The return of the
Asian miracle
By Gerry van Wyngen
The strong return to growth of some of the SE Asian
economies that led the region into crisis two years ago
presages another Asian "miracle".
It will surprise every bit as much as the one that powered
along for a couple of decades and almost ended in
catastrophe, but it will be different in character and
composition.
Fanciful? Look closely.
The new boom will be driven by the same engines as the
previous one: clever, educated, hard-working people
with initiative; high savings ratios; and undervalued
currencies.
It will have less of the brakes and impediments of the first
boom: centrally planned economies where resources
were often misallocated; corruption; and nepotism and
cronyism which often put incompetent decision-makers
between the resource and product.
The fashionable theory that the first Asian miracle was
caused by a unique mixture of government guidance and
controlled capitalism has been discredited, and should be
buried for the myth it always was.
Of all the Asian economies only Singapore was
successful with this formula, and its success was possible
only because of an asceticism that no other countries
have been able or willing to emulate. Singapore has a
continuous process of installing intelligent, well educated
people who are prepared to work hard and selflessly.
This has resulted in reasonably successful forward
planning and tough but sensible administration. But it
comes at a cost of sterility and reduction of personal
freedom that most Australians would find unacceptable.
A real driver of the Asian success story is the work ethic.
You see it in Saigon (as the locals still call it) in Vietnam,
where the streets are a congested mass of bicycles,
mopeds and cars from 7am to 10pm, seven days a
week. Many shops and stalls are open the same hours.
Another is the value of education. Take impoverished
Vietnam again. Literacy is almost 100 per cent, and many
people speak a second language (usually English or
Russian).
A high level of household savings permits capital
formation for new and existing businesses. This is often
supported by family connections in the West, especially
through the Chinese diaspora.
And the now undervalued Asian currencies will help
underwrite a massive export drive to the US, Europe and
the Pacific Basin during the next decade. In turn this will
change in character and dimension as domestic
consumption becomes an increasingly large part of these
economies.
In each country there is a different approach to the
problems revealed by the recent "Asian" crisis. In
Vietnam there is limited indication that the impediments of
corruption, and nepotism and cronyism, are going to be
eliminated. The buying of positions where graft is
possible, such as customs officials, appears to be
continuing.
In contrast, Korea is shaking up its government, business
establishment and unions with continued albeit diminishing
rigour. The cosy arrangements of the past are being
swept away.
Japan is at the beginning of a silent revolution where
openness and transparency are slowly replacing secrecy
and complacency.
At Australia's doorstep, Indonesia, a country of a couple
of hundred million people, is undergoing a self-
reassessment that will take them into unchartered
territory.
Australia will both suffer and benefit from the new Asian
boom, and probably in that order. Increased import
penetration in areas such as clothing and textiles is
already hurting, and the likelihood is that this will worsen
until the Asian currencies appreciate much further.
Australia will become an increasingly important supplier
to Asia, in turn, but the challenge is for this to be in
value-added products rather than raw commodities or
simple manufactures.
In the services area progress has been rapid. But in
manufacturing many major challenges remain, including
the whole food area. Interestingly, Dick Smith seems to
have come to a similar conclusion recently, and he
appears to have selected this area to follow up his
Australian Geographic success.
Investors betting on an Asian recovery (excluding Japan)
have already done well, with a return averaging almost 50
per cent in US dollar terms over the past year. Australian
dollar-denominated funds have done even better. Part of
the gain has been through currency appreciation, and part
through stockmarkets rising.
Future gains are unlikely to be as spectacular, or indeed
without setbacks on the way. A possible sell-off in the
US stockmarket is perhaps the largest danger, as no
market will be unaffected if this happens. Problems in
either China or Japan are other potential dangers.
But in the longer term Asia looks set to outperform all
other areas, and the sharp turn out of recession by those
countries that led into it, shows the resilience and strength
of the "tigers".
Korean industrial production is powering ahead. There
has been significant restructuring, foreign investment has
been welcomed and balance sheets have been repaired.
Inflation has fallen, interest rates have plummeted and the
won has appreciated. Trade finance is becoming more
readily available.
On the downside, the zeal for continuing the reform
process has slowed as the crisis has dissipated.
However, the increased openness of the economy will
likely bring its own disciplines.
Thailand's massive corporate debt restructuring has
hardly begun, so vast is the problem. However, GDP is
already on the rise, and as loan restructuring continues
and more companies have access to credit, the growth
will become stronger and more broad-based.
Malaysia, despite its political troubles and its unorthodox
economics, has come out of recession too. Of this
country, however, it could be asked how much - if
indeed anything - it has learned from the events of the
past two years.
Singapore's recovery has been impressive. Growth is
accelerating, underpinned by manufacturing, transport
and communications. The mandarins have picked it right
again.
Indonesia is the obvious under-performer in economic
terms, but its stockmarket is up 70 per cent measured in
US dollars since the start of this year. Banks are being
recapitalised, corporate debt is being restructured,
inflation and interest rates have dropped while the rupiah
has strengthened. The outcome of the elections is not yet
certain, but a stable government - an unlikely hope a year
ago - appears assured.
A major question is the role that Japan, the traditional
powerhouse of the region, will play. Some years ago I
postulated a "hollowing out" of the labour-intensive
industries in that country, similar to the process that took
place in the UK during this century, and this still appears
the most likely case. Japan will be a low-growth country,
expanding its services but exporting its factories to other
parts of the Asia-Pacific region. Japan will become a net
consumer of goods and services from the region, so that
its current account surplus will diminish at least in
percentage terms.
Paradoxically, Japan will be a major contributor to
growth in the Asia-Pacific region. While its growth will be
lower than during the previous boom, a greater
percentage will be an import of goods and services that
will boost the economies of the exporting countries. And
by exporting its factories it will provide jobs, and new
consumers, in countries where previously there were not
enough.
Much has been said, and too much presumed, about
China. Importantly, during the worst economic crisis in
the region in living memory, China continued to grow, to
rationalise its inefficient economy and to provide jobs. It
is clearly a dynamo, potentially even more powerful than
Japan has been. Over the next decade it will become an
increasing force in the region's trade, growth and financial
well-being.
Talking of which brings us to stockmarkets. Regardless
of what happens to the overcooked US market, and of
when, most of the non-Japan Asian markets will likely
outperform both the US and west European
stockmarkets in the longer term. Apart from a work ethic
that has dissipated in Europe, and a savings ethic that has
disappeared in the US, Asia has regained an advantage in
currency parities that will help launch a powerful export
boom.
This will attract increased investment. Indeed, it is already
beginning. So far this year the star is Korea which has
lured the equivalent of $A7 billion of foreign investment,
and aims to attract a total of $A22 billion over the full
year.
However, the change in capital flows appears to be
increasingly broad-based, both in source and destination.
So as a long-term currency play as well, many of the
Asian countries may be attractive investments.
What is in it for Australia? The answer to that is in our
own hands. Remember this boom is going to be the fruit
of countries where many are prepared to do difficult or
unpleasant work for long hours. There are no presents or
free rides if we want to share this boom.
Our taxation reform, which redresses partially the
previous bias towards taxing production and savings
rather than consumption, is a modest start. Our work
ethic has improved too. Ever noticed how the peak traffic
flows, to and from work, and now much earlier in the
morning and later in the afternoon than 10 years ago?
But now we have to capitalise on our natural advantages,
adding value to the resources we export, developing
Australian brand names synonymous with quality.
And we have to continue developing our service
industries: tourism, education, building contracting,
banking and finance, law, accounting, and computer
software.
afr.com.au
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