This topic, "Growth Prospects in Asia," is a nice one because the answer is easy. Growth prospects in Asia are bright. Our ongoing technological revolutions, the fall in transport and communication costs, and the growth of world trade have created enormous opportunities. East Asia has public officials who are, in world context, remarkably honest; an eagerness to invest in education to a high degree; institutions that have worked in supporting the fastest generation of economic growth anywhere, anytime. These fundamentals plus the still-large productivity gap between Asia--even Japan--and the North Atlantic core of the world economy create the potential for at least one further generation of extraordinarily rapid economic growth in Asia
It was John Maynard Keynes who looked forward to and thought it would be "splendid" if economists were "like dentists": competent people, with effective tools and sound knowledge, whom you could call in to fix some discrete problem--an impacted molar, say--and then after a little temporary pain, and a short period of post-operative treatment and recovery, resume your normal life.
If we want to take this analogy and run with it, the Asian economies had three different serious oral health problems in the 1990s--problems that required oral surgery, and not just repeated admonitions to brush your teeth longer and more vigorously after meals. The first of these was the current Japanese quiet depression: generated by the fallout from the collapse of Japanese equity and property values at the end of the 1990s. This is a serious problem causing prolonged and sharp pain that calls for a major operation--a root-canal, say--which has been delayed and is being delayed, as root canals are often delayed, out of fear that the further pain the dentists will inflict in the course of the operation will be neither minor nor temporary.
The second was the Asian financial crisis: generated by the combination of the 1997 loss of confidence in Asia by New York investors and the fact that so much of Asia's debt was dollar-denominated, hence we got an object lesson in both the importance of multiple equilibria in economic models and in how our previous failure to take units of account seriously had been an impediment to our vision. We can analogize this problem to that of a single decayed tooth urgently requiring a filling. A very large filling, I admit--some $50 billion of official support, and even so devaluations that seemed larger than justified by fundamentals. And a substantial amount of pain: a five percent fall in the real GDP of developing East Asia (outside China) in 1998. But the pain was temporary. Growth resumed. And if growth this year and next year is not up to its pre-1997 standard, that has at least as much to do with the recession in the U.S., the world's importer of last resort, as with the fallout from the 1997-1998 crisis.
The third is a deeper factor that contributed to causing the 1997-1998 Asian financial crisis, but that is threatening on its own as well: the fear that Asian countries outside of Japan have in an important way gotten financial institutions--both private financial institutions of control and surveillance over operating corporations, and public institutions of surveillance and supervision that regulate the private financial institutions--wrong. The best analogy for this problem is of a nagging ache to the jaw before one has seen the dentist: we don't know how serious the problem is. Here, however, the analogy breaks down: with dentists, you can consult them and they can provide a reliable diagnosis; with economists, you cannot.
Our ongoing technological revolutions, the fall in transport and communication costs, and the growth of world trade have, to continue the analogy, set the table with an extraordinarily attractive meal. Very strong growth fundamentals plus the still-large productivity gap between Asia--even Japan--and the North Atlantic core of the world economy create the potential for at least one further generation of extraordinarily rapid economic growth in Asia--if our teeth turn out to be healthy enough to actually eat the meal. So it will be very disappointing if complete oral health cannot be attained.
Let me go back over these three problems in somewhat more detail.
Japan's now decade-long quiet depression of upward-creeping unemployment, extremely anemic growth during expansion, and frequent recessions--we are now in the third such in a decade--is not something about which a great deal new can be said. Macroeconomic tools have proven much less powerful than everyone had hoped, and there is a near-consensus that this is due, as this week's IMF World Economic Outlook says, to the badly impacted state of "the banking sector, where a vicious circle needs to be broken in which large unrecognized nonperforming loans make banks unwilling to lend, hurting financial intermediation and activity, and thereby creating new nonperforming loans to replace those being [slowly] written off." The United States dealt with a much smaller but analogous problem at the start of the 1990s, with the use of the Resolution Trust Corporation to undertake a mass nationalization of zombie S&Ls and then a mass privatization of those parts of the S&Ls that could be pulled back above water. Japan hesitates--for reasons of internal Japanese politics that we economists dismiss as unworthy of our consideration, and out of the fear that recognition of the size of the problem and liquidation of zombie banks and firms will cause a panic that will deepen Japan's conventional macroeconomic demand deficit. It is hard not to sympathize with delay, but without action I at least see no way that Japanese economy will recover--no way that Asia will be able to use its left lower jaw to chew and eat the economic growth meal that our modern technological revolutions and falling transport and communication costs have put on the table.
In retrospect, it is hard for me at least not to admire the job of practical roadside emergency dentistry that was performed to deal with the 1997-1998 financial crisis. Nobody had anticipated the speed with which first-world investors in New York and elsewhere would decide to bail from a region that had, over the previous generation, delivered the fastest economic growth the world has ever seen, anywhere, anytime. Few people recognized in advance how large the region's hard-currency debts were, and how sharp were the horns of the dilemma--keep interest rates on government debt low, and find that currency depreciation and the resulting increase in the domestic-currency value of debt had put so many firms and institutions underwater and pushed risk premia so high that the economy went into deep depression, or push up interest rates on government debt to try to curb currency depreciation, and find that high domestic interest rates had put so many firms and institutions underwater that the economy went into deep depression.
