Part Two: Predicting the Economic Success of Asia

By Dr. Scott B. MacDonald

Asia is enjoying a period of solid economic growth: current account balances are generally in surplus, and foreign exchange reserves are at record high levels. In China, the region's new economic locomotive, efforts to achieve a soft landing appear to be succeeding, albeit in a gradual fashion. Elsewhere, India has achieved a change in government and many of the key elements of the country's economic reforms are intact.

Generally speaking, good news also dominates in Southeast Asia. Even in Japan, economic reforms have helped set the stage for what appears to be a sustainable recovery. The task ahead for many Asian governments and businesses is to manage success and not fall back into the pitfalls that led to the Asian financial crisis of 1997-98.

Clearly a very strong desire on the part of most Asian governments not to relive the socio-economic disequilibrium of the late 1990s has resulted in a substantial stockpiling of foreign exchange reserves (China has $483 billion), measures to improve corporate governance, and the restructuring of financial sectors. In some cases, there has been an improvement on labor market flexibility and less red tape for foreign investment.

Asia is also benefiting from relatively benign international economic conditions. In particular, the region's major trade partner, the United States, is enjoying moderate economic growth. In addition, European economic growth is set to accelerate moderately in 2005, which should help maintain export expansion in Asia.

Although there is a strong likelihood that Asia will continue to enjoy strong economic growth through 2004 and 2005, there are some clouds on the horizon. Asia's strong pattern of economic expansion can not happen without access to vast amounts of natural resources. In particular, China's spurt of industrial expansion over the past three years has fueled heavy demand for natural resources. The recent round of oil price hikes were, in part, caused by strong growth in China, which combined with renewed demand in the U.S. and geopolitical uncertainties in key oil producer nations, led to a sustained rise in international hydrocarbon prices. Some 30% of China's energy needs are imported. And behind China is India, with a population of around one billion and an increasing consumer appetite that will raise energy needs.

Asia's need to maintain strong levels of growth is renewing the old debate over securing access to key resources. While it is doubtful that any Asian countries will come to blows over coal or copper, oil is another matter altogether. For energy deficient countries such as China, South Korea, and Japan the economic lifeline extends from their home ports in the Pacific to the Middle Eastern and Central Asian oil fields. This raises issues of the security of supply lines as well as potential areas for exploration. Closer to home, it means greater attention to overlapping national claims in such areas as the Kurile Islands and the South China Sea around the Spratly Islands. In the latter, tensions have run high in the past, as reflected by a 1988 naval battle between Vietnamese and Chinese forces.

For much of Asia, economic growth was and remains export-driven. While there is a degree of complementary exports, China's long growth spurt (beginning in 1978) has elevated it into a competitor for many of the same goods produced by other Asian countries. Thailand, Malaysia, South Korea, and Japan have all felt the impact of competitive Chinese exports, based on lower labor costs. Japan and China have already locked horns on a number of trade issues and more are likely. As China climbs the industrial ladder, its competitive nature will only increase and trade frictions are likely to rise.

Other obstacles include the weakness of the Asian financial sector, where reforms have been made but more must occur, and poor corporate transparency and disclosure that hurts investors. Last, but hardly least is the threat of terrorism. There are elements throughout the region that feel marginalized by the formal political system and have opted for terrorism as a means to achieving their goals.

Yet, for all the potential points of economic derailment, Asia is more likely to stay on track. For all the tensions emerging in the region, there are critical reasons for governments to find peaceful solutions. Common economic gains are likely to outweigh the potential for conflict. Consequently, the major task confronting Asia is how to manage the challenges and avoid the pitfalls, something that it can do considering the political will and vision its leadership has demonstrated in the past. Prior to the Asian financial crisis there was considerable discussion about the Asian Century; that talk was premature, but the years ahead could be just that