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"Economics of GMS Agricultural trade in goods and services towards the world market"

Chiangmai, Thailand Sep 8-12.


(08/19/1999 - Prestowitz) The Coming Asian Crisis

The Coming Asian Crisis
By Clyde Prestowitz
893 words
19 August 1999
Far Eastern Economic Review
(c) 1999 Dow Jones & Company, Inc

At the end of a month-long tour of Asia, I sense a resurgence of that good old bubble feeling. Growth is back, interest rates are low, while currencies are stable and even rising. Best of all, fund managers and investors have rediscovered the markets from which they only recently took precipitate flight. Even Malaysia's capital controls do not appear to be an inhibition. Indeed, some investors say they are a downright inducement. Although it is a relief from the gloom that has enveloped Asia for the past two years, the new euphoria is ill-founded and could well prove to be only the calm eye of the typhoon that presages the next storm. While significant political and economic changes have taken place in some countries, much remains to be done. The truth is that the current good feeling is less the result of new prescriptions than of resort to the old witches' brew.

The apparent return to prosperity is based on three tried, but no longer necessarily true, remedies. Governments all over the region are spending massive amounts on public-works projects. With nearly 20% of Japan's huge GDP being devoted to such traditional deficit-spending efforts, the country is the leader -- but others are not far behind. At the same time, governments are printing money to keep interest rates low, and everyone is exporting as much as possible to the booming American market.

The difficulty is that none of this is sustainable, nor does it provide the basis for long-term economic health. Japan's ballooning government debt is already beginning to raise questions about who is going to buy all the bonds necessary to finance it. While other countries may have more leeway than Japan in this area, all face limits as their budget deficits hit the 5%-8% of GDP range. Moreover, government spending, with its tendency to produce monuments to corruption and political expediency, is not a good substitute for the private demand that remains depressed.

Easy money cannot long continue in the face of large budget deficits without serious inflationary consequences, either. It is also important to note that easy money lay at the heart of the crisis in the first place and that it is again alleviating the necessity for restructuring and reform.

Finally, while the United States may have developed a new kind of miracle economy, it has not repealed the law of gravity. The extraordinarily long period of strong U.S. economic growth has fuelled the export boom from Asia. But with demand increasingly linked to a soaring stockmarket that is overdue for a correction, some moderation of U.S. growth is likely in the near future. In any case, Asia's heavy reliance on exports concentrated in a few mass-production industries assures its continued vulnerability to the excess production capacity that was a major contributor to the outbreak of the crisis in l997.

Beyond these issues are two other major problems called China and Japan. China is in serious difficulty with spiralling deflation, falling exports, rising unemployment and declining investment from abroad. It desperately needs to downsize the state-owned enterprises, but doing so means creating more unemployment and potential social unrest. In fact, the SOEs actually have increased their share of GDP in recent years as the government sought to fight deflation with more public money. Chinese distress can only be bad news for the rest of Asia, particularly if it entails, as seems increasingly likely, a devaluation of the renminbi.

As for Japan, it seems in many ways like a richer version of China. Private consumption remains at dismally low levels while capital expenditure, housing starts and overall exports are all down. New lending is still contracting as banks avoid extending credit to already indebted companies. The service sector remains bogged down in red tape while Internet entrepreneurs are handicapped by some of the planet's highest telecom rates. Massive government spending and zero interest rates barely keep Japan afloat. But these measures are clearly reaching the limits of their sustainability even as the rapidly rising yen puts further pressure on Japanese exports. Thus, Japan is unlikely to make up for any slackening of U.S. growth and could well become an anchor dragging down the rest of Asia.

On the positive side, Asia is less vulnerable to short-term debt and opaque financial arrangements than before the crisis. However, reform is faltering. Bad debt in Thailand accounts for nearly half of all loans and has actually risen since mid-1998. In South Korea, the government has intervened to save Daewoo from its creditors while other chaebols continue to have access to privileged financing.

The money now flooding into Asian equity markets is making everyone feel good for the moment, but it can leave at the first sign that public works and easy money or exports to the U.S. are faltering. In fact, Asian economies remain burdened with excess capacity, excess regulation, excessive debt/equity ratios, too many cartels and excessively cosy business relationships. To achieve good, long-term economic health there is no substitute for the thorough reforms that have yet to be achieved.


The writer is president of the Economic Strategy Institute, based in Washington.

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