JULY 23, 2001, VOL.158 NO.3

This Time Around, Asia's Got to Help Itself
Why can't Asian nations end their dependence on the almighty dollar? 
BY PHILIP BOWRING

Asia's Economic Woes: For months, Asia has waited for the U.S. economy to pull the world out of its slump

Personal Investment: Safe harbors in a perilous economy

Japan: A nation gears up for a pretty painful future

Are battles won by corpulent, middle-aged men? Of course not. It is a job for the under-35s. So why do we now expect the rich, self-satisfied, overweight middle-aged triumvirate of the U.S., Western Europe and Japan to lead a revival of world economic growth?

Population growth in Japan is already at zero, and its people are steadily aging. Europe is heading toward that fate quite rapidly. To believe that aging populations can achieve sustained, accelerated growth is absurd—or a symptom of the arrogance of economists who ascribe low growth almost entirely to failures in economic policy, although policy tinkering has modest impact. As for the U.S., its demographics are O.K. thanks to immigration, but its private-sector debt levels and reliance on Asian savings to sustain its consumption habits are daily becoming more horrifying.

Unfortunately Asia and Latin America have gotten into the habit of believing they are dependent on this trio for growth. They have largely accepted, albeit grudgingly, that the three have the right to control the global economic agenda, not least through the International Monetary Fund, an organization that never criticizes Alan Greenspan's money-printing excesses but rarely hesitates to publicly lecture Asian governments, even the prudent ones.

What we really need is stimulus from the middle-income countries. But several in that category are in renewed crisis—despite having done most of what was asked of them by the IMF. The problems of Argentina have spilled over to Brazil, and those of Turkey have set off the usual round of bad mouthing of emerging markets from the always overpaid, usually undereducated people who run London's trading desks and the world's major (mostly American) investment banks. Their juvenile views get instant exposure on the wire services, TV talk shows and the business dailies. Western orthodoxy tells us to believe that markets deliver rational results. But in practice, crowd psychology rules currency and stock markets.

So far, east Asia has not been seriously touched by Turkey and Argentina. But those not-so-far-away problems are making regional governments hesitant to take the bold measures needed to stimulate demand at home, such as lowering interest rates. Asia's huge trade surpluses ought to be spurring spending at home. But they are not being put to use for fear that irrational markets will seize on a statistic, such as a current-account deficit, as an excuse to savage an Asian currency.

So what can Asian countries do? How about having a little more faith in themselves—and in one another? East Asia is awash with cash and interest rates are at record lows almost everywhere. Yet borrowing and spending are—China excepted—feeble. Governments and companies still insist on borrowing in dollars. Regional central banks still accumulate huge piles of high-priced greenbacks, even though U.S. indebtedness casts a shadow over the currency's long-term value.

Why not break this dependency on the almighty dollar? For instance, why doesn't the Bank of Thailand encourage state enterprises to issue tax-exempt baht bonds offshore, to attract foreign capital in its own currency? Why don't the Bank of Korea or People's Bank of China or Taiwan's Central Bank of China want to diversify their portfolios by buying debt instruments in Asian currencies, such as the baht, which have acceptable long-term track records? Why wouldn't the region's pension funds want won-denominated Korean corporate debt rather than dollar equivalents with much lower yields?

Thanks to the profiteering of the big investment banks, Asian governments are at once paying heavily to borrow medium- to long-term in dollars while getting poor short returns from their own dollar assets. Why not borrow in the local currency? New Zealand, whose 30-year currency track record is far worse than Thailand, has been doing it for years.

For sure, there are technical problems to be overcome if Asian countries are to provide one another with the currency diversification they need to escape the stranglehold of the geriatric trio. But the world, not just Asia, could benefit from an Asian-led attempt to make the international monetary system more responsive to the Europe of today, rather than of the Bretton Woods-era. What is needed are some meaningful initiatives and a willingness to talk back to Washington. The alternatives are to stagnate with the status quo, or retreat into controls and protectionism unworthy of Asian success. That requires countries to appreciate the potential of one another's currencies: not the leaden coin of the geriatric Old World.