The new lesson for resilient Asia
By Stephen Roach
The Financial Times
Published: June 8 2010 22:12 | Last updated: June 8 2010 22:12
Asia has come through the -global crisis of 2008-09 with flying colours. As chairman of Morgan Stanley’s Asia businesses over the past three years, I have been privileged to witness this extraordinary resilience first-hand. As I now head back to the US, three lessons stand out.
First, Asia learnt the painful lessons of the 1997-98 regional crisis very well. That crisis stemmed largely from Asia’s vulnerability to the vicissitudes of international capital flows. Lacking in foreign exchange reserves, overly exposed to short-term external debt and with rigid currency pegs, the region stood little chance when the hot money started to flee. When Thailand went, Indonesia, South Korea, Taiwan and most of the others in developing Asia were quick to follow.
By contrast, for Asia, the latest crisis was primarily an external demand shock. The unprecedented 11.8 per cent drop in the volume of global trade in goods in 2009 hit this export-led region extremely hard. No country was spared either sharp recession (Japan, Taiwan, Malaysia and Thailand) or major slowdown (China, India and South Korea). But Asia’s build-up of foreign exchange reserves in the period between the two crises – from less than US$1,000bn in 1998 to nearly $5,000bn in 2009 – insulated it from the financial upheaval that followed Lehman’s collapse.
Second, there is the China factor. As I have criss-crossed the region, there has been no mistaking Asia’s new China-centric character. I remember penning a piece in the Financial Times after the Asian crisis arguing that China was bound to supplant Japan as the leader of regional growth. Most were sceptical and even I concede that the transition occurred with greater speed than I anticipated.
But China has clearly arrived as the region’s dominant economic force. In the past 10 years, export-led economies such as Japan, South Korea and Taiwan have all redirected their overseas shipments. Their largest export market was once the US; now it is China. The “Asian dream”, as a result, is now much more a Chinese dream. That is certainly evident in Hong Kong nearly 13 years after the handover to China, but I also have seen it repeatedly in my business dealings across the region.
That puts Asia in a tight spot – relying more and more on China for sustained growth and prosperity. Yet China’s challenges can hardly be minimised – as underscored by the latest property and credit bubbles, as well as the labour-related pressures seen in the recent problems at Foxconn’s Shenzhen plant. But just as surgical administrative measures seem likely to contain the damage from the bubbles, rapid productivity growth should offset deferred minimum wage rises and keep unit labour costs in check. That does not diminish China’s most daunting structural imperative – an increasingly urgent need to stimulate private consumption.
I am hopeful that China will pull this off with a pro-consumption shift in the 12th Five Year Plan (2011-16). That, in turn, would provide a boost for its East Asian suppliers – namely, South Korea, Japan and Taiwan. If, however, China fails to engineer this transition, its growth dynamic will be impaired by lingering post-crisis headwinds blowing from the west. The rest of a China-centric Asia could then be in trouble.
Third, Asia cannot presume that just because it weathered the global crisis it has discovered the holy grail of economic prosperity. In an increasingly complex and integrated world, trouble has an unpredictable way of mutating. The cross-product contagion of 2008-09 was very different from the cross-border contagion of 1997-98. Asia must prepare for the inevitable next crisis rather than bask in warm glow of its new-found resilience.
On that score, Asia has a full plate. In the late 1990s, exports made up about 35 per cent of developing Asia’s gross domestic product. Ten years later, that ratio had risen to 45 per cent. The region has become more dependent on external demand just as the aftershocks of the 2008-09 crisis are likely to take a lasting toll on this demand in both the US and Europe.
In this context, it is critical for Asia to adapt yet again – to move towards greater reliance on its own internal markets. Asia’s post-crisis imperative is now to stimulate private consumption – very different from the imperative of repairing financial vulnerability after the crisis of the late 1990s.
My bet is on Asia – that the next three years are going to be even better than they were during my recent stint in the region. I think China definitely gets it – that the post-crisis era leaves it with little choice other than turn to its own 1.3bn consumers as a major source of internal growth.
But I leave Asia with one big worry – that the rest of the world doesn’t get it. I worry, in particular, about the steady drumbeat of China-bashing in Washington – especially as we approach mid-term elections this year. I fear that America, with a massive multilateral trade deficit that stems from an unprecedented shortfall of domestic saving, will make a major mistake in seeking a bilateral “remedy” to a jobless recovery by imposing trade sanctions on China.
More than ever, the US needs to stop taking out its frustrations on others. It should look in the mirror and deepen its understanding of the self-inflicted nature of its problems. This is America’s re-education imperative. That is a key reason why I am heading off to Yale.
The writer is the chairman of Morgan Stanley Asia and author of ‘The Next Asia’. He will be joining the faculty of Yale University on July 1