MANILAExaggeration of the impact of the technology-led slowdown in the U.S.
economy is giving an excessively negative picture of the outlook for East Asia.
That is especially the case for the
Philippines, where the modest optimism that was emerging after the crisis over
the presidency is in danger of being overwhelmed by new fears about exports and
The crude trade data tell us that
information technology accounts for almost two-thirds of the Philippines'
exports, half of Malaysia's and a quarter of Thailand's. What these figures do
not say is that the local value-added portion in these exports is low - probably
no more than 20 percent in the Philippines and Thailand and only slightly higher
in Malaysia. That is because these countries import many of the semiconductors
and other parts that go into assembly of electronics products.
In contrast, local value added in more
traditional and commodity exports such as palm and coconut oil, rice, shrimp and
minerals is close to 100 percent, and even in textiles and garments can be as
high as 50 percent. In the case of Malaysia, the impact on the overall economy
of palm oil prices is at least as great as what is happening to electronics
For the Philippine economy, the pace of
dollar remittances from overseas Filipinos is far more important than
electronics. These remittances are influenced by perceptions about political
stability and the immediate outlook for the peso. A speeding up in the sending
of dollars has a more immediate effect on domestic demand than changes in
industries such as electronics assembly.
Price volatility for the components such
as semiconductors that go into assembled goods also distorts the picture. At
present, both exports and imports are flat or falling in most of the region. But
much of this is simply a reflection of falling prices. Because these industries
are almost entirely foreign-owned, price changes have little real impact on
Southeast Asia's economies. What matters is the volume that generates employment
and adds value to the local economy.
Taiwan and South Korea, and to a lesser
degree Singapore, are different from the poorer countries of Southeast Asia.
Local value added is much higher, and industries in many cases are locally
owned, so the impact on the economy is far greater.
Taking East Asia, including China, as a
whole, the degree of specialization of processing and the low cost of shipping
parts around the region give an exaggerated picture of the industry's relative
importance. One component may enter trade statistics four or even five times
before reaching the country of the end user.
Thus, price declines in electronics
components are almost certainly overstating the regional slowdown as they
suggest that import as well as export demand is weakening. But if
misinterpreted, the data can become self-fulfilling as market sentiment leads -
as in the past few weeks - to currency depreciation and a decline in confidence.
Though the Philippines has cut its
forecast of economic growth this year to 3.5 percent because of a global
slowdown, the broader short-term outlook remains quite positive. Interest rates
are down to reasonable levels like those before the regional economic crisis
that began in 1997. The recent decline of the peso has been less than that of
the Thai baht, the South Korean won or the Australian dollar. Lower oil prices
will help consumer confidence. Agriculture has had a relatively trouble-free
Stock market sentiment is poor because of
the currency weakness, global price declines and unwillingness to commit funds
in advance of congressional elections set for next month. The voting may
determine the ability of President Gloria Arroyo to govern effectively. But
sentiment could turn quickly, as there is plenty of capital waiting in the
For the long term, perennial problems
persist. Abysmal tax collection has meant that taxes are now just 14 percent of
gross domestic product and must service public debt equal to 70 percent of GDP,
most of it dating to the era of the dictator Ferdinand Marcos. Billions of
dollars in loans from the World Bank and the Asian Development Bank have gone
There is a lack of equity capital and
investment, especially in agriculture, and manufacturing is low. Overall, the
Philippines' growth for the medium term looks unlikely to exceed its 30-year
average of 3.5 percent.
But whether or not one takes an
optimistic view of the future under Mrs. Arroyo, it is important to recognize
that here, as elsewhere in Southeast Asia, the state of the global technology
industry is much less important to growth prospects than is commonly believed.