The “Asian miracle” is looking sickly these days. For years, Asia produced astonishing rates of economic growth that transformed backward societies into industrial powerhouses. Surging prosperity has now virtually erased the worst poverty (defined by the World Bank as income of $1 a day per person) in Thailand and Malaysia, duplicating the earlier feats of Japan and South Korea. Asian societies seemed to have found the secret to rapid economic growth. All this is now under a cloud.
Japan’s growth has slowed to a crawl; between 1991 and 1995, it averaged 1.1 percent compared with U.S. growth of 2.6 percent. Earlier this year, two giant Korean steel companies went bankrupt, and the government had to aid banks that had lent to them. Now comes Thailand. Overloaded with foreign debt, it has devalued its currency and embraced austerity (higher taxes, tight credit) to curb a voracious appetite for imports. Similar problems afflict Malaysia, Indonesia and the Philippines.
What’s going on?
It’s possible to view these crises as isolated setbacks. After all, the Asian economies aren’t carbon copies of each other. Consider Thailand. The immediate cause of its problem is financial. Its companies could borrow at low interest rates abroad (usually in dollars) and convert the funds into local currency (the Thai baht) and then spend or relend the money–at higher interest rates. In 1995, rates on short-term dollar loans averaged around 6 percent; lending rates in baht varied between 8 and 12 percent. Huge profits might be made as long as the dollar/baht exchange rate remained fixed.
The trouble is that Thailand squandered much of the borrowed money. The loans spawned a construction spree that has left a glut of unneeded apartments and office towers. The overbuilding, like most speculative orgies, fed on infectious optimism. The richer the Thais felt, the more they splurged. For a while, Thailand was one of the world’s fastest growing markets for Mercedes. By 1996, the current account deficit (the excess of current imports over exports) reached almost 8 percent of gross domestic product.
This could not continue. Dollars were recycled to buy imports, and Thailand could not borrow enough to service past loans and buy more imports. So the baht has dropped 40 percent in value since June. The building boom has collapsed, and many Thai firms will have trouble repaying dollar loans. In 1995, Thailand’s economy grew 9 percent; private forecasts for 1997 and 1998 are in the 1 to 2 percent range.
Examined this way, all the ailing Asian economies can be cast as victims of separate mistakes. But this perspective is too narrow. It misses many worrying similarities. For starters, most of these countries have relied on export-led expansion, emphasizing the American market. In 1996, the United States absorbed 28 percent of Japan’s exports, 18 percent of Thailand’s and 18 percent of Malaysia’s. It’s hard for everyone to win at the same game, especially with China as a huge new competitor.
As an alternative to export-led growth, countries have turned to other approaches. So far, these have proved self-defeating. In the late 1980s, a rising yen made Japanese exports less competitive. To spur its economy, Japan kept domestic interest rates low and credit easy. This created a temporary construction and investment boom: the infamous “bubble economy” that ultimately ended in overbuilding and bad bank loans. Thailand had less need for stimulus. But foreigners were eager to invest, and the outcome was similar.
Where does this leave the Asian miracle?
What’s clear is that, except for the poorest countries (notably China), the past formula for success is stale. Countries need to move beyond becoming export platforms by adopting foreign technology. They need stronger local markets that can generate sustainable consumer demand without relying on artificial credit booms. And they need more balanced trade among themselves.
Nor do the high savings and investment rates, typical of Asia, guarantee success. More crucial is converting ample savings into productive investments. With less favorable export markets, this is proving a shared problem. Lax bank rules in Japan and Thailand led to poor investments. In Korea, banks were induced to lend to “strategic” industries. This caused overinvestment “in shipbuilding, petrochemicals, steel and computer memory chips,” says Gregory Fager of the Institute of International Finance. The steel bankruptcies were one result; another has been the collapse of prices for memory chips (from about $30 a chip to $5 or $6). This has depressed exports and hurt growth.
Asia’s very success has put it in peril. Economic growth creates new popular expectations and new social and political interests. All of Asia’s governments come in two broad varieties: young, fragile democracies; and older, fragile authoritarian regimes. It is an open question whether these governments can satisfy the growing demands placed on them and still create a climate that fosters strong economic growth. If they do, it would not be a miracle; but it would be mighty impressive.
