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ASIA: TORRENT TO TRICKLE?
The U.S. consumption binge was fodder for export-led economies everywhere. This was especially the case in Asia, which since the turn of the century has been the world's fastest-growing major region. In search of rapid growth in order to achieve its development and poverty-reduction objectives, developing Asia viewed America's consumption binge as manna from heaven. Consumption-deficient Japan had a similar response, as did large, newly industrialized economies such as Taiwan and Korea.
Indeed, exports provided high-octane fuel for Asia's growth, accounting for more than 45% of pan-Asian GDP in 2007, which was a record and was more than 10 percentage points higher than the share prevailing in the mid-1990s. But this left the region more dependent on external demand than ever before. And with the American consumer — the biggest source of that demand — now in trouble, Asia's export-led growth formula is getting squeezed.
After two years of nearly 12% GDP growth in 2006-07, China's slowed to 10.1% in the second quarter of 2008, largely because of lower growth of exports to the U.S. Now the Japanese and European economies — which collectively account for about 30% of China's total exports — are weakening. This could well prompt another drop in Chinese GDP growth, from 10% to 8% within the next year.
Japan's economic position is more precarious. Japanese exports turned down in June 2008 for the first time in 16 months. At work was emerging sluggishness in Japanese exports to Europe and elsewhere in Asia — once resilient markets that previously had been masking growing weakness in the U.S. While China has a huge cushion (its double-digit growth rate) to ward off the blow of an external shock, Japan's economy has been growing at just 2% in recent years. In a weaker external demand climate, there is a distinct possibility of a recessionary relapse in the region's largest economy.
Asia's adjustments should not be surprising. The global boom of 2002 to mid-2007 was an outgrowth of the powerful linkages of globalization. No region benefited more from this connectedness than Asia. These linkages are just as strong on the downside of the global business cycle as they are on the upside. Connectivity is now hitting Asia head-on.
HARD LESSONS
It didn't have to be this way. America went too far in its borrowing and spending sprees, and the rest of an export-dependent world was more than happy to go along for the ride. Policymakers and regulators, the stewards of the global economy, looked the other way and allowed the system to veer out of control. Investors, businesspeople, financial institutions and consumers all enjoyed the fruits of this boom. Now that it is over, can an interdependent world learn the tough lessons of the current upheaval?
These developments underscore the perils of misguided open-ended growth strategies. The U.S. couldn't hit its growth target the old fashioned way, by relying on internal income generation, so it turned to a new asset- and debt-dependent growth model. Similarly, developing Asia became overly reliant upon its export-led model. The credit crisis is a strong signal that these strategies are not sustainable. They led to multiple layers of excess, fueling dangerous housing and credit bubbles. These bubbles have burst, unmasking a worrisome financial and economic disequilibrium. This demands a new approach to policy as well as significant behavioral shifts by households, businesses and financial-market participants.
Financial and economic crises often define some of history's greatest turning points. They can be the ultimate in painful learning experiences. If all the authorities can do is opt for politically-expedient quick fixes — such as tax rebates for overextended American consumers, lax monetary and currency policies for inflation-prone developing economies and the creation of more asset bubbles — the world will have squandered a critical opportunity to put its house in order. That would be the greatest tragedy of all.
Stephen Roach is chairman of Morgan Stanley Asia and was the firm's chief economist