East Asia's dazzling growth is about to run into trouble

There are substantial risks in the future. One is the dependence on exports of a very narrow range of products
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The Independent Online
When does the great East Asian run of growth begin to taper off? The region has, over the last 20 years, been the fastest-growing in the world by a large margin, with the result that some parts - Hong Kong and Singapore for example - now have a higher per capita gross domestic product than the OECD average. At some stage, however, this growth is bound to slow. Some countries have been doubling their per capita income every 10 years, something that took the UK and US more than 50 years at a similar stage of their growth, and a rate of growth that mathematically cannot continue.

You can see the slowing growth pattern in the region's richest country, Japan, or for that matter in Europe's richest, Switzerland. Both countries have hit a glass ceiling. But what will be the pattern for the rest of the region, if indeed there is a single pattern?

The question is really a long-term one, but arises this week for a couple of reasons. First, theMerrill Lynch Gallup global survey of fund managers' investment intentions has been becoming increasing sceptical. You can see that in the graph on the left: the figures show that the world's fund managers are only just net buyers of the Pacific Basin region. True, the region is rather wider than just East Asia, but it does square with a downgrading of that region too.

The other reason is the growing evidence that, while an economic recovery is under way in the region, it is a patchy and uneven one. The East Asian economy is driven by exports to the US and Western Europe to an extraordinary extent. For example exports to the US alone account for one-third of Singapore's GDP and one-quarter of Hong Kong's. So a pause in growth in the OECD region in the second half of 1995 and most of last year hit these countries hard.

There is now a clear recovery in exports, as the graph on the right from J P Morgan shows, but this is patchy. Some countries - China, the Philippines, Taiwan - are doing well; others - Hong Kong, Indonesia, Malaysia - are doing less well.

Assuming the US economy continues to grow and there is a more secure recovery in Western Europe, eventually the whole region's growth will stage a decent cyclical recovery. On a longer view, though, it is at least plausible that the East Asia's high growth era is over. This possibility has been outlined in a new paper by David Hale, the economist at Zurich Kemper Investments in Chicago.

Hale's thesis runs like this. The region's growth has been dazzling. But there are substantial risks in the future. One is the dependence not just on exports, as noted above, but on a exports of a very narrow range of products. The electronics sector accounts for 51 per cent of Singapore's exports, 44 per cent of Malaysia's, 34 per cent of South Korea's. No less than 20 per cent of South Korea's exports are semiconductor chips.

This leaves these countries vulnerable not just to a fall in demand but also a fall in prices. One of the main reasons for a sharp rise in Korea's current account deficit last year was the 75 per cent fall in the price of chips as a result of a global glut.

A second area of vulnerability is the need for massive infrastructure investment. The need for such investment has been one of the reasons why, despite very high personal savings, the region is in overall current account deficit. While this is probably manageable without a Latin American-style meltdown, it means that the region does carry risks.

This leads to a third concern: the ability of the region to manage this infrastructure investment wisely, given that it will probably have to pay above-average rates of return to attract inward capital to finance it.

There are concerns, too, as to whether the commercial management of local companies will be sensitive to the changing demand for their products - whether, for example, Chinese companies will be inhibited by government interference.

The region has little experience of shareholder scrutiny, a weakness which may have led to the very low rates of return achieved by Japanese companies. It also has very little experience of using financial markets to allocate capital, something which will have to happen to a much larger extent in future, particularly as an ageing population will within one generation need to accumulate sufficient financial assets to cover its pension needs.

Finally, the region will need to import very large amounts of energy and probably food too. China, for example, will become a large oil importer as its car population grows.

The point here is not to argue that the region is in serious economic trouble. Rather it is to point to reasons why its growth in the future is liable to hit problems, which will have to be tackled. If these are dealt with successfully, then the debate will shift from economics to politics, and the role of the region in the wider world. David Hale believes that these countries will succeed and regain growth momentum in the final years of the century, and he may well be right. But it will not be the astonishingly rapid growth of the last two decades and there will be bumps on the way.

Maybe the main bumps will not be economic at all but political. Best candidate? Well, you can round up the usual suspects. The unification of the two Koreas cannot be that far off, but can it be achieved with the smoothness of the unification of the two Germanys? Hong Kong has to demonstrate that its economy can continue to prosper under a change of regime. And after Hong Kong, what happens to Taiwan?

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