Why the call of Asian tigers is muffled
Sunday 07 September 1997
These are a set of questions posed by the chaos in East Asian financial markets over the last two months and which continued last week, if anything at a more intensive pace.
Start with information. There is certainly one world in information in the sense that a powerful story or an image can be flashed instantly anywhere on the globe and seen by billions of people - as I suppose the dreadful story of the last week reminds us. A full range of economic information, on the other hand, is instantly available only to the tiny group of people who are prepared to pay the price of subscribing to the wire services. And that information is pretty raw; for judgement and help in interpreting the information people need access to the research departments of the various bodies that study economic data.
So what looks like a world of infinite and immediate information is far from that. Sure, there is plenty of data available to all, but useful judgements are harder to find. There is therefore a hierarchy: vast amounts of dross and a tiny number of valuable nuggets.
When one moves from economic data to the practical information which businesses use in their normal commercial activities there is a parallel hierarchy. Most of the information needed to develop a product, get it produced, and market and distribute it is also available. For simple products you just take it: many countries in East Asia established whole industries by reverse engineering more advanced countries' products: they bought a product, took it to bits to see how it was made, and then made a copy. In East Asia, the markets are full of fake Rolex watches.
But even more complex industries can be established, and legally too. A country wishing to establish a car industry can buy the designs, hire the expertise to build the plants and market the product: all it has to do is supply the land and the labour. Thus South Korea, which has no tradition of motor manufacture, has in one generation built an industry which may overtake that of Germany.
There are, however, other types of practical information which are harder to acquire. Some of this is high-tech: the skills needed to build a pharmaceutical or defence industry. And some industries move so quickly that leaders keep developing a new body of knowledge which, by the time it is transferred, has become obsolete. A good example of that is mobile phone technology, where Ericsson in Sweden and Nokia in Finland have been able to hold a disproportionate amount of the world market for companies from such small countries, simply because they have been able to move with astonishing speed.
Finally there are activities where there are such profound cultural barriers to entry that even though in theory the knowledge could pass across national boundaries, in practice it does not. The prime example of this is Hollywood, which dominates the movie trade. Technically it is possible for any country to make a movie and just about every country does. Countries like India make many more movies than the US. But the revenues are tiny compared with America's.
Now apply this hierarchy to the turmoil in East Asian markets. Perhaps the first point to make is that there has been no transfer of the jitters to the markets of the other two continents: North American and European securities markets have continued to remain strong. Had the market movements started in the US, they would certainly have spread. It seems that intellectual leadership in financial markets remains in the States.
That is unsurprising. Though the US is a net debtor and so receives the rest of the world's savings rather than distributes cash, much of the decision-making is driven by US-owned institutions. Physically the largest centre for cross-border investment happens to be in London, so maybe the American dominance has an Anglo tinge to it too. As you might expect, enthusiasm for investment in what are in short-hand known as "emerging markets" swings pretty widely. The graph (which covers markets in Latin America as well as East Asia) shows how enthusiasm reached a peak at the end of 1994 and has subsequently waned. That may be as much a reaction to the renewed self-confidence of US and continental European investors in their own markets as a collapse of confidence in others. Never- theless, I think it is a reasonable assumption that the swings of fashion between investment in emerging markets and established ones are driven by people in the established ones.
Finance, of course is different from the real economy. It may be that the financial world is dominated by ideas in the US and Europe, but what about the economic world, the real economies of the regions? How much has power shifted to East Asia?
I have been looking at some figures for world exports. Between 1970 and 1979 the US averaged 12.4 per cent; this year the IMF estimates its share will be 13.2 per cent. So the US is more important in world trade, not less. European countries are down a bit: Germany from 10.3 per cent to 8.8 per cent, France 7 per cent to 5.4 per cent, ourselves from 6 per cent to 5.2 per cent (Italy has increased its share from 4.4 per cent to 4.8 per cent.) But the big increases are in East Asia. For example, Hong Kong is up from 1 per cent to 3.6 per cent, Malaysia from 0.5 per cent to 1.4 per cent, China from 0.7 per cent to 2.6 per cent.
So there has been a shift, but it has been from Europe to East Asia, not from the US, which has gained ground; and while some East Asian countries are successful exporters, their absolute share remains well below that of large European ones. Only China plus Hong Kong are really significant at the moment.
One obvious conclusion would be that while East Asia is the most dynamic region there has been little or no shift of power away from the US - though there has from Europe. Another would be that while there is a global economy in which "emerging" nations have become more important, they are not yet that important. A third would be that it looks as though financial disruption in East Asia will not destabilise the world. And finally it is at least plausible that economic disruption will not be too damaging for the rest of the world either.
Yes, it is one world to a much greater extent than ever before in human history. But no, it is not a level playing field ... yet.
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