EAST ASIA: Economic crisis mark II

Issue 

BY EVA CHENG

During 1999-2000, four of the Asian countries most seriously hit by the 1997-98 economic crisis — Indonesia, South Korea, Malaysia and Thailand — appeared to be recovering sharply. But things swiftly turned sour at the end of last year, with the first signs that the US economy was slowing.

Compared to the previous quarter's figures, investment in South Korea had increased 36.8% in the third quarter of 1999, in Indonesia it jumped 40.2% in the fourth quarter of 2000, in Malaysia it rose by 47% in the third quarter of 2000 and in Thailand investment jumped 26.6% in the first quarter of 2000.

However, now these countries' exports are plunging, as are their foreign exchange earnings. All are likely to end the current quarter with a smaller economy.

At the moment, Singapore is in most trouble. With its economy shrinking by 10.6% in annualised terms during the first six months of this year, the contraction is the sharpest in the country's history and a far cry from the 9.9% growth in 2000.

Taiwan's economy, which was growing at 6% last year, contracted by 2.35% in the June quarter, its worst decline since 1976. Exports, which generate half of Taiwan's gross domestic product (GDP), dropped in July for the fifth straight month. Many other economies in east Asia also looked very sick, with the exception of China.

In fact, South Korea, Taiwan and Hong Kong — which together with Singapore were portrayed until 1997 as the brightest economies in the region — are also in the biggest mess, according to the International Monetary Fund (IMF).

In its World Economic Outlook 2001, released in late September, the IMF said: "The economic slowdown has continued to be steepest among the four newly industrialized economies [NIEs] and Malaysia, which were furthest advanced in recovery from the 1997-98 crisis."

The NIEs, also dubbed the "four dragons" until 1997, were said to be almost on par in industrial development with the established industrialised economies. Malaysia, Thailand, Indonesia and the Philippines, dubbed the "four tigers", were said to be trailing closely behind. South Korea's 1996 admission to the rich-country club of the Organisation for Economic Cooperation and Development seemed to have added weight to the NIE thesis.

The World Economic Outlook 2001 continued: "Export growth in all five has turned down sharply, accompanied by a rapid decline in industrial production ... These developments have been exacerbated by slowing domestic demand growth."

Until the recent downturn, propagators of the NIE thesis seized upon the apparent 1999-2000 recovery as evidence that many Asian countries were back on track to catch up with the industrialised countries and that the 1997-98 crisis was a temporary setback.

Down with the USA

Singapore's deputy prime minister Lee Hsien-Loong traced the origin of his country's current downturn to the US economy, saying: "If they are down, we are down".

Lee's diagnosis applies to many other Asian countries, especially the NIEs, but with one modification: they are not just dependent on the US but also on other imperialist centres such as Japan and the 15-member European Union, through credit, investments and trade.

Typical of the "mainstream" explanation of Asia's current downturn, the Asian Development Bank said in its Asian Recovery Report 2001, released in September, that "Exports played a key role in reviving the region's growth in the aftermath of the 1997 financial crisis, but are now leading the economic downturn".

More specifically, electronics exports played a critical role, JP Morgan Chase's research head Bijan Aghevli told the September 6 Far Eastern Economic Review, adding that "over dependence on electronics exposes the region to huge cyclical swings".

These arguments are based on partial facts, taken at face value, and result in misleading conclusions.

East Asia's reliance on exports is hardly new. It has been the case since the 1950s, the hey-day of the region's first inroads into manufacturing. In those days, they were in most cases low value-added and labour-intensive activities taking advantage of cheap labour.

Though the "four dragons" have gradually replaced the production of textiles and garments with the production of electronic parts or other higher value and "high-tech" components, it has not laid the foundations for the type of industrialisation that the imperialist countries have been able to achieve.

Thriving on plundering the materials, energy or labour of oppressed countries, now collectively called the Third World, the imperialists' predatory economies have excluded late-comers from joining their club.

Exceptions?

South Korea and Taiwan appeared to be key exceptions, particularly due to their big investments in physical infrastructure and in some heavy industries such as steel production and shipbuilding. But they could fund such ventures only due to extraordinary US, and indirectly Japanese, backing that was aimed at maintaining them as bastions against Communist China and, to a lesser extent, North Korea. Secondary technologies were more liberally passed on, but still controlled through patents and royalties.

As city economies, Singapore and Hong Kong achieved impressive growth by serving the major neighbouring economies of Malaysia and China respectively.

