KONGBy 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
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.
The negative view has the following
•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.
•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.
•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.
•The impact of the problems of Turkey and
Argentina on all emerging markets.
Each of these ingredients deserve a
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.
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.
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
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.
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.
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.
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.
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.
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.
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.
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.
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