An Agenda for Asia

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Japan won't be the only country suffering. In late October, India's central bank lowered its GDP growth forecast for the current fiscal year to a range of 6-6.5%, citing a mediocre monsoon season and high oil prices. Last year, the economy grew 8.2%. Southeast Asia, too, will see a decline, from 5.8% growth this year to 4.4% in 2005, according to Merrill Lynch. In Indonesia, the region's most populous country, hopes are running high that new President Susilo Bambang Yudhoyono will push through tough reforms and woo back the investment needed to spur the sagging economy. But the biggest worry is the Philippines, where ballooning debt and endemic budget deficits are sparking fears that the country could slip into a debt crisis.

Nevertheless, China will be the biggest economic challenge facing the U.S. President. For the American public, China is replacing Japan as an economic bogeyman. Though the criticism isn't entirely fair, the fears of China's growing economic dominance in Asia are real. In the early 1990s, Japan's share of the deficit spiked at more than 50%, but it since has sunk to about 10%. Meanwhile, China's share has slowly crept upward, to more than 20%, and now represents the U.S.'s largest deficit with any country. The trend is set to continue as Beijing opens the mainland's economy to meet the terms of WTO membership. Bush will also have to keep a spotlight on the Chinese policy of pegging its currency, the renminbi, to the U.S. dollar. The Bush Administration has criticized Beijing for keeping its currency artificially undervalued, making Chinese-made products more competitive and investment in China more attractive. "The buildup of the deficit with China is becoming very serious," says Charles Chang, managing partner of investment consulting firm Accolade Inc. in Seoul. "The next President has to continue the effort to relax control of the renminbi."

Chinese officials argue that the mainland needs to fix major domestic financial problems, such as a banking sector riddled with bad loans, before tackling currency reform. In any event, President Bush will be able to push China only so hard. America is becoming more and more dependent on Asia for its own growth. U.S. companies, from General Motors to Motorola to McDonald's, are banking on China as a substantial source of future profits. Cheap imports of toys and electronics from China fill stores in the U.S. and help keep American consumers spending and supporting their own economy. And the Chinese government is the world's second largest foreign owner of U.S. Treasury bills, in effect funding Washington's ballooning budget deficit.

The U.S. President's policy toward that budget deficit could prove to be a major factor for the economies of Asia. If the deficit is steadily reduced, growth in the States might slow and drag down Asian economies with it. But if the deficit continues to expand, the impact might be even worse. Beijing and Tokyo might lose interest in buying U.S. government bonds, which would speed up the deterioration in the value of the dollar and exert painful pressure on the global economy. "If the U.S. continues with the current fiscal policy, the chance of a dollar crisis is high," says Kenneth Courtis, Tokyo-based vice chairman of Goldman Sachs Asia. "That would create a lot of turbulence in the region." None of which would be good for the new Administration.

OUTSOURCING
Anger Management
By Aravind Adiga | New Delhi

It's a sign of how heated a topic outsourcing became during the U.S. election campaign that even Osama bin Laden got roped into the debate. Claiming that George W. Bush should have used American troops to hunt down bin Laden in Afghanistan instead of handing over the task to local warlords, John Kerry charged that Bush had "outsourced the job of capturing [bin Laden], just like he outsourced a lot of American jobs." Kerry hammered Bush for not doing enough to stop the flight of American jobs to countries like India, and assailed a U.S. law that encourages outsourcing by allowing companies to defer paying taxes on money earned overseas. He said that if he were President it would take him "about a nanosecond" to decide to try changing the law.

That's why executives from India to the Philippines are greeting President Bush's re-election with a huge sigh of relief. During Bush's last term, the outsourcing industry in Asia grew at an astonishing rate. Tata Consultancy Services, India's largest exporter of software services, saw its revenues surge 44% between July and September this year, compared with the same period last year; revenues at Infosys, another major Indian tech firm, grew 51%. Many U.S. companies aren't just sending call-center jobs and low-end software programming abroad; they're using India's enormous pool of highly qualified and cheap labor to cut their research-and-development budgets. Google, for instance, opened an R.-and-D. center in Bangalore earlier this year to explore ways of improving its online search tools.

Asian outsourcing firms hope Bush will now give them a further boost by increasing the annual quota of American H-1B visas. Indian tech companies rely on these visas—which allow skilled foreigners to migrate to the U.S. for three years—to send teams of software engineers to clients' American offices for on-site training. But current U.S. law restricts the number of H-1B visas to only 65,000 a year—woefully inadequate to meet the Indian tech companies' needs. Without more visas, India's outsourcers will have to hire Americans to do their on-site work—which would significantly bump up their labor costs.

Under Bush, outsourcing should continue to fatten American corporate profits, but it also threatens to leach millions of jobs away from the U.S. service sector. The challenge for Bush is to ensure that American workers receive the higher education and vocational training they need, so that it's still worth paying them a premium. If he fails to do so, Asia will benefit.