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Jumping for Joy in the Pacific

13 minute read
Charles P. Alexander

TIME’S economists forecast swift growth in East Asia and Australia

The Pacific Basin has become the place where America shops for everything from toys to machine tools. The U.S. this year will import goods worth an estimated $110 billion from East Asia and Australia. During the past 18 months, when the American economy staged a stronger recovery than expected, the powerhouse industries of the Pacific region shifted into overdrive. Singapore’s exports to the U.S. rose 51% in the first eight months of this year, and Japan’s jumped 46%. The flood of Asian products is a boon to American consumers, but it has stirred cries from U.S. companies and labor unions for protection from imports.

Against that backdrop, the TIME Pacific Board of Economists gathered in Tokyo for its third annual meeting to assess the region’s economic performance and prospects. The board members reported that East Asia is enjoying its most spectacular growth since the go-go years of the 1970s. Japan, the area’s industrial giant, is cruising at a 5% to 6% annual pace, while fast-rising South Korea, Singapore, Taiwan and Hong Kong are expanding at supercharged rates in the 7% to 10% range. Even China, which a decade ago was an economic backwater, is growing at a 9.5% clip.

The board predicted another strong, if slightly less stunning, performance in 1985. The TIME economists expect that most countries will grow at rates between 4.5% and 8% next year, while unemployment will stay in the 3% to 6% range.

The Pacific region is not without problems. Several less-developed nations, including Indonesia, Malaysia, Thailand and the Philippines, have been hurt by a slump in the prices they receive for exports of raw materials such as sugar, copper, tin and oil. Observed Board Member Narongchai Akrasanee, a senior vice president of Thailand’s Industrial Finance Corp.: “Commodity prices are really miserable.” Even so, Indonesia, Malaysia and Thailand have managed to maintain respectable growth rates of 4% or more. The only serious trouble spot is the Philippines, where economic mismanagement by the regime of President Ferdinand Marcos and continuing political unrest in the wake of last year’s assassination of Opposition Leader Benigno Aquino have plunged the country into a deep recession.

The TIME board recognized that Pacific prosperity is closely linked to the U.S. economic expansion. Growth in Western Europe and most other parts of the world is still sluggish. Said Lawrence Krause, a senior fellow at the Brookings

Institution in Washington, D.C.: “The U.S. economy is dominating world economic development again, just like it did in the 1950s and early 1960s.”

Asian nations are nervous about whether the American recovery will be long lasting. U.S. growth was only 2.7% in the July-September period, down from 7.1% in the previous quarter. Some of TIME’S economists expressed concern that the U.S. budget deficit, which will be at least $167 billion in 1985, might eventually drive up American interest rates and cause a recession. Narongchai noted that the combined gross national product of the Association (of South East Asian Nations (ASEAN), which includes Singapore, the Philippines, Indonesia, Malaysia, Thailand and Brunei, is only $200 billion. Said he: “All we produce in a year would barely be enough to pay for the misbehavior of the U.S. Government.”

Krause admitted that the deficit is worrisome, but noted that U.S. inflation is still low and that American businesses have not built up excessive inventories as they usually do before a serious production slump. Said he: “The factors that normally cause recessions in the U.S. are just not present.”

The Asian economists said that a sharp U.S. slowdown would be damaging to their nations but not devastating. To some extent, the Pacific economies can make up for a fall-off in exports by boosting production for domestic consumption. Said Edward Chen, director of the Center of Asian Studies at the University of Hong Kong: “When the U.S. does well, we do extremely well. But when it does not, we are still all right.”

The adjective that board members often used to describe their economies was “resilient.”

The outlook for key Pacific countries:

JAPAN. The major Western industrial nations can only dream about matching Japan’s current set of economic statistics: 5.3% growth, 2.7% unemployment and 2.6% inflation.

Bunroku Yoshino, president of Institute for International Economic Studies in Tokyo, predicted that those rosy figures would remain virtually unchanged through next year.

Japan’s export industries are so strong that the country is expected to pile up a $33 billion trade surplus in 1984. It is an embarrassment of riches that Japan does not know how to absorb. Said Yoshino: “We are not able to invest in our own economy all that we have earned.”

The country’s trading partners think that the Japanese should spend their surplus by sharply boosting imports. But Japan’s demand for foreign goods continues to be sluggish, partly because its people are notoriously thrifty, saving about 15% of their personal income.

Much of that money flows overseas.

