Page 2 of 2 Asia's passing pleasure moment
By R Taggart Murphy
new system was predicated purely on the willingness and ability of the likes of
Japan to continue to accumulate and hold stores of dollars.
Meanwhile, Japan's 25-year sprint from devastation to the front ranks of the
world's industrial powers provided an overwhelming example to the region. South
Korea, Taiwan and Malaysia all pro-actively adopted export-led growth
strategies with concomitant suppression of domestic demand, undervalued
currencies, and savings channeled into the development of internationally
competitive industries.
With the coming to power in 1977 of Deng Xiaoping and Beijing's tacit adoption
of the Japanese economic model, the region turned decisively away from autarkic
development models. Vietnam
would arrive at the party in the late 1980s, and in 2000 India would formally
abandon Nehru's legacy of import substitution to join in the scramble to build
industries for export.
But not only did most Asian countries emulate Japan in making the highest
national priority the building of internationally competitive export
industries, they followed Japan in accumulating reserves in dollars - a trend
that accelerated after the crisis of a decade ago. Most countries in the
region, whether they had suffered badly (Thailand and South Korea), or largely
escaped the worst effects (Malaysia and China) resolved they would never again
be in a position where emissaries from Washington - or anywhere else, for that
matter - would be in a position to dictate their macroeconomic policies or how
they ought to structure their banking systems. They redoubled their efforts to
build impregnable fortresses of international reserves against the slings and
arrows of future balance of payments crises.
That effectively meant accumulating reserves in US dollars. Aggregate two-way
trade and investment flows between Europe and Asia are not large enough to
permit the euro to circulate yet in sufficient quantities in the region to see
the euro substitute for the dollar as the region's reserve currency, even if
the region's businesses were willing to switch from dollars to euros as their
primary cross-border settlements currency.
As for the yen, neither Japan nor China for separate reasons want to see the
Japanese currency supplant the dollar in the region. China is not prepared to
cede that kind of economic leadership to Japan, while the wrenching changes
that the emergence of the yen as a major international currency would pose to
the Japanese economic and political order insure that Tokyo will move to bring
that about only when there is no alternative.
But when a country accumulates reserves in dollars, it is effectively leaving
its export earnings inside the American banking system where they can be used,
among other things, to finance the building of houses for people who do not
earn enough to afford those houses. The result is seven-figure salaries for
gamblers with other people's money and tax cuts enacted while spending soars on
entitlements and wars of choice.
The latest surge of dollar holdings in Asia on top of a generation of dollar
accumulation in countries such as Japan and Korea coincided with the coming to
power of the most fiscally irresponsible administration in American history.
Not only did Asia's soaring dollar holdings help the George W Bush
administration avoid the usual financial consequences in ripping open the
sutures its predecessor had stitched up between America's taxes and government
spending. They also facilitated a horrendous asset bubble in American housing
while Alan Greenspan's Federal Reserve watched idly from the sidelines.
The era of American "deficits without tears," in the famous phrase of the
French economist Jacques Rueff, has ended with the Panic of 2008. The core
institutions of American finance are collapsing. The United States is still -
and will remain for some time to come - the world's largest and most productive
economy. But it can no longer act as the world's engine of demand, no matter
how many dollars Asia throws at it.
For while those dollars may be "owned" by Asian central banks and businesses,
they reside inside a ruined financial system whose panicked participants will
not lend to those who need credit to keep their businesses running. As the
Japanese can explain from their own experience of the mid-1990s, you can pour
all the money you want into tottering banks and brokers, but when they are
paralyzed by fear and will do nothing but lend back to the government, it does
little for your economy.
The days of export-led growth for Asia are over, or at least exports outside
the region. Intra-regional trade is another matter provided importers in the
region can be found to equal exporters and the final demand is in Asia; that
is, exports of parts and supplies from one Asian country to another for
finished products headed for the US market don't count.
As the Koreans and Thais can easily testify given their own recent traumas, the
United States cannot recover from the mess it is in without more savings -
another way of saying less consumption. That in turn means the US after 40
years of profligacy will have to export more than it imports. For this to
happen, much of the production capacity that has been steadily transferred to
Asia over the last 50 years will have to be repatriated back to the United
States so that Americans will have enough factories again in which to go to
work to pay off the debts that their politicians and bankers so recklessly ran
up. Otherwise, all those dollars Asia holds will quickly be worth very little.
What, after all, is a dollar other than a claim on the output of an American?
The Americans will have to have the means to create that output if the dollar
is to have value.
Meanwhile, what of Asia? How is Asia going to wean itself from its dependence
on the US market? One lesson the world may finally learn from this crisis is
that genuine, long-term prosperity comes not from continuously shoveling money
at distant foreigners so they can keep buying your stuff, and certainly not
from games-playing and speculation by would-be plutocrats. Rather, prosperity
comes from a large, economically secure middle class - a middle class with the
means to purchase the output of a nation's factories, farms, and service
providers.
Here is where we see a connection between the meltdown of American finance and
the political turmoil that has been wracking practically every country in the
region. Each specific example has it own local causes and flavors: the struggle
in Thailand over former prime minister Thaksin Shinawatra's
buy-rural-votes-populism; the political insurrection led by Anwar Ibrahim in
Malaysia against the entrenched UMNO elite; the seemingly out-of-proportion
demonstrations in South Korea over beef imports; the palpable rage in China at
the inability of the government to enforce safety standards in construction and
food provision; the challenge posed by Japan's first serious, united opposition
in 50 years to the Liberal Democratic Party's control of that country's formal
political institutions.
Behind these varied struggles one can hear a common theme: a demand for
accountable, responsible government that puts the interests of the middle class
first. I wrote at the beginning of this piece that the political discussion
necessary to restructure the region's economies carries with it all kinds of
risks. We have been seeing those played out in the streets of Bangkok and Seoul
or on-line behind the firewalls that Beijing builds in its attempts to contain
and control discussion of China's future.
These struggles threaten, among other things, the workings of essential
economic machinery, as Thailand's tourist-related businesses can readily
testify. The struggles provide a profound challenge to elites that are
accustomed to effecting minor corrections behind closed cockpit doors to
national trajectories that have long been taken for granted.
But the meltdown of American finance has closed the destination of an economy
humming with industries for export. Whether Asia's economies have the political
will and ability to chart a new course will determine how they ride out the
present storm.
R Taggart Murphy, a former investment banker, is professor in the MBA
Program in International Business at the University of Tsukuba's Tokyo campus
and a Japan Focus associate. He is the author of The Weight of the Yen
(Norton, 1996) and, with Akio Mikuni, of Japan's Policy Trap (Brookings,
2002).
This is a substantially expanded version of an article that appeared in The
Brief. Magazine of the British Chamber of Commerce Thailand. It was posted at
Japan Focus on October 24, 2008.
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