Pacific Perspective


Friday, September 27, 2002

Two different
views of East Asia

Economics, the mother discipline of business and commerce, has a "split personality" in her economic forecasting for East Asia.

The traditional view is that East Asian economies are export-dependent. Therefore, they are highly impacted by the fortunes of the U.S. economy. If the U.S. economy sneezes then East Asian economies catches influenza.

On the other hand, there appears to be an emerging regional economic strength in East Asia that boldly refuses to yield to the economic woes of the global economy. This thesis is supported by the economic restructuring put in place since the 1997 financial crisis. In the past five years, East Asia countries have made improvements in the following areas:

Strengthening of macroeconomic management and growth of foreign exchange reserves. Restructuring finance and banking sectors; bank consolidations; banking privatization and improved bank regulations. Restructuring the corporate sector; improved debt to equity ratios and strengthening corporate governance.

These changes make the region more economically vibrant and buffer it from external shocks. Recent data from the region supports this view.

The combined gross domestic product of China, S. Korea, Indonesia, Malaysia, Philippines, Singapore and Thailand grew at a 5.3 percent in the first quarter of 2002. It is on track to finish this year with 5.8 percent growth, according to a recent Asian Development Bank report.

The Financial Times reported last month a Goldman Sachs forecast of GDP growth in 2002 of 7.5 percent for China, 4 percent for Thailand and 5.8 percent for Korea.

Domestic consumption is on the increase in East Asia. Domestic driven demand is an important engine to economic growth.

Additionally, it supports interregional exports. In the first quarter of 2002, most countries of East Asia saw growth in domestic consumption. In China, domestic demand grew at 12 percent in 2001 and 14 percent in the first quarter of 2002. Moreover, with the exception of Indonesia, inflation in East Asia has been modest; less than 4 percent.

Is it possible that this region, with is newly acquired taste for market driven economic growth based on post-1997 reforms, will become a more regionally integrated, self-sustained market with vibrant domestic consumption and improved standard of living for a growing middle class?

On the other hand, (a favorite phrase of economists) forecasters that hold the globally-interconnected world-economy view have a much bleaker forecast for East Asia. The US technology sector's bubble burst and the following meltdown of the stock market is forecasted to put a major drag on fragile East Asian economic growth, according to an article in the Aug. 15 Financial Times.

The Enron and WorldCom scandals have also eroded corporate confidence. This is compounded by the economic impact of Sept. 11, which has bruised the tourism industry and may lead to wholesale bankruptcy in the airlines industry.

Additionally, Asia's traditional economic leader, Japan, is plagued with recession, domestic deflation, compounded by mountains of bad debt and the lack of political will to craft a solution.

Japanese domestic companies are hollowed out as they seek lower labor cost in Asian countries. More recently, these countries are becoming direct competitors of Japan as technological abilities begin to penetrate the other East Asian economies.

Finally, Japan's aging population problem has diminished its potential for productivity gains.

In short, this view holds that East Asia is globally integrated and its economic fortunes are inextricably linked to the economic health of the United States and the world economy.

How will these two perspectives play out?

The stakes are high. If the region becomes more self-sustaining, based on growth in domestic demand, then we can be optimistic about the future, as the market system will increase the living standard and economic well being of millions of people.

However, if this region remains a sweatshop for manufacturing export goods for the consumption of the wealthy countries, a global recession may result in disillusionment with the market system and become a potential source of political unrest in the region.

James R. Wills Jr. is associate dean and executive secretary of the Academy of International Business at the University of Hawaii College of Business Administration. Reach him at

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