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'Would the Economic Crisis Morph into a Long Recession?' by Dr Michael Heng

Would the Economic Crisis Morph into a Long Recession?
Date/Time: Jul 02, 2009 / 6:00-7:30pm
Venue: The SIIA House, 2 Nassim Road Singapore 258370

"I think the US faces a decade of recession, similar to what happened in Japan.”
-    Kenneth Rogoff, professor of economics, Harvard University

This comment of the good professor comes across as alarmist on first reading. The reasons are simple. To deal with financial crisis, governments resort to Keynesian prime-pumping to stimulate demand and cut interest rates to lower capital cost for business. These combined measures have proved to work very well since the Great Depression. But they have somehow failed to pull Japan out of its “lost decade”.

The scope of the talk is to explore the underlying assumptions of government stimulus packages and why the magic may not be so powerful this time for the advanced economies. What can they then do to cope with the current crisis? Long-term wise, they must adopt measures to increase productivity through innovations at managerial, technological and societal levels, in short, a restructuring and transformation of the economy. This will benefit every country in the world.

Programme Schedule: 

6:00 – 6:15pm   Arrival of Guests and Light Reception 
6:15 – 6:20pm   Opening Remarks by Moderator 
6:20 – 6:50pm   Speaker's Remarks 
6:50 – 7:20pm   Question and Answers 
7:20 – 7:30pm   Closing Remarks by Moderator

Michael S H Heng is a researcher at East Asian Institute, National University of Singapore. Before this, he has held academic appointments in Australia, China, Malaysia, The Netherlands and Singapore. He holds a Ph D in information systems from Free University of Amsterdam.  He is a winner of Emerald Literati Network 2006 Award for Excellence for his paper on supply chain management. He is editorial board member of three international journals on electronic business. He is a co-editor of the book Supply Chain Management: Issues in the New Era of Collaboration and Competition (2007), and the co-author of the bookDestructive Creativity of Wall Street and the East Asian Response (2009).  With Prof Ten Chin Liew, he is currently co-editing the book State and Secularism: some Asian views.
Event Report: 

WHEN The Theory of Employment, Theory and Money was published in 1936 by John Maynard Keynes, an English economist, the conventional economical thinking was still firmly entrenched in classical economics. The book, widely considered to be Keynes’ magnum opus, challenged that classical thinking, and put forth his belief in using the interventionist approach during a recession.

Keynes posited that recessions are caused by a lack of aggregate demand and governments need to stimulate demand by increasing public spending. However Keynesian economics failed to pull Japan out of its recession after her asset price bubble burst in the late 1980s. The failure of the interventionist response contributed to the next decade (1990 to 2000) as a period of economic stagnancy. The period was aptly termed as the “lost decade”

With the current global crisis sinking its deep roots into the world economy especially the US economy, Kenneth Rogoff, a Harvard economics professor predicted, “I think the US faces a decade of recession, similar to what happened in Japan”.

To discuss the possibility and implications of such a ‘bad’ scenario, SIIA invited Dr Michael Heng, a researcher with the East Asian Institute to share his views on the gloomy forecast of Professor Rogoff.

Apparently, Keynesian economics work to varying degrees of success in stimulating economic recovery. It was ineffectual for the Japanese because of macro-economic, structural and social reasons according to Dr Heng.

For example, the Japanese bank bailout efforts were insufficient. This rescue inadequacy created the weakness in the banking system and contributed to the economic stagnancy during the ‘lost decade’. Dr Heng believed that saving the banks from total collapse is critical to resuscitating the economy. He approved of the US banks bailout and said, “The bailout of banks by Washington is correct.”

Although the Japanese and USA shared several qualities common to an industrial and mature economy, they also have other differences. Dr Heng highlighted the current account deficit and high pension expenses of USA as compared to Japan’s surpluses.

Dr Heng thinks the high costs of production and pension schemes are hindering the American efforts in recovering from this global crisis.

He is however cautiously optimistic that given the right focus in the right areas, USA can revive its economy. He identified areas such as healthcare reforms, education reforms, defence expenditure and litigation cost-savings amongst others, as the areas USA should focus on.

Should USA also focus on the alternative energy development industry? This question was posed from the floor and was related to George Friedman’s prediction in The Next 100 Years. The book predicts that energy will be the next global driving industry.

In his response, Dr Heng warned against forecasting too far into the future and he judged a century as too long a period to predict with accuracy. He claimed that the Americans have lost the ‘spirit’ that enabled the national economy to boom during the post-world war two period. He cited the declining vibrancy spirit in innovation as a prime factor. “Where are the exciting big ideas?” He asked. He suggested that USA should return to the tenets of economic growth, which implied that the issue is not about predicting the next big industry, but on solid economic foundations and institutions.

Dr Heng is also optimistic that this crisis is a good opportunity for reforms to take place in USA and the world. He quoted from Rahm Emanuel who said, “Never allow a crisis to go to waste. They are opportunities to do big things.”

Another quote from ancient Chinese philosopher, Laozi, in Tao Te Ching, appears to support Rahm’s comment; Disaster is that on which good fortune depends. Good fortune is that in which disaster is concealed.

Under the differing situations between Japan of the 1990s and USA of now, Dr Heng suggests that whether USA would slipped into a “lost decade” is dependent on the policies and areas of focus that they undertake now.

Event reported by Bernard Aw

Event Photographs: 

Photographs and images used are obtained from publicly-accessible resources. No copyright infringement is intended.


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