Global: An Unprepared Asia
Stephen Roach (from Beijing)
I worry that Asia is about to be blindsided by a tough global climate. Like most of the world, they didn’t see it coming. But unlike the rest of the world, Asia feels that it has already suffered enough -- a financial crisis, the likes of which had not been experienced since the 1930s. Having felt the pain, Asia feels sufficiently chastened and relatively insulated from anything that might lie ahead. That could be a serious mistake. The risk is that Asia could be facing a more severe external shock over the next year than it did in 1997-98.
I draw this conclusion from my second visit to Asia in the past month -- first, a jaunt to Japan and now a more extensive tour of non-Japan Asia. It’s not as if the headlines from Wall Street haven’t caused considerable consternation in Asia’s financial centers. From Tokyo to Beijing, that’s usually the first concern I hear. But Asia is uniformly of the view that America is suffering from a stock-market-specific malady that is unlikely to have a lasting impact on the real economy. When I speak of U- or even L-shaped recovery characteristics, Asians shake their head in disbelief. They are still banking on the glorious V -- and on all of its bullish earnings implications for an oversold stock market. Just the thought that America may have to face a much longer workout from a host of structural problems -- especially its negative personal saving rate, a huge IT overhang, and a massive current-account deficit -- is invariably met with the glazed look of disbelief and denial. The spirit of America’s once proud New Economy is still alive and well out here in Asia.
There are three legs to the stool of global vulnerability, as I see it. The first is what I have called the world-without-an-engine syndrome (see my 16 February dispatch, "A World Without an Engine"). According to our estimates, the US economy has directly accounted for about 26% of world GDP growth over the past four years. Adding in the indirect effects of trade and FDI linkages, and the US impact could easily be close to 40%. As America slips to the brink of recession, its ability to provide a global cushion will likely all but vanish. That’s a major difference between the macro climate of 2001 and that of the crisis-torn 1997-98 interval. Back then, the engine of the world -- the US economy -- was booming at a 4.4% average annual rate; by contrast, for 2001, we are looking for US GDP growth of just 0.7%. At the same time, with the Japanese economy now probably back in recession, all eyes have turned to Europe as a candidate to fill the void left by America. However, our projections call for a 2001 Euroland growth outcome of just 2.2% -- literally half the gain of America’s leadership position over the preceding five years. In short, it’s not a stretch to claim that today’s world economy is, indeed, engineless.
The globalization of supply chains is a second leg to the stool of global vulnerability. Courtesy of the confluence of rapidly expanded trade linkages and new information technologies, a shock in one region of the world quickly spreads around the globe. For that reason alone, when America -- the once-proud engine of the global economy -- sneezes, the rest of the world quickly catches a cold. That’s especially true of America’s NAFTA partners, Canada and Mexico, where exports to the US account for 32% and 25% of each country’s GDP, respectively. But it’s also very true of non-Japan Asia, the world’s most open trading region, where exports account for fully 37% of pan-regional GDP. With the bulk of recent Asian export growth driven by a US IT cycle that has now rolled over, Asian export demand is now collapsing. Particularly vulnerable in that regard are Malaysia and Singapore, where IT exports to the US account for fully 80% and 73%, respectively, of their total US export exposure; little wonder export growth comparisons of both countries have already dipped into negative territory. Whereas Taiwan and Korea are not too far behind in their US IT exposure, China and Hong Kong, by contrast, are the Asian economies least exposed to the US IT cycle.
It’s not as if Asia doesn’t read the handwriting on the wall of a sharp slowdown in its export-led growth dynamic. The numbers speak for themselves -- especially in Taiwan and Korea, where a recent weakening of GDP growth and rising unemployment render the clearest verdict of all. But the Asians I have met with in the past few weeks view this as nothing more than a temporary bump in the road. The possibility of a sustained slowdown in the region’s external demand is viewed as a low-probability event. Convictions are deep that America is going through nothing more than a garden-variety inventory recession. Once this cycle runs its course -- widely presumed to be sooner rather than later -- most believe that the heady days of IT-led export growth will quickly return. Lacking in domestic demand vigor, this is Asia’s only real recipe for renewed vitality. The region is unprepared for the alternative, in my view.
A strong dollar is the third leg to the global vulnerability stool. That’s especially the case in non-Japan Asia, where the currency story is really more one of yen weakness. Today’s circumstances are, of course, very different than the crisis years of 1997-98, when fixed-exchange-rate regimes prevented market-driven currency adjustments -- until the cataclysmic shock of sharp devaluation was unavoidable. Currency pegs have since been replaced by floating-rate regimes. As a result, the recent bout of yen weakness has triggered a new round of competitive devaluations throughout East Asia, with currencies in Korea, Taiwan, Singapore, Thailand, and the Philippines all having recently fallen to lows not seen since the depths of the regional crisis in 1998. Needless to say, such currency movements pose potentially serious competitive pressures for those few economies still on fixed-rate regimes -- namely China and Hong Kong.
In the end, of course, competitive devaluations are a losing game. Not only are they ultimately inflationary, but they pit countries against one another in a seemingly endless battle for market share -- a battle that is now occurring for an ever-shrinking pie, as manifested in the form of a record slowdown in global trade. Again, it’s not as if Asians don’t see this handwriting on the wall. But they continue to view it as largely transitory -- operating under the presumption that Japan will somehow find another way to reflate. Like it or not, a strong dollar is bearish for global growth. It not only exacerbates weakness in Smokestack America, but it triggers a very destabilizing currency response in Asia.
On all of these counts -- global leadership, trade linkages, and currency pressures -- hope seems to spring eternal out here in Asia. This is a region that believes lightning can’t strike twice so quickly -- that it has already seen enough pain to last for a generation. But as I see it, the external challenges facing Asia in 2001 could turn out to be far more threatening than the events of 1997-98. The crisis of a few years ago was made in Asia and compounded by global currency speculators. This time, the shock has been made in America, leaving Asia without the safety net of external demand. Steeped in denial, Asia is unprepared for what could lie ahead.
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