Clouse, Thomas, Global Finance
Asia's economic powerhouses are shifting to a new economic model. The transition will be painful-but will also pay huge dividends.
Asia has played a starring role in the story of globalization. The region has pulled in massive foreign investment and found eager markets for its products around the world. The region's exports now range from simple consumer goods to sophisticated electronics and popular automobiles. The strong investment and booming exports have given Asian economies some of the fastest growth rates in history, and Asia now boasts the world's second- and third-largest economies, in Japan and China.
Asian policymakers, drawing from the lessons of the Asian financial crisis a decade ago, managed their countries' successes conserva- tively. They kept budgets low, limited external financing, pursued con- servative monetary policy and built up substantial foreign ex- change re- serves. They also pushed forward aggressive financial system reform, greatly strengthening banks and other financial institutions.
All of these moves have cushioned the impact of the current global eco- nomic crisis. Asia's regional economy maintained relative stability as global liquidity tightened, and policymakers were able to lower interest and reserve rates while introducing fiscal spending programs. In addition, Asian banks had only limited exposure to mortgage- backed securities. Australian financial services firm Macquarie Group esti- mates the region's total subprime loss- es at less than $35 billion, accounting for 0.2% of total bank assets. Bill Belchere, chief Asia economist for Macquarie Group, says, "From our macro perch, Asia has proven well equipped to maintain financial stability since the onset of the global recession and credit crunch by virtue of its both . . . high level of FX reserves relative to short-term external debt and sustainable current account positions with low non-performing-loan levels."
Belchere warns, however, that the strong financial positions of Asian countries cannot compensate for the long-term problems with the region's growth model. "One of our key macro themes for the first half of 2009 remains the struggle between Asia's strong macro balance sheet and its impaired growth/business model," he says.
The impaired growth model to which Belchere refers has served Asia well in the past. The model fuels economic growth pri- marily with export increases. But with the United States, the European Union and Japan now in recession, demand for Asian exports has dried up. Thus, despite Asia's strong financial position, the real economy is beginning to suffer due to its dependence on these export markets.
"Given the linkages to the rest of the economy reflected in the high exportto-GDP ratios," Belchere continues, "the indirect impact on the non-tradable sectors will be considerable. And if the business model freezes up, then the strong balance sheet will deteriorate."
Recent export and GDP numbers already show signs of this deterioration in the macro economy. China and India both registered drops in shipment volume of more than 15% year-onyear. For Japan, Korea and Taiwan, which tend to export more expensive products, the drop was even more severe, ranging from 34% in Korea to 46% in Japan.
Falling exports led the International Monetary Fund (IMF) in January to revise down growth estimates for 2009, with developing Asia expected to grow 5.5%, down from 10.6% in 2007 and 7.8% in 2008. Asia's newly industrialized economies (NIEs) will shrink by 3.9%, and Japan's economy will contract 2.6% in 2009, the IMF predicts. In comparison, Asia's NIEs grew by 5.6% in 2007, and Japan posted growth of 2.4%.
These recent statistics, however, show only one aspect of the crisis. Eduardo Chakarian, principal of the Singapore office of management consulting firm Monitor Group, explains: "AU crises have two aspects - short-term turbulence and the world after the crisis. …