Asia's Export Economies: A Failed Model?

The Wall Street Journal had a dry but important piece Sunday morning on the decline in Chinese manufacturing. The numbers that the Chinese are reporting may or may not accurately reflect the reality of the current state of the Chinese economy, but even if puffed up they point to an economy heading towards recession.

Which leads into an article on the Telegraph.co.uk site by Ambrose Evans-Pritchard, who argues that the economies of Asia and the West have locked themselves into an unholy alliance that threatens to spiral down to a global depression. After reviewing the numbers, he gets to the meat of his argument:

A stale debate simmers over whether the Great Bubble was caused by Anglo-Saxon and Club Med hedonism, or by an Asian “Savings Glut” spilling into global bond markets and fuelling asset booms, as Washington claims. It was obviously a mix.

Two cultural systems interacted through globalisation, locking each other into a funeral dance.

The point is that this experiment has now blown up. Whether or not we slam straight into a global depression depends on how we – East, West, all of us – handle this.

The top sources of net global demand as measured by current account deficits over the last 12 months have been the US ($697bn), Spain ($166bn), Italy ($71bn), France ($57bn) Australia ($57bn), Greece (53bn), Turkey ($47bn), and Britain ($46bn).

Most are tightening their belts drastically, and in the case of Britain the shift has been so swift that the arch-sinner may soon be in surplus. If they are draining world demand, then world demand is going to collapse unless others step into the breach.

The surplus states – China ($378bn), Germany ($266bn) Japan ($176bn) – have not yet done so, which is why the global economy went off a cliff in October, November, and December. Beijing is planning a $600bn fiscal blitz.

Pritchard seems to have substantial doubts as to the commitment of the Chinese and others to spend in order to prop up demand. To my mind, he doesn’t fully explore the issue of what happens in the medium term. Certainly countries can step in and create demand, but that is hardly a prescription for viable long-term global growth. If the Western consumer truly does permanently cut back, either voluntarily or because credit availability is reduced, that component of consumption has to be somehow replaced. Can the Asian countries make that sort of adjustment?

Perhaps in the long run they can, but doing so requires a massive shift in preferences among their citizens. The fact that most of the countries in the region lack viable social safety nets only contributes to the propensity of their populace to save rather than consume. Changing these behavioural patterns is most likely something that will only occur generationally. It’s doubtful that salvation will come from Asian consumers.

Pritchard, like so many others, is dancing around the central problem. If the West does indeed see its consumers pull back and the credit jet fuel restricted, then there is simply going to be a smaller economic pie for everyone to cut up. How we do that is the question no one seems to want to address. It would be useful to begin to describe what we mean by normal as we aspire to recover from this downturn. If it’s a different normal than what we have been used to, and by that I mean a smaller normal, then we need now to begin talking about how we live with it and structure societies around it.

Comments

[Moon Kil Woong:]

I think the main problem with the Chinese economy is the vast concentration of wealth. The people would spend if they could but with the huge wealth disparity and the few mega-rich can you expect the ultra-elites to really buy more gold diamonds and Rolls Royces? You need a middle class to have real economic growth and internal demand. A few billionaires does not make a real economy.

At the other end, the concentration of wealth and the shrinking middle class in the US will also lead towards a less stable economy. Although these are long term macro-trends they still should factor into a concise economic analysis of any country.

Trade is good when it creates lower inflation and prosperity. It becomes bad when it creates asset volatility, wealth imbalance, and social unrest.

Jan 05 10:47 AM

[damonmcalli...:]

The current ideology based on the antiquated ideals of import/export (goods/services) economies has official came to an end. This idea of exponential growth that is fixated within the constraints of a finite world has been kicked around for far too long and we (globally) have hit the wall (vertical ascent of the curve.) Estimates of dwindling resources pertaining to all commodities have been touted by creditable sources for years. At our current pace almost all viably extractable resources would be above ground within the next two decades. The future models need to be based upon sustainability, with economic growth more aligned with informational resources then natural resources.

Jan 05 11:20 AM

[Chris B:]

The percentage of income that US consumers save instead of spend will revert back to the long-term mean of 10% (vs. current 2%) and may overshoot to 15-20%.

-Baby boomers are nearing retirement.
-Household debt levels are at all time highs and have to be paid off.
-Like Japan in the early 90's, the US demographic profile is graying, meaning less consumption.
-Continuing healthcare shortages in the US will encourage emergency savings (i.e. lack of safety net).
-Credit availability won't reach 2005-2006 levels for years.

This is a disaster for economies dependent on exports to the US. Thus, China is a leveraged bet on US growth, the exact opposite of decoupling. The silver lining would be if the communist leadership expanded the number of elected positions, or went full democracy, to allow the people to vent. Russia went this way in the 80's-90's when its out of control defense budget caused economic collapse.

Jan 05 02:23 PM