Asian Economies’ Troubled Waters Cause Ripples in U.S.
Like a distant El Nino current, currency market convulsions in Asia influence business and economic patterns in the United States.
Last week Hong Kong, with avowed backing from China, withstood global market attacks on the Hong Kong dollar. But since mid-July, Thailand, the Philippines, Malaysia and Indonesia have been forced to let their currencies sink against the U.S. dollar.
This has brought losses and difficulties to banks and businesses in those countries, and it has lowered the living standards of millions of people who had been enjoying at least some fruits of their economies’ rapid development.
Yet if Americans were aware of the turmoil in Asia, it was to see it as a distant, mysterious process. Once Asia’s economies were called tigers; now they appear to be sick cats. The effect on America’s calm prosperity and buoyant stock market seem minimal.
But it isn’t minimal. The emerging economies of Asia are already sizable--larger, for example, than those of Eastern Europe. Malaysia has 20 million people and roughly $70 billion in output of goods and services; Thailand, 59 million people and $130 billion in output; Indonesia, 200 million people and $170 billion in output. Hong Kong, of course, is now part of China, where the long-booming economy is also slowing.
Those countries get a major share of investment from U.S. companies--car plants in Thailand, semiconductor facilities in Malaysia; electric power projects in Indonesia; U.S. consumer goods, from Coca-Cola to Starbucks coffee, and U.S. banking and finance, from J.P. Morgan to Merrill Lynch, everywhere.
“Their effect is mostly below the surface,” says Jeffrey Garten, dean of the Yale School of Management and former U.S. undersecretary of commerce. Those countries are the parts makers--sewing sections of clothing and shoes, turning out parts of electronic goods. They are one reason U.S. consumer prices don’t go up, the Federal Reserve keeps interest rates down and Americans can get reasonably priced mortgages.
At the same time, their growing economies have been a source of earnings gains for U.S. companies. One reason U.S. and global stock markets have been so volatile lately is that Asia’s slowdown is casting a shadow on earnings gains for the Gillettes and Coca-Colas of this world,
Worries will continue. The slowdown is not a temporary setback but the start of a five-year process of adjustment and reorganization of societies and economies, says Garten, who this year published “The Big Ten,” a book on the major developing countries.
“Americans should be prepared for the possibility of very significant turmoil,” Garten says.
The prospects are not all bleak, although undeniably hard times are here. Construction projects will be halted from Shanghai to Kuala Lumpur. But other projects, such as a $1.6-billion pulp and paper production venture announced Friday by China and Malaysia, will go forward.
Some investment advisors see an improved landscape. “Now that they’ve devalued, we expect many Asian markets to trend up strongly,” says economist David Roche, head of the London-based investment analysis firm Independent Strategy.
The push to export more to the United States and Japan will intensify, and the region will be looking to expand sales to Europe.
There will be tensions. China is said to have the capacity to double its production of all sorts of goods for export. China’s exports are already edging aside its Asian neighbors. One reason Thailand had to devalue its currency was that its industries couldn’t compete with China’s.
China’s military will become more of a factor in the new era. China is now spending $25 billion to $30 billion a year--roughly 3% of its economy--on military goods and personnel, estimates Charles Wolf, director of research at Rand Corp., the Santa Monica-based think tank. Wolf’s estimates have credibility. Two decades ago, he correctly calculated that military spending was crowding out the civilian economic potential of the old Soviet Union.
Today China’s civilian economy is slowing, which means the vision of China as an endless market for the world’s goods will need adjusting.
What all this means is the end of one phase in development and the beginning of another. The view of Asia by Americans and others will need adjusting.
“Perspective is needed,” says Richard Drobnick, vice provost of USC and a director of its international business education program. “Keep in mind that these countries are still growing at double the rate of the U.S., Japan and Europe,” says Drobnick, who has just returned from Malaysia and Indonesia.
He sees the beginning of reform. “There are 75 construction cranes operating in Kuala Lumpur,” he reports. “But the central bank has stopped construction loans. The currency is floating, just as the U.S. dollar started to do 20-odd years ago. So the economy will change.”
In the next phase of their development, the countries of Asia will have to go beyond reliance on low-cost labor industries. Which means they will reach out for productivity-increasing measures and instruction.
There will be opportunities to sell know-how. U.S. electric utilities and General Electric already sell not only power plants, but the services of operating an electrical system.
Factory automation providers, such as Honeywell Inc. of Minneapolis and Allen-Bradley of Milwaukee, will find fertile markets.
U.S. universities will benefit. One of Malaysia’s grander projects is its $10-billion multimedia center for films, television and entertainment software. It has turned to USC’s famed film and television school for help in the business of Hollywood.
The upshot: America’s interdependence with Asia will increase in the new era, in matters both great and small.
In terms of global power and alliances, “U.S. government policy in the new era will need to give China some of the consideration it is showing toward Russia,” says Rand’s Wolf.
And now that Asian economies have a chance for more authentic growth, perhaps it’s time to take a look at those international mutual funds.
