To get the latest take on the economic recovery in Asia, the Business Journal spoke with Ross C. DeVol, director of regional studies and demographics at the Milken Institute in Santa Monica.
DeVol is the author of "The Asian Crisis Tsunami: Trade and Other Impacts on California and the United States," a study published last year by the institute.
Though DeVol believes the recovery that began this year will continue at an increasingly faster pace through 2000, he says the days of 8 percent growth in Asia are long gone.
Question: To what extent is Asia making a comeback?
Answer: From a short-term macro-economic perspective, there are parts of Asia that are coming back. Overall, the decline was fairly close to what people were expecting, say, in late 1997 for 1998.
South Korea had a very severe recession last year, a decline of almost 6 percent of the gross domestic product. But Korea looks like it is coming out of the crisis first. First-quarter GDP was up, which is a very good sign. And you see all the other indicators, such as industrial production, improving again.
Orders are up for industrial equipment, computers and other capital goods. So, it looks like South Korea, at least in the near term, is improving. It remains to be seen whether the structural reforms in the financial system, the banking sector, and throughout the economy are going be implemented and carried out.
Q: What about Japan?
A: Japan, of course, is the largest economy in Asia, and got some very good numbers in the first quarter of this year, suggesting their economy is really bouncing back and showing a year-over-year increase.
In 1998, Japan's economy contracted 2.3 percent, and that was the worst recession in the post-war period. While I see the first-quarter numbers in Japan as encouraging, I think they are very misleading in that most of the increase was due to government expenditures. Consumption expenditures were flat, and retail sales continued to be weak.
The Japanese consumer is still suffering from very low expectations that the economy will recover; therefore, their confidence is very low. It remains to be seen how vigorous their recovery can be given all the structural difficulties that in some cases are beginning to be addressed. It will take a decade of serious action for Japan to make really substantive progress on structural issues.
Q: Are the other economies that were impacted by the financial crisis two years ago doing any better?
A: Hong Kong had a 5 percent decline in GDP last year, and unfortunately it did not come back in the first quarter of this year.
Of course, Indonesia was the true basket case of Asia in 1998, when its GDP declined almost 14 percent, and there was real pain and suffering. It looks like Indonesia bottomed out in the first part of 1999, although there clearly hasn't been any recovery yet.
It looks like Malaysia and Thailand also have bottomed out. Taiwan actually continued to grow throughout 1998, but its growth rate was approximately cut in half from what it had been prior to the crisis.
China has been a key ingredient in this whole crisis, in that its economy has continued to grow at about a 7 percent rate. A lot of that is due to the government purposefully spending vast sums on infrastructure projects like dams, highway construction, communication and transportation, with the hope that it can keep its economy moving forward and not be hurt too much by declining exports to the rest of Asia. So, non-Japan Asia appears to be recovering, meaning the worst is over, which is obviously good for us.
Q: How sustainable is the recovery in South Korea and Japan without the structural changes you refer to?
A: It is a major issue. To a large extent it is a question of access to capital. One thing that is clear in Korea, and to a lesser extent in Japan, is the reliance on banks for financing. So, with the chaebols (typically large, family-owned conglomerates) playing a large role in the banking system, it is difficult for funds to get into the hands of entrepreneurs to start new businesses. That's one of the key financial, structural reforms that needs to take place. There has been legislation passed (in South Korea), but the chaebols account for a larger share of Korea's economy today than they did three years ago. So it is an open question whether Korea's recovery is sustainable.
Q: What are the ramifications of the Asian recovery for the L.A. economy?
A: We had a collapse in exports to Asia in 1998. For the state of California, exports to the Asian 10 were down slightly over 20 percent. That's a major collapse. The good news, looking at the first-quarter export numbers, is that the declines are not nearly as severe as they had been in 1998. In fact, we had a fairly large increase in exports to Korea. Exports to Japan were still down in the first quarter, although not by as much. As we move into the second half of 1999, assuming that Japan is on an upward trajectory, that says very positive things about what will happen to our exports.
Q: What kind of exports are we looking at in this context?
A: It is mainly high-tech, capital goods. It's computers and related products, electronic components, industrial machinery, and search and navigation equipment. We had major declines in exports in those categories. But as we get into the second half of the year, I would expect to see exports of capital goods begin to pick up again, as Asian consumer purchases of computers begin to accelerate.
Q: Los Angeles was not as badly hurt as the Bay Area by the Asian recession because we export fewer high-tech products. Is there any reason to think we will reap the benefits from an increased demand for those kinds of products?
A: There were some negative aspects from Asia here. You look at the numbers, and you see that employment in instrument (production) is down about 4 percent year over year. You see it in aircraft, and you see it in computers, down about 3.5 percent year over year.
But, those sectors are not as large a part of our economy in Southern California as they are in the Bay Area.
Tourism from Asia was down substantially last year, but that's starting to recover. So, overall it was hard to see, on the aggregate, much of an impact from Asia. But, as exports pick up, there will be somewhat of a positive effect overall.
Q: Will local manufacturing benefit from increased Asian demand?
A: Manufacturing is still a large part of the Los Angeles economy, but the capital goods that Asia is going to be buying are not produced that much here. More so in Northern California. There will be positive aspects from the recovery for electronics, electronic components, industrial components, and computers here.
Q: Will an Asian recovery have an impact on imports, which have helped fuel the local economy?
A: I expect a reduced rate of increase in imports. They are still going to grow very vigorously, first of all, because the U.S. economy is doing so well and we are sucking in imports. The value of the dollar is very high still, which increases our purchasing power of foreign goods. So overall import growth will stay strong although not as high as it has been but we will get a better balance between exports and imports than we had in '98.
Q: What are the opportunities for foreign companies doing business in Asia?
A: If there was any one thing that has been positive about the Asian crisis in terms of foreign investors, especially from the U.S., it's that it is starting to open the capital markets. It is much easier for an American firm to acquire assets in Asia today than it was three years ago.
It is still difficult, however. There is a lot of bureaucratic red tape you have to go through, and sometimes the bidding processes can be very confusing. It's actually in Asia's best interest to allow foreign firms to infuse some new capital into these industries and perhaps reinvigorate them. Asia has been pretty much closed to direct investment. They have been open to short-term capital flows, but not to long-term, direct investment.
Q: What is your prognosis for the next 12 months?
A: My sense is that the '99 numbers will, in most cases, be positive in terms of growth, and by 2000 growth will return to a much higher rate. But the growth rate that Asia goes back to will be substantially lower than it had been prior to entering the crisis in mid-'97. Countries like Korea, Malaysia, Singapore and Taiwan that had been growing 7 percent to 8 percent will have maximal sustainable growth rates of 5 percent to 5.5 percent. The days of 8 percent growth are over in Asia.
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