Economic Crisis Serves as Wake Up Call for Asian Export Market

The Economist has a short interesting story on the Asian export model. The article notes how the export oriented strategy grew among many Asian countries, how it became the essential strength of their economies and the devastation that the collapse in demand has wreaked on the strategy.

The article poses this question at the end. How do the Asian export economies adjust to a world in which demand remains permanently reduced? The answer to the question the author offers is that they have to develop a new model but haven’t admitted that fact to themselves.

No doubt the Asian economies would be well served by developing a stronger domestic economy and providing more social services. Getting to that point is going to be difficult, requiring wrenching political and economic adjustments. Those with vested interests in the export model are not going to go quietly.

All of this is based on the “new” conventional wisdom that the American consumer is gone forever. That in fact we are moving on to a world in which demand remains permanently depressed from prior levels and former consumers become savers. I think that there might be more wishful thinking than reality in this meme.

The history of the U.S. since the end of World War ll has been one of steady growth in production and consumption. Like any economy there has been waxing and waning of both but the trend line has been consistently up. It’s difficult to see why there should not be some mean reversion this time as well. Time may be required to heal some damage to balance sheets but predictions of Americans developing the savings habits of the Japanese seem off the mark.

Conventional wisdom is usually wrong. Whether predicting the never ending increase of housing prices or the end of western consumerism it usually represents more hope than a logical conclusion of the likely course of events. The Asian economies should consider this.

Yes, diversification of their economies is a justifiably good goal. They, however, likely have much more time than most currently give them to make those adjustments. Economies will recover and consumers will begin buying the goods that come from Asia. Prosperity generated by an export economy will not vanish. This crisis should serve as a wake up call for Asia, not as a mandate for radical change.

They will have plenty of time to properly restructure as consumers do what comes naturally.

Comments

[Mad Hedge F...:]

As it should. Japan’s closely watched tankan report was released today, a quarterly report of business sentiment, showing its sharpest drop in history, cliff diving from -24 to -58. Japan is the one nation that has profited the most from globalization, and is therefore the most severely punished now that it is in retreat. Exports have dropped by half, industrial production plunged 9% in a month, and unemployment is soaring. Q4 GDP shrunk an unimaginable 3.2%, double the fall seen in the US. The last time the numbers were this bad, two atomic bombs had just been dropped on Japan and it lost WWII. Prime Minister Taro Aso’s government is embroiled in multiple scandals, taking his approval rating down to 23%, so the ruling Liberal Democratic Party’s half century long hold on power is in doubt. Elections are due in September. Perversely, a hurried unwind of a decade long accumulation of yen carry trades has pushed the yen up just short of a 20 year high of ¥87 in January, making the country’s essential exports even less competitive, and vaporizing the foreign earnings of Japanese companies. Toyota Motors (TM) has been reduced to begging for bail out money from the government, GM style. The government has passed four bailout packages in the past year totaling 13% of GPD, none of which have so far been spent. Japan has little choice but to wait for a US economic recovery, and then grab hold of its coat tails for dear life.

Apr 01 04:25 PM