It is true that the IMF showed up at the scene of the toothache thinking initially that this was a Latin American-style profligate government crisis, and spent several months counterproductively searching for the hidden public-sector deficits that it thought must be at the root of the problem. It is true that throughout the crisis the IMF couldn't resist micromanagement: every mission chief saw the crisis as an opportunity to do favors for his friends in the local Department of Finance by advancing their (largely sound) agendas for prudence and reform. (And Morris Goldstein and Marty Feldstein, at least, believe that this micromanagement badly undermined the IMF's authority.) But the most important thing the IMF did was show up with the gold to fill the hole in the tooth. And--once the filling was in place--things were fixed: that part of the jaw chews fine. Growth recovered and came close to its pre-1997 pace--except for years like last year when outside demand for East Asian exports fell off. The net capital inflow to East Asia to finance development did not resume, but that is more likely to reflect the combination of the U.S. trade deficit and certain arithmetic identities in international economics than a lingering fallout from 1997-1998. And the most important flow of capital into East Asia--the flow of Foreign Direct Investment that may well be the carrier of a lot of technology transfer--was barely interrupted at all. If we think of the Japanese situation as analogous to a root-canal operation that the patient is still too scared to schedule, we should think of the East Asian crisis of 1997-1998 as analogous to a successful emergency roadside filling.
However, these are not the only two oral health problems Asia had in the 1990s. The third--and fear of it was a major cause of the 1997-1998 financial crisis--is the possibility that Asia does not have government regulatory institutions of the strength and competence it needs to properly supervise its financial sectors, and that Asia has chosen a model for private-side finance-industry relations--corporate control and supervision--that served Germany well in 1900 and served Japan well in 1970, but that is poorly fitted for the world of today and tomorrow.
Now failures of regulatory institutions are not confined to the far side of the Pacific Ocean. In the about-to-be-distributed issue of the Atlantic Monthly, Joe Stiglitz fires up his flamethrower and tries to retrospectively revoke the license to practice dentistry of the Bentsen Treasury--in which I worked--because of its pressuring of FASB not to tighten up on options-reporting requirements. In this criticism, at least, Joe is completely right. Failures of financial and other private-sector mechanisms of corporate control to even be aware of the extent of self-dealing and the existence of risks are not confined to the far side of the Pacific Ocean. Nothing I ever read about crony capitalism in East Asia approaches Fastow's Raptor off-balance-sheet vehicles at Enron. My head still spins at remembering Senator Gramm's denunciations of crony capitalists and do-nothing monitors when I think that at the same time his wife was on Enron's audit committee. And nothing I ever read about blithe overoptimism and lack of concern about what East Asian companies were doing with their investor's money matched major New York financial institutions' willingness to lend to the highly-leveraged LTCM without even a shred of due diligence.
Nevertheless, the fact that we in the U.S. share the same problems does not mean that East Asia does not need to have financial regulators that can do a better job of monitoring and controlling the systemic risks its financial institutions' transactions create. It does not mean that East Asia does not need to rely more on public information dissemination and arms-length market transactions and less on long-term "relationships" in determining what and how operating companies get to use other people's money. The most powerful argument, I think, for attempting to move further away from a Germano-Japanese and toward an Anglo-American financial system is simply that the U.S. is the center of the world economy, that the ability to draw on New York-based finance is a very valuable social asset, and that will be hard to do if information is not presented and corporations are not governed and supervised in a way familiar to New York.
Here, as I said before, the analogy with dentistry breaks down. There is nobody we can go to to diagnose how serious this third oral health issue is. It may prove to be not very important at all. It may prove to be important indeed.
The fact that we have to say that only one of the three oral health problems of Asia in the 1990s has been successfully dealt with is bitterly disappointing. Our ongoing technological revolutions, the fall in transport and communication costs, and the growth of world trade have, to continue the analogy, set the table with an extraordinarily attractive meal. Public officials who are, in world context, remarkably honest; an eagerness to invest in education to a high degree; institutions that have worked in supporting the fastest generation of economic growth anywhere, anytime. These fundamentals plus the still-large productivity gap between Asia--even Japan--and the North Atlantic core of the world economy create the potential for at least one further generation of extraordinarily rapid economic growth in Asia--if our teeth turn out to be healthy enough to actually eat the meal. But aggregate demand has to be kept high. Zombie institutions have to be dealt with so as not to generate large risk and default premia for all borrowers. International financial crises need to be headed off before and managed after they occur. And the public and private institutional framework has to be both effective and comfortable for New York-based world finance.
Keynes would be disappointed, because we are really not yet very much like dentists at all.Posted by DeLong at September 27, 2002 11:47 AM | Trackback