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
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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