JANUARY 8, 2001
VOL. 157 NO. 1
East Asian nations must realize that, if there is a sharp U.S. downturn, their salvation lies in their own hands. They—and to a lesser degree the Europeans—have essentially been sponsoring the U.S. consumer-spending and debt booms with excess savings. They are the ones with the persistent current-account surpluses that now dwarf the deficits some of them ran in the pre-crisis years. Over the past three years Malaysia's surplus has averaged a monstrous 12% of GDP; those of South Korea and Thailand are about 8%. China and even Indonesia and the Philippines have also been registering large surpluses.
Developing countries ought to be importing capital because they spend money more effectively in raising their own living standards. To be sure, before the crisis they imported too much capital, and now they need to consume. The same is true for the more mature economies that have long maintained surpluses—Japan, Taiwan, Hong Kong, Singapore. They tend to view excess savings as a sign of merit even if the savings are being invested poorly, by supporting the profligacy of others.
Can East Asia now stimulate domestic demand to offset the U.S. slowdown? Skeptics point to Japan, where massive government spending and near-zero interest rates have done no more than prevent another recession. But Japan, with its static population, aging workforce and surfeit of consumer durables, is the Asian exception. The rest of the region is crying out for more goods and services. China's efforts at stimulation—infrastructure spending, wage hikes and tax disincentives for savers—are paying off. Consumption is now rising faster than exports. The trade surplus is shrinking. Hurrah! Others should copy China.
For the smaller countries in Asia, a weaker American economy will soon mean lower U.S. interest rates and a weaker dollar. Splendid. Asian countries can cut interest rates too, without worrying that their currencies will go into a tailspin. Existing dollar debts will become cheaper to service. Those economies still pegged to the greenback, like Hong Kong, badly need weaker currencies.
The region will get a lift from the decline of oil prices from levels that slowed recovery in 2000. This should give a boost to consumers and perhaps even convince central bankers that, for now, inflation isn't a worry. In fact, the region needs a bit of inflation to get out of the trap of higher real interest rates and the debt overhang. There is nothing like an expectation of inflation to spur lower savings and more consumption. Many governments are sitting around waiting for an increase in investment to take over from exports. But the first requirement is higher consumption, without which there is no need to invest more.
In 1997 and 1998, the U.S. response to the Asian and Russian financial crises was to provide monetary stimulation for its own economy, and for those selling to it. The world benefited. Now it is the turn of Asian governments to do themselves and the world a favor by cutting interest rates, encouraging wage increases and refraining from ill-conceived "fiscal responsibility."
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