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Economic and Political Review of Selected Asian
COUNTRY REPORT - Asian Growth
Prepared for "Asia and Pacific Review 2001"
Economic Slowdown in Asia
Whilst neither the United States or Japan is officially in recession, the omens are poor. Economic growth in both are clearly headed south, and what is particularly important, this is likely to be only the second time since World War II that both countries could be in recession simultaneously - the other was 1974.
The U.S. and Japan make up 46 percent of the world economy and Europe about 27 percent. Non-Japan Asia is only about 10 percent. European growth is slowing and cannot pick up the slack. The European banking system could suffer a hangover from the unwise telecoms lending that resulted from the stupidity last year of the telecom companies bidding for 3g licenses.
The regional projections by the official agencies such as the IMF, the World Bank or the Asian Development Bank are beginning to reflect this reality but are still optimistic for a couple of reasons. Firstly, for political reasons they do not wish to confront their most important shareholders and low-ball growth there and secondly, the situation has been deteriorating so quickly. They all take their base case as a recovery in the US economy in the second half of the year and back to about 3 percent growth next year and Japan at about 1.5 percent. That would seem to be more likely to be a three sigma outcome on the upside with all errors expected on the downside.
With the economic distortions and debt build-up in the US as a result of the long boom most probably requiring a longer and more painful adjustment than the comfortable consensus and Japan still moving the deck chairs on the Titanic the likelihood of a sustainable quick snapback seems questionable. The recovery from the comparatively mild S&L crisis in the US took a several years to complete. The decision to change the Japanese Prime Minister and the proposal to take the shareholdings of banks onto a public bailout fund are just further examples of Japanese incrementalism.
Non-Japan Asia can be crudely separated into four separate areas with differing prospects:
NIES: Hong Kong; Singapore, Taiwan and Korea
Large Developing Economies: India and China
ASEAN: Cambodia; Indonesia; Malaysia; Philippines; Thailand and Vietnam
Other South Asian and Central Asia
Asia's V shaped recovery from the 1997 crisis ran into trouble in the second half of 2000 with higher oil prices beginning to take their toll combined with the first signs of a slowdown in the US electronics cycle and volatility in the equity markets.
Globally, developing Asia is expected to suffer more proportionally from the global slowdown than elsewhere. Economic growth in non Japan Asia could slow from 7 to 5 percent, but that would still leave Asia as the fastest growing developing part of the world.
However, the two large continental economies, India and China, neither of which have open capital accounts, distort the figures.
China continues to enjoy many positives: high FDI on the back of prospective WTO membership. In this it is unique for the region since the crisis; contracted FDI has held up. The fiscal policy remains expansionary but the country's external position remains very strong and slow reform continues in the banking, insurance and the industrial sector. Its export dependence is much more varied than the smaller economies and much less dependent on electronics.
India is enjoying a supply-side budget and reforming slowly by opening up new sectors such as insurance. The efficiency of its industrial sector is slowly improving. Growth is expected in the 6-7 percent range, particularly if the harvests are good.
The World Bank estimates that growth in the East Asian NIEs will slow from around 10 percent to about 4 percent in 2001; however, these could be on the high side. While their export growth is likely to be down sharply, the economic growth in Hong Kong and Taiwan are to some degree protected by their ties to China.
The ASEAN countries with open economies (i.e., excluding Vietnam) are expected to be hit the very hard. Short term they are suffering from: their incomplete recovery from the Asian crisis, particularly completing the restructuring of their banking systems and the privatisation of their public sector enterprises, together with their particularly high dependence on the US electronics market overlaid with domestic political crises.
The three most open markets Philippines, Indonesia and Thailand - are affected by all the negatives. The Philippines, however, has had a successful transition to a well-qualified President. It's too bad the external environment is not presently very conducive but there is hope and, while this year growth will be low at 2-2.5 percent, it may be able to bounce back next year if it can grab the opportunity.
Thailand has now moved to a new populist Administration. There are great doubts as to the survivability of the Thaksin regime despite his overwhelming popular vote in the elections. The Corruption Commission is close to a decision on whether he will be able to stay in office.
There are already siren calls in Thailand to copy Malaysia on its exchange rate policies. These reflect frustration that fast growth cannot be re-established on a sustainable basis despite the Thai's belief that they followed IMF prescriptions.
Whilst Indonesia's economy benefits from the strength in oil and gas prices but its politics are desperate. Wahid seems likely to be effectively an ex-President before too long. But can Megawati handle the situation or will she be a front for the military and Golkar?
Indonesia could well be a test case for the Bush Administration in the coming months. It has expressed a dislike for using the IMF to bailout creditors of countries in trouble. How will it react if Indonesia threatens to implode. Real politique should eventually prevail and they end up using the IMF much like prior Administrations.
A new Asian crisis?
Despite market speculation about a new Asian crisis among investors, it is not probable since the conditions as different. But the situation is very different from 1997. Debt has been rescheduled and is longer term. Foreign exchange reserves have been rebuilt and the foreign exchange regimes are now flexible (except Hong Kong where the currency board arrangement is not under threat.) Our main caveat would be a mistaken policy response to Indonesia leading to a general loss of confidence.
Re-establishing higher growth paths will require a renewed commitment to reform of the banking, corporate and legal structures. Importantly, the reforms have to be properly implemented. That is where the weaknesses often lie. Laws are passed to satisfy the international community - for instance on bankruptcy - by poorly implemented. The countries must build hard infrastructure and improve soft infrastructure (education for instance). They must also stay open and attractive to FDI. All these things affect important vested interests that are only willing to move when forced by a crisis.
An expected cautious improvement in the policy environment would prepare the way for better growth in 2002 especially if Japan and the US are supportive. Absent a meltdown, growth in much of Asia will continue to be higher than elsewhere, even if the glory days of the 1980s and early 1990s are gone for good, because the fundamentals (savings, demography, education) are still sound.
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