WITH all its problems, the US remains the only real superpower in global politics and thus the country with a predominant impact on Asia. The re-election of President Barack Obama will thus have considerable implications for Asians.
Many have focused on the direct impact – how the re-elected president engages with the key countries in Asia, especially China, India and Asean.
This is important, but we believe that it is more important to see how Obama’s re-election could catalyse a consensus on overcoming the critical challenges the US faces but has avoided facing up to for so long – the fiscal time bomb, woeful infrastructure, declining educational standards, inadequate management of immigration and a regulatory system that has become a major burden on productive businesses.
If new policy reforms do materialise, the benefits to a revitalised US would flow to Asia in the form of reduced risks to global growth, stronger export demand, higher inflows of foreign investment and increased spillovers of new technology.
The elections have changed the status quo in US politics
Some analysts argue that not much has changed in US politics since we still have the same president, the same Democrat-controlled Senate and the same Republican-controlled House of Representatives – a recipe for the gridlock that has paralysed the political system’s capacity to resolve critical challenges.
However, we feel that enough important changes have occurred with this election to improve the chances of compromises on at least some key issues.
* First, Obama won because he put together a new winning coalition in US politics – women, African-Americans, Hispanics, Asians, liberal white Americans and young voters.
Demographic trends will inexorably increase the proportion of this winning coalition in the electorate over the next few election cycles.
This election has brought home to moderate Republicans how critical it is for them to win over some segments of this winning coalition by shifting away from their uncompromising stance on key issues such as taxes, healthcare, immigration and environmental regulation, which alienates important voter segments.
Failure to do so could condemn them to lose power for decades, as they did between 1933 and 1953, when the Republicans failed to break the winning coalition that President Franklin Roosevelt had built. In other words, more Republicans are realising that they have to adopt a more constructive approach with Obama.
* Second, since Obama cannot run for another term in office, he will be more prepared to make the concessions needed to forge compromises.
One of the greatest failures of his first term was his rejection – on cold-blooded electoral calculation – of the sensible measures for fiscal reform proposed by the Bowles-Simpson Commission that he himself had appointed. He is unlikely to make the same mistake again.
* Third, he can argue convincingly that he has a strong mandate.
Clearly, the electorate has rejected the Republican insistence that any fiscal reform should avoid raising taxes on the wealthy. Not only did the Republican view fail to gain much traction with voters in the presidential election, those in states such as California actually voted in favour of higher taxes in separate referendums that were conducted on election day.
* Fourth, the Democrats have strengthened their position in the Senate.
Most analysts had expected them to lose a few seats. In the end, voters in states across the US rejected Republican candidates with extreme views, allowing the Democrats to gain two Senate seats, dealing a severe reminder to the Republicans of the electorate’s preference for moderate and balanced politics.
However, Democrats made only marginal gains in the House of Representatives, which the Republicans still control. And they know that their hold on the loyalties of the new coalition is not firm yet. This should dispose them to find moderate solutions that are acceptable to a good number of Republicans.
Imminent challenge: Fiscal cliff
Given these developments, we believe the US will avoid the so-called fiscal cliff, the massive fiscal contraction of around four percentage points of GDP that will kick in on Jan 1, 2013 if there is no political compromise to avoid it.
This fiscal cliff arises because a large number of tax cuts expire on that day unless renewed, as do a number of stimulus measures enacted at the height of the financial crisis in 2009.
Moreover, the compromise to resolve the August 2011 fiscal crisis mandated severe cuts in expenditures in January 2013 if measures to reduce the fiscal deficit could not be agreed upon.
Since the election, Obama has reached out to his Republican foes. There have been indications from senior economists advising the Republicans that a form of compromise could be achieved – Obama getting his way on securing some increased tax revenues from the wealthy while conceding some ground on social spending.
While there is still scope for brinkmanship that will lead to nervous and choppy financial markets, the greater likelihood is a compromise that will avoid another fiscal emergency in the US.
Longer-term challenges can no longer be avoided
Avoiding the fiscal cliff will be just the beginning of a long series of fundamental policy decisions that Obama and Congress will have to work on.
First, they have to agree on a credible medium-term plan to bring the fiscal deficit down to a more sustainable level, from 7% in fiscal 2011/2012, which was below the peak of 10.2% in 2009 but still among the highest deficits since 1947.
This will be a painful process as there has to be a thorough reform of the tax code while hard decisions will have to be made on which popular social programmes to cut since the US simply cannot afford the projected social spending in the coming decades.
Given how sharply divided the major parties are on this issue, Obama may have little choice but to return to the recommendations of the neutral and non-partisan Bowles-Simpson Commission that he had originally rejected. If he can persuade his political opponents to accept the key points in the Bowles-Simpson plan, progress can be made on achieving a sensible return to sustainable fiscal dynamics.
Second, Obama has to tackle the reasons why cash-rich US businesses are unwilling to invest in new capital equipment. Aside from US businesses being deterred by the uncertainty arising from political gridlock and continued worries about the strength of the US recovery, there are some fundamental issues that hold US businesses back.
* Regulatory costs have grown in size and complexity in recent years, deterring American businesses.
* Failures in the provision of public goods have to be reversed.
Infrastructure in the US – highways, railroads, bridges, airports and ports – is strained and is far worse than in less-developed economies such as China. Obama needs to persuade enough Republicans to join him in working out a programme for infrastructure renewal.
Another area crying out for reforms is education, in which the US is now underperforming many of its economic competitors.
Third, immigration reform has to be stepped up. With the Republicans realising that they cannot afford to alienate the fastest-growing blocs of voters in the US – Hispanics and Asians – there is now a greater chance of a sensible reform.
Fourth, Obama’s victory makes it more likely that his landmark healthcare law will not be reversed, as once feared. He now needs to tackle the critical weakness in his healthcare reform – the absence of a strategy to tackle rising healthcare costs, which have caused it to be unpopular with businesses.
We think there is a fair chance of sufficient political consensus on some of these areas, which will help the US economy become more robust and dynamic.
Foreign policy challenges may be second priority, but they cannot be avoided either
There are several reasons why Southeast Asians will be comfortable with a continuation of the foreign-policy approach of the Obama Administration.
First, the administration has committed to a more substantive engagement with Asean than previous administrations. Obama’s decision to visit Myanmar and his forthcoming attendance at the Asean Summit are welcome signals that he will maintain a foreign policy that is friendly towards the regional grouping.
Second, the Obama administration has learnt how to deal with China and is likely to avoid a confrontational approach.
While there are many potential pitfalls in the US’ relations with China, including the former’s support for Japan and the Philippines in their territorial disputes with China, there is now a wealth of accumulated experience in the White House on how to play this delicate game.
Third, while the Obama administration’s “pivot to Asia” strategy has angered China, Southeast Asians will probably be better off with a greater US presence in the region. After all, it is better for us to have two large powers contending for influence in the region and checking and balancing each other than to be subject to the whims of a single dominant nation.
The bottom line for this part of the world: The road ahead will certainly be bumpy in the US, but there is a real chance that the political gridlock will be broken and a revitalised US emerge. That can only be positive for Asia.-This article was first published in The Edge Malaysia Nov 19-25 issue