Ramsey, you Asia hand you, thought you'd find this article from todays theStreet.com interesting:
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Commentary Features: China and Japan Are
Dragging Asia into Prolonged Depression
By Ross H. Munro
Special to TheStreet.com
4/16/98 4:00 PM ET
Japan and China, the economic powerhouses of Asia, could
plunge the region into a depression from which it may not
emerge for over two years.
That's because neither country seems willing or able to
transform itself into an engine of growth for the region. Japan's
political leaders are paralyzed, unable to enact the sweeping
structural reforms crucial for the healthy and sustained
economic growth that would quickly help revive the region.
In sharp contrast, China's leaders are aggressively
transforming their economy to keep it growing -- but they're
doing so partly by adopting predatory trade practices that are
hurting China's Asian neighbors.
Together, Japanese inaction and Chinese action spell more
trouble for the reeling economies of Thailand, Indonesia and
South Korea. And even the "strong" economies of Taiwan and
Singapore are beginning to hurt.
It seems that Asia cannot drag itself out of the big hole it has
fallen into. The economic outlook for most countries is, at best,
grim. Only recently, Indonesian officials projected that their
economy would contract by 4% this year, which was bad
enough. Now, analysts in Jakarta expect the drop in Indonesia's
GDP will be more than triple that earlier prediction. Thailand's
GDP shrinkage will be at least 6%.
Optimists continue to suggest that the region will work itself out
of the mess, but rebound scenarios are hard to come by.
Taiwan, which was not badly hit by the crisis, could be one
country to feel good about. And some certainly do. Bullish
economists at Goldman Sachs predict that the island dynamo
will achieve 6% growth this year. But that seems unlikely now
that Taiwan has just racked up its first quarterly trade deficit in
15 years due to the regional slump.
The optimists will be proven wrong because Japan and China
will not change overnight.
Japan's paralysis is thoroughly documented. World leaders are
justifiably hammering the Japanese government for its failure to
come up with a credible, comprehensive set of economic
policies that will reignite the Japanese economy and help the
region's economies recover.
After stagnating for most of this decade, Japan's economy has
now begun to shrink at an annual rate of more than 2%. While
Tokyo still officially projects positive growth, even the
diplomatically cautious chief economist for the IMF, Michael
Mussa, conceded this week that "zero [growth] will be hard to
achieve."
It is difficult to explain how much this matters to the rest of Asia.
A one-year 2% GDP decline in Japan amounts to an absolute
drop in economic output greater than we're seeing right now in
all of Southeast Asia.
For months, Japan's discredited political leadership has been
hinting at, and then announcing, grand plans to reignite
economic growth with bigger and bigger tax cuts and bigger and
bigger public works programs.
These measures are being widely dismissed -- and for good
reason. The increasingly pessimistic Japanese will save, not
spend, the extra money in their paychecks, and the public works
spending will be wasted in unneeded projects that will generate
little long-term economic activity.
But that's not the worst of it. Even if Japan operated at full
capacity, official forecasts say it couldn't grow any faster than 2%
over the coming decade. And on the horizon is a further slowing.
Notes Richard Katz of The Oriental Economist Report in Tokyo:
"With the labor force now shrinking, unless productivity
rebounds, after 2010 potential GDP growth will sink to 1% or
less."
Japan can only do better than that if there are drastic and
sweeping reforms and a deregulation of Japan's domestic
economy as well as a much wider opening of Japan's markets
to the rest of Asia and the world. Only with the creative
destruction of Japan's clogged economic arteries, starting with
the financial sector, can Japan possibly achieve greater
productivity and profitability. If Japan is to thrive, Japan Inc. must
first be destroyed.
The chances of that happening in the foreseeable future are
slim to none, unless economic shrinkage becomes economic
collapse and a new political leadership emerges from the
ashes. Indeed, a growing number of Japan-watchers in
Washington are sotto voce wishing for a full-blown economic
crisis.
In sharp contrast to the political paralysis in Japan, China's
leaders are actively pursuing an aggressive strategy aimed at
halting rapidly rising unemployment and an overall economic
slowdown. While Goldman Sachs is projecting 9% growth this
year, the Organization of Economic Cooperation and
Development recently predicted growth will slip to 7.2%, far
below China's two-decade average of 10%.
The problem with China's emerging growth strategy, however, is
that it amounts to beggar-thy-neighbor economics that will prove
to be just as formidable a barrier to Asian economic recovery as
Japanese inaction.
Last month, we showed how China has stepped up its export
subsidies. Boosted by such tools as low-interest bank loans
and tax rebates, Chinese exports continue to grow and take
market share away from Southeast Asian countries. The most
recent indicator: China's exports of machinery and electronic
goods in the first two months of this year were 33% higher than
the same period in 1997.
Meanwhile, China is reducing its imports and racking up large
surpluses in its merchandise trade account.
Recently, more information has emerged that helps explain the
success of China's export drive. As competition for world
markets has grown, the Chinese are lowering their export
prices, not only by using subsidies, but also by forcing down
real wages. That's according to respected Sinologists who are
conducting firsthand research in South China factories that
pump out a large portion of China's labor-intensive exports.
During a panel discussion at the annual meeting of the
Association for Asian Studies in Washington late last month,
the researchers all agreed that real wages, already low to begin
with, have recently dropped significantly.
The Sinologists' findings are supported by a startling report
issued by China's own State Statistical Bureau two weeks ago.
The SSB report disclosed that 39% of Chinese families in urban
areas experienced a decrease in income in 1997. Among the
lowest-income families, 60% reported an income decline.
So, China and Japan, in their separate ways, seem to be laying
the groundwork for a durable, deflationary depression in Asia.
Ross H. Munro, co-author of The Coming Conflict with China, is
director of Asian Studies at the Center for Security Studies in
Washington.
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