A Sun Rising In the East

By Michael Elliott

Why do Americans have to do all the heavy lifting? That's the refrain of every U.S. policymaker, wondering why the rest of the world seems to be waiting for the U.S. economy to pull it out of a downturn. And the sentiment is shared by American corporations, which would just love to find a growing international market for their products. But Western Europe continues to disappoint, and Japan's recession seems endless. What's an exporter to do?

How about: look past Japan to the rest of East Asia. During the early and mid-1990s, tigers like South Korea, Singapore, Taiwan and Hong Kong, plus the fast-growing cubs of Indonesia, Thailand, Malaysia and the Philippines, posted some of the best growth rates in the world. The "Asian miracle" drew capital even from banks and factory owners in the U.S. hinterlands. Then came the financial crisis of 1997, and the story turned sour. But after a recent reporting trip through Asia, I'm convinced the region can once again be a beacon of growth.

To understand why, it's important to remember what made the miracle happen. At the root of the Asian economic success were two decades of robust export performance, much helped by undervalued currencies. (It was when the U.S. dollar, to which many local currencies were pegged, started to rise in the mid-'90s that systemic weaknesses in the Asian economies became apparent.) But "outward orientation," as the academics called it, wasn't the whole story. Domestic demand grew rapidly too. Two components of Asian domestic economies were particularly important. First, there was construction, which remade the skylines of every city from Kuala Lumpur to Shanghai. Seven of the world's 10 tallest buildings are in East Asia. Second, there was consumer spending, as a new middle class flocked to shopping malls to buy fancy electronics and designer labels. For a while it was easier to find a Prada or a Gucci store in Hong Kong and Singapore than in New York or London.

With the financial crash came a sharp decline in bank lending to property speculators, coupled with a steep increase in unemployment. Consumers kept their hands in their pockets, the designer fashion stores left town, and magazines ran pictures of empty shopping malls. Such recovery as Asia saw in the late '90s was almost exclusively explained by an increase in net exports, helped along by newly devalued currencies. So when the growth in world trade screeched to a halt at the end of 2000, so did the Asian recovery.

But the picture has changed. In some interesting recent research, the Asian-economics team at HSBC has found that domestic consumption is running ahead of exports as a source of growth in South Korea, Indonesia, Malaysia, the Philippines and Thailand. In Taiwan, HSBC estimates, private-consumption expenditure, which grew just 1.4% last year, will post a more respectable 3.8% growth in 2002. Moreover, construction is booming in Thailand and South Korea. Some countries--notably South Korea, whose forecast growth of more than 6% this year makes it the region's star--have introduced tax reforms to encourage consumer spending, and others are pumping up demand with public expenditure. But the key driver of the recovery is easy money. Interest rates remain low, credit demand is up, and banks--the best of which have cleaned up their loan portfolios--are feeling generous again.

As always in Asia, the broad-brush picture hides many fine details. Hong Kong and Singapore aren't seeing as strong a growth in consumer spending as elsewhere. In Hong Kong, especially, perceptions of household wealth have always been tied to the property market, and because property prices have been slumping since 1997--with no end in sight--people just don't feel rich. While I was visiting there last month, the unemployment rate rose to 7%, the highest since 1981. In many years of trips to Hong Kong, I can't remember a time when the economic sentiment of those I talked with was quite so gloomy. Farther afield, there continues to be real doubt as to whether India and China can generate the growth needed to find jobs for their ever expanding populations.

But in most of the region, the prospects are encouraging. U.S. businesses still find Asia an attractive place to build plants. Given trade liberalization in China and rising consumer spending in most of Asia, persistent American firms are being rewarded with fresh demand for their products.