KONGAsian economies are looking healthier. But they still look more to
Uncle Sam's apparently insatiable consumption habit than to their own devices to
keep them on the recovery path. The Asian Development Bank has just predicted
that East Asian GDP growth this year will hit 5.2 percent and accelerate further
in 2003, with China heading the pack at 7 percent and South Korea at 4.5.
Finance ministers of the Association of South East Asian Nations forecast
expansion for their region of 3.5 to 4 percent this year. All are expecting the
pickup in the United States to continue and power an export-led revival. So far,
the region can feel happy that U.S. consumer demand has propelled it out of
recession. And the turn of the inventory cycle gives a boost to the vital
The ADB and finance ministers should be
discussing what they will do if this is not spring but an Indian summer. Even
during the brief recession, the U.S. current account deficit was still running
at 4 percent of GDP, compared with 1.5 or less during previous recessions. With
demand picking up and the dollar strong, it is headed toward 5 percent, or $500
Recessions are also supposed to be
periods when balance sheets are restored to health after overindulgence in debt.
Yet thanks to low interest rates, households have continued to borrow, often
against their homes. The collapse in profits has meant that corporations have
increased debt even after slashing capital spending.
The link between the current account
deficit and the borrowing binge is provided by the U.S. bonds that are being
bought by foreign investors. Much of this is the debt of federally backed
institutions whose huge expansion has been a major stimulus to household
No one can tell when all this will end.
But end it must, whether through a long period of slow U.S. growth or a sharp
decline in the dollar, or both.
Asia more than ever needs to keep focused
on sustaining domestic demand stimulus. Only South Korea has been successful,
with a boom in housing and in consumer finance. This was made possible by reform
of much of the banking sector and by the impact on money supply of allowing the
currency to weaken against the dollar.
Other countries are either unwilling to
sustain fiscal stimulus for fear of accumulating excessive government debt, or,
as with Thailand and Taiwan, still have much to do to mend their banks and
There remains a reluctance to reduce
interest levels as far as economic conditions justify, either because of fixed
exchange rates - as with Malaysia, Hong Kong and China - or because of
preference for a strong currency over domestic demand growth. As hangover from
the Asian crisis, there is also still a fixation with building up foreign
reserves. China's reserves are a wasteful $212 billion. Modest import growth
suggests that its claim of 7 percent GDP growth is overstated.
U.S. adjustment, when it comes, will
require that Asian current account surpluses be slashed. That can happen through
a contraction of exports resulting from U.S. recession, dollar re-alignment or
protectionism. Or it can come from an expansion of Asian imports driven by
The days of the United States as buyer of
last resort are almost over. Asia must consume or stagnate. Responding to this
challenge should be the priority of ministers and the ADB.