This year alone, Japanese investors have salted away $25 billion in American bonds. Fortunately for the U.S., that cash is financing a large chunk of its budget deficit. Yoshino cited a light hearted suggestion by Chicago Economist David Hale that the U.S. and Japanese economies should get married. “After all,” Yoshino said, “the Japanese propensity to save would help the American eagerness to spend and borrow.”

SOUTH KOREA. Strangely, South Korea has been worried about growing too fast. In 1983 its economy expanded at a 9.5% pace, and the government of President Chun Doo Hwan became concerned that inflation, which was a modest 2.5% that year, might speed up. Officials remembered how a 29% inflation rate in 1980 helped produce a crippling recession.

To prevent a new price explosion, the South Korean government tightened the money supply and held public spending in 1984 to its 1983 levels. That turned out to be the right touch of restraint. Growth has cooled, but it is still a robust 7.8%. Meanwhile, inflation has stayed below 3%.

After managing the slowdown so successfully, the government now feels it has the latitude to increase spending next year by 10%. Board Member Suh Sang Mok, vice president of the Korea Development Institute, predicted that growth will hum along at a 7.3% pace in 1985 and that prices will rise only 2.5%. Said he: “I think our very low inflation rate is becoming more or less permanent.”

CHINA. In the late 1970s the government began allowing peasants to sell excess produce on open markets and pocket the proceeds. Result: sales of agricultural products are up 53.5% since 1978. Last month China unveiled a plan to extend similar capitalist-style reforms to its long-depressed cities. State-owned enterprises will be allowed to keep part of their profits, and managers will have new freedom to set wage levels and hire and fire as they choose. Most important, the prices of many products will be allowed to fluctuate according to supply and demand. Until now, the cost of such basics as rice and vegetables has been kept artificially low by government subsidies.

Board Member Chen said that the reforms would be a boon to China’s long-term prospects, but foresaw transitional difficulties. He predicted that China’s growth rate would ease from 9.5% this year to 7.5% in 1985. The new flexible pricing system may cause inflation to rise from 1.5% to 5%. In addition, efforts by enterprises to trim their work forces and become more productive could raise unemployment. Though the official jobless rate is only 3%, Chen estimated that about 15% of the population is “underemployed” at part-time and make-work jobs.

HONG KONG. Business confidence in Hong Kong got a boost in September after Britain and China inked a new agreement on the colony’s future. When Britain’s lease on most of Hong Kong expires in 1997, China will take political control. But Peking promised not to interfere with Hong Kong’s capitalist economy for 50 years after assuming sovereignty.

Surging exports of such consumer products as clothing, toys and watches have helped Hong Kong hit an 8.5% growth rate this year. Chen expects that pace to dip slightly to 6.5% in 1985, largely because of a slowdown in shipments to the U.S. Investment in new industrial plants and machinery is up 17% this year, but that has been offset by a continuing slump in commercial and residential construction. In the late 1970s and early 1980s, construction firms went on a speculative spree, and many of the luxury apartment and office buildings they put up are still not fully occupied.

TAIWAN. The thriving exporters of Taiwan are selling increasingly sophisticated products. Last year, for the first time, exports of electronics goods ($4.85 billion) surpassed shipments of textiles ($4.6 billion). The biggest surge has come in sales of computer accessories, including terminals, disk drives and printers. Spurred by an 18% increase in exports this year, Taiwan’s overall growth rate is about 9%. In 1985, Chen predicted, the pace of expansion will be about 7%.

Taiwan is worried about becoming too dependent on the U.S. market. Americans have bought 49% of Taiwan’s exports this year, up from 39% in 1983. The country’s sales to Western Europe have been sluggish because the value of the Taiwan dollar, like the U.S. dollar, has risen sharply during the past year against European currencies. As a result, Taiwan’s products have become more expensive for Europeans. In addition, slumping oil prices have hurt the buying power of Taiwan’s customers in the Middle East.

ASEAN. Among the countries in the Association of South East Asian Nations, the standout is Singapore, which is expected to end the year with an 8.6% growth rate. Exports of garments and electrical machinery have been brisk, and the government has stimulated the construction industry through heavy spending on public housing and Singapore’s new rapid transit system. Economist Narongchai forecast that growth will remain in the 8% range through 1985.

While Singapore shoots forward, the Philippines sinks. Bernardo Villegas, executive director of the Center for Research and Communication in Metro Manila and a guest economist at the TIME meeting, traced the Philippines’ troubles back to 1983. Because of excessive government spending, the country was suffering from 10% inflation and a serious trade deficit. “The Philippines,” said Villegas, “was like a patient in an intensive-care unit.”