But South Korea, Taiwan, Singapore and Hong Kong remained inherently dependent, notwithstanding the high-tech facades and hype that they have made it to industrialisation.

The contradictions surrounding South Korea's "industrialisation" have become particularly acute since the mid-1980s because it sought to compete directly with the imperialist centres in bread-and-butter industries such as car manufacturing and shipbuilding.

Many of South Korea's industries rely not only on the overseas markets but also on essential overseas inputs which require foreign exchange. A shortfall between such international payments and receipts often occurred and were funded by mounting international borrowing. This situation was made worse by the Korean government's heavy reliance on borrowing to fund its deficit spending and that of the private sector to fund investments.

All this has made the country vulnerable to significant changes in funding costs and availability (crucial to "roll over" existing credit lines to support ongoing operations). Major movements in exchange rates, interest rates or even stock market values can tip the precarious balance.

For example, in an attempt to minimise uncertainties, many Asian countries pegged their currencies to the US dollar, their key market. They benefited significantly during the first half of the 1990s when the US dollar depreciated against the yen, boosting their exports. But fortunes were reversed as the US dollar has strengthened since early 1995. The situation was made worse by speculative capital which involved enormous sums and was ready to pounce for lucrative profits, hugely magnifying volatility. This was what happened in 1997.

Structural dependency

Such structural dependencies and weaknesses also apply to other "fast" developing Asian economies, despite the general absence of heavy industries. But fierce competition among them in low value-added manufacturing (electronics in particular), which target the same key markets, has increased their vulnerability. A major plunge in the price of semiconductors triggered the 1997 crisis.

The "mainstream" arguments that have sought to explain the crisis as being a result of crony capitalism, over dependence on short-term foreign currency borrowing or fixed exchange rate systems totally evade the fundamental structural problems of the Asian economies that the IMF bailouts have sought to reinforce.

These problems were again temporarily papered over by the 1998-2000 "dotcom mania" in the US, a stock market speculative bubble centring around information and communication technologies (ICT). This major wave of overinvestment started to unwind in mid-2000.

This rush of ICT investment had Asian factories running hot in 1999-2000 to produce electronic parts. But the orders evaporated just as swiftly following the US "tech-wreck" of March 2000.

Not materially different from before 1997, despite reduced imports, many East Asian countries have remained heavily in debt in an attempt to plug their perpetual international balance of payments deficits. Last year, Indonesia's external debt was equivalent to 97% of its GDP, Thailand 66%, the Philippines 76%, Malaysia 48% and South Korea 28%.

The recent wild swings in East Asia's fortunes aren't hard to understand, considering that the value of Singapore's exports last year reached 180% of its GDP, Malaysia's 125%, Thailand's 66%, the Philippines' 56%, Taiwan's 54%, South Korea's 45% and Indonesia's 39%. Also last year, electronics accounted for 64% of Singapore's exports, 59% of Malaysia's and the Philippines', 47% of Taiwan's, 38% of South Korea's, 33% of Thailand's and 15% of Indonesia's exports.

They are all aimed more or less at the same markets, the US and Japanese being the biggest (accounting for at least half of the exports of many Asian countries up until a decade ago). With rising intra-regional trade, their shares have declined but remain significant, taking for example last year 17% and 7% respectively of Singapore's exports, 24% and 11% of Taiwan's, 23% and 11% of South Korea's, 16% and 22% of Indonesia's, 23% and 16% of Thailand's, 30% and 15% of the Philippines' and 22% and 13% of Malaysia's.

The generally heavier economic weight of the US over Japan in East Asia explained why these Asian economies were still managing in the 1990s despite Japan's prolonged slowdown/recession since the early 1990s. The strong US growth in the 1990s helped prop up the East Asian economies, but not for long.

With the US now firmly in recession, there's no room for optimism in the region. With less integration with the capitalist world economy (exports accounting for 26% of its GDP), China has been hit less hard than its Asian neighbours.

As in 1997, a collapse of semiconductor/electronic prices has triggered a new economic crisis in East Asia. But this was only the trigger. The fundamental cause lies in East Asia's dependence on the imperialist economies, as in the case of other Third World countries.

These "core" economies, while engaging in dog-eat-dog competition among themselves, continue to create new cycles of "overinvestment"/overcapacity across many industrial sectors, resulting in a new round of boom and bust and taking the peripheral economies with them.

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