JANUARY 8, 2001 VOL. 157 NO. 1

Don't Panic, Spend!
Asia's response to the U.S. downturn should be to shop till it drops
By PHILIP BOWRING

ALSO
Lowdown on the Slowdown
America braces for a downturn as policymakers try to smooth
Fallout: If the U.S. sneezes, does Asia have to catch a cold?

Instead of being frozen with fear at the prospect of a U.S. recession, East Asia should start working now to offset its impact. An American recession is not inevitable, though a slowdown is needed. A corrective recession for the U.S. now would reduce the prospect of an even bigger one later, thereby avoiding the Japanese experience of the past decade and that of Asia's crisis-hit countries since 1997. The world needs to address trade and capital imbalances now, before they get worse. U.S. trade deficits and Asian and European surpluses must be reduced before they reach levels that induce panicked capital flight as happened in Asia in 1997. There has been nothing wrong with the record-breaking U.S. expansion, but there has been plenty wrong with the way it has recently been financed. The most visible sign of imbalance is America's current account deficit, which is likely to total $450 billion, or 4.5% of GDP, in 2000. This figure approaches Asian levels just before the 1997 crisis. Popular wisdom holds that capital has been surging into the U.S. to buy American technology and U.S. equities. Actually, much of the flow results from American firms and financial institutions borrowing abroad.

ALSO IN TIME COVER: Lowdown on the Slowdown America braces for a downturn as policymakers try to smooth the road ahead • Fallout: If the U.S. sneezes, does Asia have to catch a cold? • Viewpoint: America's woes spell opportunity for Asia THAILAND: Rules of Engagement The latest election pageant has exposed a familiar underbelly of guns, gangsters and political deception • Nowhere to Hide: The watchdogs try to clean things up CAMBODIA: The Taxman Cometh An American citizen leads a violent effort to topple Phnom Penh's government, sparking a moral dilemma for the U.S. CHINA: Rockabye Baby In far-western Yunnan province, women are making ends meet by producing infants for sale to wealthier Chinese JAPAN: Youth Gone Wild A disturbing film is prompting citizens—and opportunistic politicians—to reopen the debate on violent kids TRAVEL WATCH Killing Time: A Guide to Asia's Airports

More worrying than the deficit has been the buildup to double-digit annual growth levels of corporate, consumer and mortgage debt (which has dwarfed a modest decline in government debt). The U.S. debt explosion is a far deeper problem than the collapse of the technology stock bubble. Even before the recent economic downturn, the debt expansion had caused corporate bond yields to rise steeply, even as those on Treasury bonds were falling—a sure sign of fear. Interest-rate cuts from Alan Greenspan will make little difference if lenders smell trouble.

East Asian nations must realize that, if there is a sharp U.S. downturn, their salvation lies in their own hands. They—and to a lesser degree the Europeans—have essentially been sponsoring the U.S. consumer-spending and debt booms with excess savings. They are the ones with the persistent current-account surpluses that now dwarf the deficits some of them ran in the pre-crisis years. Over the past three years Malaysia's surplus has averaged a monstrous 12% of GDP; those of South Korea and Thailand are about 8%. China and even Indonesia and the Philippines have also been registering large surpluses.

Developing countries ought to be importing capital because they spend money more effectively in raising their own living standards. To be sure, before the crisis they imported too much capital, and now they need to consume. The same is true for the more mature economies that have long maintained surpluses—Japan, Taiwan, Hong Kong, Singapore. They tend to view excess savings as a sign of merit even if the savings are being invested poorly, by supporting the profligacy of others.

Can East Asia now stimulate domestic demand to offset the U.S. slowdown? Skeptics point to Japan, where massive government spending and near-zero interest rates have done no more than prevent another recession. But Japan, with its static population, aging workforce and surfeit of consumer durables, is the Asian exception. The rest of the region is crying out for more goods and services. China's efforts at stimulation—infrastructure spending, wage hikes and tax disincentives for savers—are paying off. Consumption is now rising faster than exports. The trade surplus is shrinking. Hurrah! Others should copy China.

For the smaller countries in Asia, a weaker American economy will soon mean lower U.S. interest rates and a weaker dollar. Splendid. Asian countries can cut interest rates too, without worrying that their currencies will go into a tailspin. Existing dollar debts will become cheaper to service. Those economies still pegged to the greenback, like Hong Kong, badly need weaker currencies.

The region will get a lift from the decline of oil prices from levels that slowed recovery in 2000. This should give a boost to consumers and perhaps even convince central bankers that, for now, inflation isn't a worry. In fact, the region needs a bit of inflation to get out of the trap of higher real interest rates and the debt overhang. There is nothing like an expectation of inflation to spur lower savings and more consumption. Many governments are sitting around waiting for an increase in investment to take over from exports. But the first requirement is higher consumption, without which there is no need to invest more.

In 1997 and 1998, the U.S. response to the Asian and Russian financial crises was to provide monetary stimulation for its own economy, and for those selling to it. The world benefited. Now it is the turn of Asian governments to do themselves and the world a favor by cutting interest rates, encouraging wage increases and refraining from ill-conceived "fiscal responsibility."

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