The need to consume. Asia's economic future lies not in exporting to an overstretched US but in domestic demand -- which needs continuing stimulus if recovery is not to falter. IHT May 26.

by Philip Bowring 

Hongkong: There is a popular belief that Asia's economic 
revival, now at the embryonic stage, is dependent on 
continuation on the US import boom. This is a dangerous myth. 
It diverts attention from what Asian governments can and 
should do in support of recovery. And it gives the US another 
excuse for not reining in its foreign funded self-indulgence. 
It is also factually incorrect. 

Asia's tentative recovery is not a export-led. The start of an 
upturn of some Asian economies has come at a time when year on 
year exports are still in negative territory almost 
everywhere. Taiwan, which never had a domestic recession, is 
almost the only exception thanks to its stake in the personal 
computer and internet boom. For sure, the US market strength 
has to a considerable extent offset sharp declines in regional 
sales and near stagnation in exports to Europe. But the key to 
Asian recovery lies in sustained revival of domestic demand. 

This has begun but is not yet assured. Take the case of Korea, 
which is in the recovery lead with a 4.5% GDP growth for the 
first quarter of 1999. Some are now forecasting full year 
expansion of 5%, which would take the economy almost back to 
where it was at the start of the crisis. But a big part of the 
revival has been a one-off pick up in manufacturing output as 
a huge inventory adjustment -- 25% over 12 months -- has been 
completed. Imports have recovered for the same reason. With 
luck the plateauing of unemployment and some pick up in 
investment will spark a broader revival of consumption. But 
the situation remains fragile. It is too soon to declare 
victory. Precautionary household savings have risen, prices 
are flat, and money supply growth sluggish. Even the IMF 
agrees this is no time for thinking about  tighter money or a 
reduced budget deficit. 

Several of same principles apply in Thailand and Malaysia but 
with their problems exacerbated by the slower progress of bank 
restructuring. Exports are unimpressive but the trade 
surpluses remain much larger than needed due to feeble demand. 
As for China, it is living proof of how difficult it can be to 
generate a revival of consumer demand even with massive fiscal 
stimulus. China may well be hurting its exports with its 
political commitment to a fixed exchange rate. But no amount 
of exports to the US or anywhere else can compensate for 
bulging inventories and vast excess capacity. China needs 
Japanese-style interest rates, and to let the currency find 
its own level. As it is, high real interest rates are 
deterring consumption and exacerbating the bad debt problems 
of banks and enterprises. Ditto Indonesia which has 
achieved a degree of equilibrium but will find growth outside 
the primary sector very hard to achieve. 

Everywhere, investment will remain weak due to overcapacity 
and high corporate debt. The key need is for higher 
consumption and lower household savings on the one hand and 
improved profits and lower corporate debt on the other. The 
and only then will recovery become self-generating, and 
justify the sharp recovery in share prices. 

There is no reason for Asia (except currency-pegged Hongkong) 
to fear higher US interest rates so long there is no 
temptation to follow any upward move in search of spurious 
"currency stability". Indeed, rather the opposite. The 
possibility of US tightening should be spur to more Asian 
easing. It is not just in Japan that stimulus is still needed. 
Much rests on the Asian consumer reviving demand and keeping 
world -- and especially intra-Asian -- trade growing. In the 
process, Asian countries can collapse the region's dangerously 
high current account supluses, which are inviting US 
retaliation. Things are looking up, but Asia still needs 
stimulus above stability. 




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