Then, on Aug. 21, 1983, came the Aquino assassination. “It was,” Villegas observed, “as if a bunch of criminals entered the ICU and pulled the plug on the patient’s life-support system.” As Filipinos demonstrated in the streets, business confidence plummeted. The result: recession. Production is now falling at a 5% annual rate, and inflation is 45%. Said Villegas: “Suddenly, the Philippines is not sure whether it’s in Asia or Latin America.”

Villegas expects the Marcos regime to survive the uproar, but the economist predicted that a weakened government will be forced to restrain public spending and agree to economic reforms. Marcos may have to dismantle the sugar, coconut and grain monopolies headed by the President’s cronies. If substantial reforms go through, Villegas predicted, the Philippines could climb back to a 1% growth rate by the end of next year.

Unlike the Philippines, Indonesia has enjoyed political calm, for the most part, during the 18-year tenure of President Suharto. But the archipelago faces economic challenges. Falling oil prices have cut Indonesia’s earnings from its chief export, and the country’s current account deficit will be about $4.2 billion this year. On the bright side, agricultural production is strong. Narongchai predicted that Indonesia will achieve 4.5% growth in 1985.

Malaysia is currently enjoying a 6% growth rate. It might be even better, said Narongchai, were it not for tensions between the country’s major ethnic groups. Wealthy businessmen of Chinese descent are nervous about the government’s long-range plans to keep giving the native Malays a bigger role in the economy. Moreover, the government intends to curb its spending because of a persistent budget deficit that now totals 12% of the gross national product. Partly for that reason, growth may slip next year to 4.5%.

In Thailand, expansion has also been constrained by conservative economic policies. The government has restricted the money supply and imposed import controls to combat a worrisome trade deficit that was almost $4 billion last year. Narongchai forecast that growth would hover at its current level of about 5.5% through 1985. Looking at the long term, he voiced concern that half of Thailand’s population of 49 million is less than 20 years old. The influx of young people into the work force may aggravate unemployment, which now stands at 5.9%.

AUSTRALIA. In 1982 and early 1983 the Australian economy was virtually stagnant. But in the twelve-month period ending last June, production suddenly spurted by 10%, its best performance in 25 years. About a quarter-million jobs were created, and unemployment fell from 10% to 8.8%. Said Peter Drysdale, executive director of the Australia-Japan Research Center at the Australian National University in Canberra: “Australia is moving from a spectacular recovery into a period of solid and sustained growth.”

Much of the credit for the turnaround goes to the Labor government of Prime Minister Bob Hawke, which took office in 1983 and seems certain to win a new term in the coming election on Dec. 1. Hawke’s most important economic achievement so far has been to engineer an anti-inflation accord between labor and business.

Unions agreed to curb their wage demands if companies would hold the line on prices. The pact helped slash inflation from an 11% rate only 18 months ago to its current level of 3.9%.

While the economic outlook in most Pacific countries is bright, the political climate is less certain. In many East Asian nations, businessmen face perplexing questions: What will happen in the Philippines if the ailing Marcos should die or be forced out of office? Will Deng Xiaoping, the 80-year-old Chinese leader, live long enough to solidify his reforms? Will the North Korean terrorists who killed 16 South Korean officials in a bombing in Burma last year strike again?

Without dismissing such concerns, ic TIME economists said that the current prosperity in Pacific nations would smooth leadership transitions. Said Chen: “In many cases, if an economy does well, it helps stabilize the political situation.” Agreed Villegas: “Compared with the Middle East, Africa, and Latin America, East Asia is a haven of political stability.”

The most serious threat to Asian growth is what Yoshino called “the ugly problem of trade frictions.” As their imports have mounted, Western nations have persuaded Japan and other countries to accept “voluntary” limits on exports. The U.S. has curbed imports of cars and steel and tightened rules that restrict the entry of textiles.

The Asian nations can partially insulate themselves from Western protectionism if they expand trade with one another. Several countries are excited about China’s new eagerness to boost imports and forge economic alliances. Hong Kong’s exports to China have risen 81% this year. “For the first time,” said Chen, “China has become a very significant market for Hong Kong’s products.”

Many Asian countries insist that Japan should buy more from them. Thailand, in particular, is angry about last year’s $1.5 billion trade deficit with the Japanese. Thousands of Thai demonstrators marched last month in downtown Bangkok to kick off a boycott of Japanese imports.

If the Pacific countries can work out their differences, the TIME economists agreed, the potential for future growth in the region is staggering. Drysdale pointed out that since 1960 the percentage of world economic output generated by East Asia has climbed from 8% to 17%. That figure is likely to keep on rising for many years to come.

—By Charles P. Alexander

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