Saturday, August 28, 1999
Asian Economy
Bumpy road
to better timesAsia's economy is coming back, but
By Richard Halloran
the path to recovery is marked by
caution signs that warn Hawaii and
the world not to rejoice just yet
Special to the Star-Bulletin
The political and economic leaders of the Asia-Pacific Economic Cooperation forum, including President Clinton, will have good news to talk about for the first time in more than two years when they sit down in Auckland, New Zealand, for their annual meeting next month.
From Seoul to Singapore, growth rates are up, as are stock markets. National currencies are stronger and foreign exchange reserves healthier.
Industrial production is rising. Interest rates and inflation are stabilizing. Exports look better. Unemployment has dropped. Even Indonesia, the nation most stricken by the Asian contagion, is showing signs of recovery.
Said Richard Koo, chief economist for the Nomura Research Institute in Tokyo, "Asia is coming back to life."
For the United States, which is experiencing record deficits in its balance of trade, partly because of imports from Asia, this means improved opportunities for exports to Asia, for selling services there, for Asian tourists visiting America, and for American investments that will pay a reasonable return in the future.
For Hawaii, whether the upturn in Asia will benefit the economy is open to question. By rights, it should mean an increase in Asian visitors. If experience with the U.S. mainland is any gauge, it may not. The U.S. economy, as seen in the stock market, has been surging upward for four years, but that has done little to pull Hawaii after it.
Hawaii has had a series of economic commissions, task forces, panel discussions, and articles in the public prints but so far that thrashing around has produced no consensus. Some argue that economic recovery will come only with changes in Hawaii itself, such as prices more competitive with other tourist destinations, better and less costly air service, improved tourist promotion in Asia and the U.S. mainland, and cleaning up prostitution and petty crime.
Moreover, economic recovery in Asia has at least a half-dozen uncertainties that warrant a degree of caution. They include:
At a recent conference of Asian and American scholars, government officials and journalists at the East-West Center, the economic recovery of Asia came under close scrutiny. The rules of the gathering preclude naming speakers but several, like Koo, said they could be quoted.Complacency. The sense of urgency about correcting ills that caused East Asian economies to plummet, such as bad bank loans to political cronies, has faltered.
Few agreed on the causes of the plunge that began in early July 1997, when Thailand devalued its currency. That was followed by capital flight, sinking stock markets, shrinking currencies and near-panic on the part of hapless governments.
The International Monetary Fund stepped in but its prescriptions for belt-tightening were controversial. The Clinton administration ignored the problem until the Asian recession started to lap the shores of the United States in early 1998.
Whatever the case, almost all agreed that recovery in Asia has begun. As the economic free-fall started in the south and spread north, so the climb has started in the north and is spreading south. South Korea reported a robust 9.8 percent growth rate in the second quarter of this year, a rise in industrial production of 29.5 percent, and foreign exchange reserves of $61.3 billion compared with $38.7 billion a year ago.
In the south, Singapore reported a solid 6.7 percent growth rate in the second quarter, an 18.4 percent expansion in industrial production, and a modest growth in foreign exchange reserves to $73.2 billion from $71.9 billion a year ago. To compare, Japan's foreign exchange reserves, the world's largest, stood at $245 billion.
The recovery is widely seen, however, as fragile. Lee Hamilton, former chairman of the House Committee on Foreign Affairs and now director of the Woodrow Wilson International Center for Scholars in Washington, said, "We are in the early stages of a global recovery, but it's fragile."
Support for his assessment has come from all sides. "The East Asian yo-yo has bounced back," said The Economist. "But its string still looks frayed."
Jeffrey Garten, a former senior official in the Treasury, has written, "Little of a fundamental nature has changed and in some respects the environment is more fragile today."
Stapleton Roy, U.S. ambassador to Indonesia, said in a speech in Jakarta, "Signs of economic recovery in Indonesia are encouraging but fragile."
Complacency may be an obstacle to full recovery because it might preclude necessary reforms such as allowing exchange rates to find their most economic level. "An unhealthy complacency has set in," Hamilton said. "The question: Is there the political will to tackle these problems?"
Some say yes. The head of research for SG Securities in Singapore, Manu Bhaskaran, wrote in the Far Eastern Economic Review, "The crisis served as a wake-up call to the region's policymakers."
He maintained, "The argument that the current rapid recovery will slow reforms and corporate restructuring is a little too harsh."
Financial reports indicate that foreign investment is flowing back to Asia but with investors looking over their shoulders. The executive director of Morgan Stanley Capital International in Hong Kong was quoted in the New York Times, "The volatility of the last two years has made people much more careful."
The belligerence of North Korea has cast a pall over security in Northeast Asia. In the central region, the hostile rhetoric of China toward Taiwan casts a similar pall. Internal strife in Indonesia, which sits astride the world's busiest waterway in the South China Sea, is a third damper on economic recovery.
For some weeks, rumors have circulated that China would be forced to devalue its currency to boost its exports and stimulate industrial production. Chinese officials and scholars, however, said it won't happen. They assert that China's leaders are driven more by politics than economics.
Maintaining the value of China's currency is a mark of strong leadership, which applies both in China and abroad where China has won points for not devaluing and thus making its exports more competitive with those from other Asian nations.
Moreover, China's economic indicators are better than most Westerners seem to realize. The growth rate in the second quarter was a respectable 6.9 percent. Industrial production was up 9.3 percent, the trade balance was the same as a year ago, and foreign exchange reserves stood at $150.4 billion, second only to those of Japan. "I don't think China's leaders will devalue," said a Chinese scholar who asked not to be named.
Japan remains an economic enigma because it has long been in recession without political and business leaders in Tokyo appearing to do much to haul it out. That hampers recovery in Asia because Japan is importing less. Imports that were worth $76 billion in the second quarter of 1997, before the slump, dropped to $63.5 billion in the second quarter of this year.
Richard Katz, senior editor of the Oriental Economist Report, told the East-West Center conference, "Before, Japan was seen as a threat because its economy was too strong. Now, Japan is seen as a threat because its economy is too weak."
Minoru Makihara, chairman of Mitsubishi Corp., one of Japan's and the world's most powerful corporations, told an interviewer for the Japan Economic Institute Report that Japan needed to overcome a weak banking system, a problem of over-capacity, and over-employment in some industries. The most difficult, he said, was the third "since it is not just an economic problem but a societal and political issue as well."
At the East-West Center conference, most agreed that a threat of American protectionism that would slow imports from Asia and thus hinder recovery was not great because Americans have accepted their role on the international stage.
Elsewhere, however, others have argued that protectionism could erupt any time.
Ten years ago, when Japan ran huge surpluses with the United States, "Japan bashing" was a favorite political sport. Today, those surpluses are even larger and Japan has been joined by China. Between them, they piled up a $63 billion surplus in the first half of this year, ahead of the $60 billion for the same period last year, which might just be ammunition for protectionists in the United States.
Richard Halloran, a former Asia correspondent
for the New York Times, is a freelance writer based in Honolulu.
