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Tiger economies weather the
storm
By Alan Boyd
SYDNEY -
It was supposed to be a year when East Asian economies
would pay dearly for their strong dependence on sluggish
US and Japanese consumer markets.
Technology
sales had still not recovered from the disastrous
collapse in the second half of 2001. Inclement weather
was threatening rural commodities. Property values were
in free fall. Even the region’s equities revival looked
to be in trouble.
Then came the global security
alert, accompanied by a spate of travel warnings that
would buffet the crucial tourism industry and send
foreign investors packing.
Yet none of these
challenges has been able to shatter the comfort zone
that East Asia has found within its own borders, as it
draws on the inner strengths that eased it through the
1997-98 financial crisis.
Preliminary data
indicate that the 16 countries achieved average economic
growth of 5.5 percent in the past 12 months, with
China’s economy alone expanding by 7.7 percent and South
Korea registering a 6.1 percent gain. Not bad for a
region that still sends 40 percent of its exports to
either the United States or Japan and relies heavily
upon direct capital investment from North America and
the stuttering European Union economies.
What
has changed is that exporters were able to sell 24
percent of their goods in East Asian markets other than
Japan in the first three quarters of the year, while
shipments to China were up by about 50 percent. "This
extremely rapid rise in exports to China this year will
clearly not be sustained, but the underlying trend in
the importance of China as an export market for East
Asia will continue, as it has for the last decade," said
chief World Bank regional economist Homi Kharas, adding
that Japan has been the main loser from the shift.
Fostering intra-regional trade is hardly a new
concept, with its origins probably dating back to the
withdrawal of US military and economic interests at the
end of the Indochina conflict in the 1970s.
At
the onset of the financial upheaval about 25 percent of
export transactions took place in East Asia - 40 percent
if Japan is included. Key factors encouraging closer
economic unity have been the end of the Cold War, with
the resultant opening of markets in Indochina, and trade
liberalization efforts by the Association of Southeast
Asian Nations (ASEAN).
This is not to say that
the transition has been wholly successful. As the World
Bank noted in its quarterly economic update, a
substantial portion of intra-regional exports involve
intermediate or processed goods that are merely being
assembled locally.
"If this is the case, then
demand in G3 [the US, Japan and EU] countries will
continue to be the main driver of intra-regional trade,"
the World Bank stated. "As a derived demand,
intra-regional exports would not have their own momentum
or be independent of the trends in exports to the G3."
Nevertheless, domestic consumption has recovered
to a level where it should provide a continuing buffer
against the downturn in global demand, unless the US
falls into a double-dip recession.
Consensus
Economics of London expects average growth of 5.9
percent in East Asia next year, with the ASEAN countries
recording a 4.3 percent expansion, China 7.5 percent and
South Korea 5.6 percent. Bringing up the rear again is
the Philippines, with forecast growth of 3.8 percent.
Consumer demand has dipped since mid-2002,
undermined by a steady decline in equity and real estate
values, coupled with security tensions and uncertainty
over the Middle East situation. However, interest rates
are in most cases at historic lows, retail prices are
static and banks are starting to lend again to
consumption sectors after clearing debts accumulated in
1997-98.
The chief concern is low levels of
private investment, with the Asian Development Bank
(ADB) warning that these may not be sufficient to shield
vulnerable production sectors such as information
technology and consumer electronics. "Particularly
worrisome is the situation of private investment in some
countries that have a great deal of excess capacity and
that are still plagued by financial problems derived
from the Asian financial crisis," the ADB stated in its
most recent economic update.
Private capital
flows are defying the slowdown in other emerging
markets. The Institute of International Finance expects
net inflows to China, India, South Korea, Indonesia,
Malaysia, Thailand and the Philippines to reach $60.3
billion in 2003, an increase of almost $7 billion on
this year. But these may bring only selective benefits.
Most will be in the form of equity and portfolio
investment, and the bulk will probably go to China,
Thailand, South Korea and Malaysia.
While these
countries are favored for their improving economic
fundamentals, and the latter three for an upgraded
sovereign bonds outlook, lagging economies such as the
Philippines and Indonesia will be left on the sidelines.
Little respite is likely from public spending, as the
same countries are also under pressure to curb spiraling
government debt and will have to tighten monetary
policies to prevent an exodus of funds.
In
general, however, monetary chiefs will be able to
exploit the absence of significant price pressures by
maintaining mildly expansionary policies that were
instituted in response to falling technology exports in
late 2002.
The main threat is a prolonged Middle
East conflict, which would undermine the oil income of
exporters like Indonesia and impose price pressures
elsewhere as supply shortages ensue.
One outcome
of a prolonged energy disruption might be an
appreciation of real exchange rates and an increase in
short-term interest rates that could affect export
competitiveness. But the odds on a sustained Middle East
conflict are relatively low, while production growth in
the majority of cases is sufficiently broad-based to
withstand temporary external shocks.
Output is
forecast by the World Bank to grow by 5.5 percent in
2003, about the same as this year, with China and
Vietnam achieving levels of 6-7 percent and the leading
ASEAN countries 3-4 percent.
Less optimistic are
prospects for services income, which will be undermined
by lower tourism receipts as the region reacts to the
Bali bombings and Muslim tensions over a possible US
military offensive in Iraq. Services account for 40-60
percent of GDP on average, and in a better external
environment could have offered a safety net against
reduced global demand for manufactured consumer goods.
Arrivals from the US have fallen by almost 11
percent in the 12 months since the September 11 terror
attacks, according to the Pacific Asia Travel
Association. They dropped by 33 percent in the immediate
aftermath of the attacks. Regional arrivals are likely
to strengthen, as Asians strive to avoid long-haul
flights by having their holidays closer to home.
However, this won’t be enough to cover other
cancellations.
The World Bank predicted that
Indonesia and the Philippines, the most visible victims
of terrorist activities and among the most heavily
indebted, would suffer the worst tourism fallout.
"Receipts from tourism represent 45 percent of
GDP in Indonesia and in Southeast Asia generally. Lower
tourism arrivals and the adverse impact of the attack on
consumer and business confidence could reduce
Indonesia’s growth by one percentage point," the World
Bank stated.
(©2002 Asia Times Online Co, Ltd.
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