Don't Exaggerate Asia's Woes
 
Friday, July 20, 2001
HONG KONG By most accounts, Asian economies are once again in deep trouble. The Economist proclaims "East Asia falling (again)," a judgment it shares with Time magazine. Morgan Stanley's chief economist, Stephen Roach, argues that if the yen falls to 140 to the dollar (from 124 now) it would be "curtains for Asia."
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Most Asian markets and currencies have wilted under this barrage of negative sentiment. But the pessimistic consensus is wrong. Asia is weaker than it was, but still has better prospects than the gloomier forecasts suggest.
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The negative view has the following ingredients:
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A stagnant Japan spells trouble for the rest of Asia. A weak yen is bad for other regional currencies and, according to Mr. Roach, threatens a replay of the 1997 and 1998 devaluations.
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A feeble global economy, and fall in U.S. imports, will cripple growth in export dependent Asia and perhaps lead to a new currency crisis. The spectacular collapse in demand for electronics and telecommunications products is hitting Asia where it hurts most.
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A belief that countries have been backtracking on the structural reforms instigated by the previous crisis. The assumption here is that continued weakness in the banking system will preclude domestic demand taking over from exports as the engine of growth.
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The impact of the problems of Turkey and Argentina on all emerging markets.
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Each of these ingredients deserve a closer look.
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For sure, it would be comforting if Japan succeeded in stimulating demand. But the reality is that Asian exports to Japan are thriving. Japan's trade surplus is eroding because of consumer preference for cheaper products, under-utilized capacity in Asia and pressure on Japanese companies to find lower cost sources, particularly China.
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The yen has been relatively stable against currencies such as the Korean won, Taiwan dollar and Thai baht. They have fallen 18 percent, 14 percent and 12 percent respectively against the U.S. dollar over the past year compared with a 15 percent decline against the yen. Unlike 1997, most are now floating and are at very competitive levels.
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Any decline in China's competitiveness due to its fixed exchange rate is being offset by the surge of foreign investment into higher value manufacturing linked to membership in the World Trade Organization.
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Export weakness in Asia is exaggerated. Steep declines in electronics exports look alarming but reflect prices more than volume. Imports have also plummeted. The net effect on the trade balance is much less than the raw export numbers suggest.
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Every country is still running a large current account surplus. The electronics bust is being felt by corporate profits in Taiwan and Korea. It is also indirectly hurting banks by reducing credit quality. But electronics remains a growth industry in volume terms.
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Southeast Asia is more reliant on commodity exports. Electronics looks big but value added is low and it is mostly foreign-owned. The southeast has many more political problems, but demographics, natural resources and plentiful foreign exchange will keep it growing faster than the world average.
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Western emphasis on "structural reform" is often self-serving as well as ideological. Progress in tackling corporate problems in Malaysia and banking ones in Thailand and Taiwan has been fitful but their dangers are overdone. They are a drag on growth, but will not cause a new crisis. Continuing International Monetary Fund lectures to Korea, whose corporate structure has changed quite remarkably since 1997, are misplaced.
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The emerging market contagion effect cannot be ignored, given the ignorance which prevails in the dealing rooms of New York and London. However, there are no comparable situations to Argentina or Turkey, nor is Asia today anything like it was in 1997.
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Asia then largely abandoned the fixed rates which contributed to the Argentina and Turkey crises. Short term foreign debt has been drastically reduced and foreign reserves are much higher. Government debt in Asia has been increased by banking rescues, but from low levels. Unlike Argentina, little of it is in foreign currency. Unlike Turkey, inflation is dead.
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China is a competitive threat to some of its neighbors but its growth - even if official figures are overstated - is now a significant factor in global demand, particularly for commodities like oil. China's economy will slow as exports stagnate but domestic demand there, as in Korea, will keep expanding.
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The problem for Asia is that it is scared of the markets, scared of the dominance of the dollar, still lacking confidence after the crisis. Domestic stimulation mostly falls short of what is needed. Strong fundamentals are at odds with nervous sentiment. Despite superior demographics and low costs, non-Japan Asia continues to support the excesses of the Anglo-Saxon economies rather than spend money at home. Lack of instruments and the self-interest of investment bankers results in excess Asian savings being invested in U.S. debt rather than in regional countries and currencies.
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That is disappointing but at least the savings, trade surpluses and bank liquidity are there. Far from being on the edge of a new crisis, Asia is laying the foundations for another boom. Not this year or next, but when it responds to the reality that Europe is as geriatric as Japan and the United States is as much in hock as Argentina. International Herald Tribune

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