the last
ten years, will shrink even more. In
this world, Singapore, as a small and
vulnerable open economy, will have to
deal with the impact of a volatile, unstable
global macroeconomic environment.
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Scenario 2: Chasm
A lack of international coordination
and political will delay the process
of economic recovery. Conservative
lending practices become entrenched
in the commercial banking sector,
and credit growth to the private sector
and households slows down. A global
demand shortfall results as savings
rates in the G3 permanently rise with
the protracted downturn. Consequently,
trade flows are significantly reduced
with the fall in G3 demand. Creeping levels of protectionism further inhibit
Asia’s ability to tap into G3 demand.
The emergence of new and more
insidious forms of protectionism occurs
as governments are pressured to take
actions with mass appeal in stimulating
the economy.
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