Asian Miracle II

It’s not easy to see a bright future in Asia today. The financial crisis that began last year with currency devaluations and loan defaults has plunged many Asian economies into recession and sparked social unrest in others. The threat of a deep and lingering regional depression is very real.

Yet, beneath the surface, changes are occurring in all the countries of Asia--from industrially powerful Japan to economically insurgent China and from South Korea to the nations of Southeast Asia--that are creating a new Asia for the new century.

What is struggling to emerge is phase two of the Asian miracle. It will produce an economically more sophisticated region than the industrial adolescent of recent decades.

Phase one of the miracle, now coming to a rude ending, was marked by economies that developed rapidly in heavy industries with the aid of government-backed banks and massive exports, mostly to the U.S. While industrial growth lifted the living standards of hundreds of millions of Asia’s people, the consumer took a back seat to the needs of industry.

In phase two, the people of Asia, if they’re lucky, will enjoy a future as mortgage-paying homeowners, credit-wielding consumers, and shareholders of companies from Toyota to IBM.

“Consumers” in the next phase will not be merely purchasers of TV sets and motor scooters, but property owners and workers skilled in service industries and in the discipline of financing industry through selling shares in public stock markets.

Economic modernization will be different for each country, yet similar in effect.

In South Korea, modernization means the breakup of giant conglomerates and the spread of small, entrepreneurial companies.

In China, it means workers buying their own apartments from the companies they work for; it means selling stock on the New York Stock Exchange to finance chemical plants for state industries.

In Japan, modernization means the reform of banks and corporations and opening the economy to foreign investors, goods and services. It is an opening as historic as the country’s reforms in the Meiji period of 1870 and the MacArthur period after World War II.

Yet that vision of Asia’s tomorrow is clouded by today’s worsening pain. The economies of Japan, South Korea, Thailand and Indonesia are in recession. Their economies are shrinking.

Wealth has been destroyed by the collapse of prices for real estate and devaluations of currency. South Korea’s gross national product, for example, worth $600 billion last year, is now worth only about $200 billion. The average Korean, who was enjoying a living standard close to that of Israel or Ireland, is now fearful of losing his or her job. Soup kitchens, not seen in Seoul for decades, have returned.

And Asia’s economies face even greater dangers just ahead because Japan’s giant economy, $4 trillion in size, is in retreat and the yen is falling in value. This brings pressure directly on all of Asia because, with a weak yen, Japanese goods compete with those of Korea and China in countries like the United States.

And Japan’s investment in other Asian countries, a vital source of capital for China and Southeast Asia, is reduced. Japanese officials have been unable or unwilling to be a “locomotive” for growth in Southeast Asia.

The trouble lies back home in Japan. The nightmare scenario is that Japan’s economy--and the yen--will continue to slide, dragging all of Asia into a long-term depression, comparable to the United States in the 1930s or Mexico and Latin America in the 1980s.

The consequences would be very serious around the world.

“If the yen continues to fall and Japan imposes controls on outflows of capital, interest rates on U.S. Treasury bonds would shoot up and your stock market would probably crash,” says economist Richard Koo of Nomura Research Institute in Tokyo.

That’s a worst-case scenario but a real possibility, underscoring how tense Asia’s situation is at the moment.

However, a more hopeful picture is likely to prevail. By August, the $200 billion of stimulus and bank recapitalization that the Japanese government has pumped into the economy will begin to help revive things and lift the yen’s value, Koo predicts.

Other Asian countries, suffering in 1998, will return to positive growth in 1999, predicts the prestigious Pacific Economic Cooperation Council, a body that represents the considered judgment of government leaders, businesspeople and academic experts from 22 countries.

How will they come back? By selling goods and real estate and stakes in companies to buyers with cash, be they foreign investors or shrewd local citizens.

Reports of deals are already surfacing--Kia Motors, Samsung and Daewoo of Korea talking of hoped-for investments from Ford and General Motors. In Japan, Nissan is openly soliciting foreign investment, an unusual move for a major Japanese company but one that will become more common.

In the financial services field, Travelers Group and Merrill Lynch are already investing heavily in brokerage businesses in Japan. More will follow. The doors are opening.

But Asia’s economies won’t recover just because devalued assets are cheap. They will do so because the Asian miracle of recent decades has given all these countries educated, healthy work forces and populations, eager to adapt and move forward. Just last week, for example, Korea’s famously militant labor unions agreed to meet with major employers to work out ways to restructure companies and get production moving again.

Foreign investment from the U.S., Japan and other developed countries, attracted by those work forces and the promise of developing markets, will provide the necessary element that was missing from Latin America in the 1980s--not to mention the U.S. in the 1930s.

So Asia will recover and develop the next phase of its miracle, becoming a continent of modern economies less absolutely dependent on exporting to the U.S. market but more in partnership with U.S. business investment.

Japan’s economy will continue to play the leading financial role in the new Asia. China’s economy will grow and develop and ultimately become preeminent. A unified South and North Korea will present a formidable industrial power. Southeast Asian nations will produce goods and services for world markets on their own, aided by investment from Japan, Taiwan, the U.S. and Europe.

The U.S. business role is likely to be greater in the new Asia, even as the U.S. political and cultural role may diminish in the early decades of the 21st century and U.S. troops are brought home from duty in Japan and Korea.

That’s fitting. The first phase of Asia’s miracle was influenced by Cold War politics, with the U.S.-Japan relationship vitally important.

In the next phase, economic power will rest again with the nations of Asia, whose combined gross national products and percentage of world trade may well be larger than that of any region, including the Western Hemisphere.

It’s never easy to see a bright future in times of recession. In Asia today, the trick is to look at the dynamism of its young populations and the trends developing beneath the surface.

*

Times Senior Economics Editor James Flanigan prepared this report on Asia’s economic future after traveling to Tokyo, Taipei, Beijing, Shanghai, Hong Kong and Chengdu, China.