KONGAsian worries about the regional impact of a "hard landing" for the
U.S. economy could become a self-fulfilling prophecy. But there is no reason for
the region to talk itself into another recession. The advantages of a weakening
U.S. economy may equal the negatives.
At the very least, the situation argues
against premature attempts by Asian finance ministers to pursue conservative
fiscal policies. They need to act on the assumption that there will be a U.S.
recession because debt levels and other severe imbalances will not be corrected
just because Mr. Greenspan lowers interest rates.
At first glance, Asian worries seem well
founded. Export growth has tumbled into single digits, even though the U.S.
economy has so far only slowed from breakneck to cruising speed, and a strong
dollar has been making life easy for Asian exporters. After an uptick in the
first half of the year there are signs of renewed downward pressure on export
prices. If this is reality now, how bad will life be if there is a real U.S.
Worries have been reflected in the
weakness of Asian bourses, particularly Korea and Taiwan which are most closely
linked to Nasdaq. Export weakness and falling stock markets have revived
concerns that many banking and restructuring problems from the Asian crisis have
yet to be resolved, threatening to create another crisis of confidence in 2001.
However, closer examination suggests that
the picture is not so gloomy. First, much of the slowdown in global growth
affecting Asia has been due not to the United States but to oil prices, which
appear to have peaked. They may well fall quite steeply over the next six
months, stimulating demand in those regions most dependent on imported energy -
Europe and East Asia.
Second, Asian weakness has been
exaggerated by domestic political problems, which should prove temporary at
least in Taiwan and Thailand.
Third, weakening in electronics exports
has been the result of inventory correction after the manic boom in the first
quarter of the year. This has affected prices as well as volumes. After a period
of 30 percent annual growth, it has been a shock for exporters, but it is by no
means a permanent situation. Even if the U.S. market stagnates, there is a still
strong secular global growth. The fact that stock analysts' earlier absurdly
high profit estimates are being brought down to earth does not mean that this
key industry faces a crisis.
As for the larger regional economies,
doubts remain over Japan but China, India and Australia are stronger than
earlier expected. Although China is more dependent on the U.S. market than its
neighbors, domestic demand is now strong enough to sustain growth in the face of
stagnation or worse in sales to the United States.
A weakening U.S. economy will mean a
softer U.S. dollar, which is good news for most of Asia. Dollar strength in
recent months has helped rekindle concerns about foreign currency debts in the
region. With interest rates in the region being kept low to try to stimulate
demand, a strong dollar has resulted in capital outflow and a weakening in
A weaker dollar should bring money back
to Asia, allow further cuts in interest rates, and cut the costs of dollar debt.
The cooling of the global love-affair with the U.S. economy and with technology
stocks will eventually bring into focus the attractions of Asian stocks, with
lower valuations and better growth prospects than their U.S. or European
Positive capital flows should stimulate
domestic demand and asset values more than enough to offset the downside impact
of U.S. stagnation. Despite high oil prices, East Asia continues to run large
current account surpluses. These countries can afford to ride out a U.S.
recession by aiming for current account equilibrium. Indeed, they will have to
learn to live with a world in which a gigantic trade deficit is not taken for
granted. The sooner they do the better for all.