Economic Recovery in the Asia Pacific: Is It Sustainable?
Dr. Kenneth Courtis
Vice Chairman - Asia
Goldman Sachs
It's difficult to know where to start this morning. No sooner are markets up or down than they seem to be going in the other direction. The same events in markets lead to interpretations that seem almost diametrically opposite. It reminds me in fact of the taxis in New York City which I saw when I was there last week. As you know there's an intense senate electoral campaign shaping up and you can often, I think, sense the mood and sense the understanding that people have of things by looking at bumper stickers. And as I looked at the New York taxi cars last week, I saw that about half of them had a sticker on the back of the cars that said, "Run, Hillary, Run" and the other had the same bumper sticker, but on the front of the car. So you, I guess, could do an opinion poll and see who was a democratic or republican driver.
But it is difficult to really know where to start - just look at some of the statistics from overnight. Last night the Thais announced the fourth quarter numbers for their economy - up 6.5% from a year earlier; Korea announced fourth quarter numbers up 13.2%, which means last year they grew at over 10%, the first quarter this year will be over 10%. We talked about this global integration; yet when we talk about this global integration and we talk about that so-called 'Asia financial crisis' I think it's really important if we're looking to the future to understand cause and effect -- to understand actually what drove that crisis and what's driving these economies now. Because I think if we don't do that, we can't really look at this global landscape and measure the challenges that are there and position ourselves to avoid the difficulties and to capitalize on the opportunities.
I think many in this room know my view is that there was no 'Asian crisis.' So that in fact, the 'Asian crisis' was but the first phase of a global emerging markets crisis which had as its basis very little to do with (what do they call it?) 'crony capitalism' - badly managed banks or insufficiently supervised markets. Of course all of that's part of it, but to try to make people believe that financial difficulties and economic difficulties in a country like Thailand triggered a global financial crisis - that's an alibi. That's like saying that a butterfly that flaps its wings in Bangkok could re-ignite the volcano at Diamond Head. Of course the world economy is integrated and of course large forces at work in your world economy have huge effects and of course that's how the Asian crisis got started.
Let's look at, for a couple minutes, at the background, at the basis of what's driving that form a global perspective. In the second half of the eighties and through much of the nineties, we had a tidal wave of investment throughout the emerging markets, particularly in the Asian emerging markets. A time some of these countries were investing in new stock and plant and production capacity forty or forty-five percent of GNP. Actually if you invest at those levels, you double your output capacity every twenty-four months. So if you do that for four, five, six, seven years you end up with massive amounts of new capacity. And much of that new capacity, in fact a very large portion of that new capacity, was in sectors that we call today the 'old' economy. Centrally driven by investment coming from the developed economies as many people in the older industrial sectors, found themselves through the eighties and nineties with a big problem. The problem was there is very little top line growth and so the only way that you can maintain and indeed, increase your profits is by cutting costs and cutting costs and with the wonderful work that the GATT and the WTO had done over thirty years, some of which Mr. Moore enumerated earlier, markets are open today; and so its possible to put production capacity in emerging markets and export around the world. At the same time over the last decade with the end of the Cold War, we've had the freeing up of huge amounts of capital.
Think of it, today we spend 31/2 percent of the world GNP less on defense than we did a decade ago. In the 1990s with one or two exceptions, Europe annually has seen very slow growth as it's tried to get its budgets and fiscal position in order so it could live with the common currency. And so Europe has generated huge current account surpluses in the 1990s, and balances of payments have to balance and so that money had to be reinvested in the world economy and much of it of course, went to the emerging markets, particularly to Asia.
Japan in the 1990s has seen virtually no growth. In ten years it's generated a current accounts surplus of about 1.25 trillion dollars - more than the rest of Asia's annual GNP combined. And again, that money has to be recycled to the world economy and much of it has gone into US bonds, but a significant amount of it went to finance investment in Asia. So people having to move technology out, markets opening, vast amounts of capital that come available, the East Asian economies in particular were attractive. They had the right demographics, education, economies moving everyday more to a market focus... and even more important from a global investment perspective, virtually all the economies of the region were tied in one way or another to the dollar. A pig. A basket. A dirty float. And of course, with the break-up of Breton Woods in 1971, through the next twenty-five years the dollar went in one direction - that is down.
Remember, Roberto just spoke of the meeting here in 1993 when Lloyd Benson was still Treasurer of the Secretariat. It was a policy of the first phase of the Clinton government to break open the Japanese market with the weaker currency. And so, as the dollar went down, all of these emerging markets of Asia became even more attractive for international investment. The success of Asia had very little do to with what people tried to sell us as Asian values. It was driven essentially by this broader context with particularly positive attributes that Asia brought to the table. And so the reversal. To understand it - to understand its violence - it's speed, it's dimension, we have to go back and look at those broad global forces that shaped the environment.
By the mid-1990s we had excess capacity in virtually every sector of traded goods of the traditional economy. Think of it. Today we can produce 78 million cars around the world. And we're going to have strong growth in the year 2000, we'll sell about 56 million cars. The excess capacity is greater than the total demand of America. The world economy slowed also through the mid-1990s. Because America slowed as Europe and Japan were already slowed. And finally, and more fundamentally, in the Spring of 1995 the United States and Japan decided the dollar could no longer get weaker, because if it did the yen was so strong that it was - even the bullet-proof Japanese companies at eighty yen to the dollar couldn't survive. And Japan was on the lip of a financial implosion. And that financial implosion would have huge international implications because America every year, has to borrow so much money because of its net savings deficit. And a large portion of that money comes from Japan, so if the Japanese had to repatriate capital US interest rates would up exactly at the moment that Mexico was blowing up. And the US market looked wobbly. And the economy started to look dicey. Clinton had just been badly mauled in the 1994 elections.
And so it was decided in the Spring of 1995, that the US would reverse its twenty-five year policy of dollar devaluation. And we started to hear a new statement which became a new mantra from US Treasury Secretariat was that it's in the strategic interests of the United States to have a strong dollar. And we had subsequently the biggest interventions in currency markets ever. Not just by the big players, but they even had it times countries like Poland. Buying the dollar against the yen to try to drive the dollar back up. And as the dollar moved higher, the cost structures of all of East Asia were just, almost overnight, knocked out of whack. It didn't help anything that at that time China also made a massive devaluation coming onto the market with many of the same products as the rest of East Asia was producing.
It was only a matter of months before profits collapsed, stock markets started to reverse, current accounts started to go from positive to negative, and currencies broke. And all of the sudden people who had made huge loans, as Roberto said, much of this investment was financed with that, found that they had obligations in dollars that were getting stronger by the minute as their currencies collapsed. And it's from that point that growth went from good numbers into very bad numbers and then the demand for global commodities went into reverse, and Asia had been such an important element in the drive in the increase in global demand over the late eighties and nineties for commodities. So as commodity demand fell, prices of those products collapsed, and that then further destabilized countries like Russia, Venezuela, Brazil, Mexico, and started creating also, huge problems for countries in the Middle East. So we end up with a global emerging markets crisis. And at that point, because so much of the investment in the emerging markets had come from the banks, the banks then started facing the prospect that they weren't going to get paid back. And if you think of it, at the beginning of 1999, the five hundred leading banks in the world had loans to the emerging markets of 2.4 trillion dollars -- off an equity base of only 1.6 trillion dollars. Of which 320 billion of that 1.6 trillion dollars, according to the BIS - the Bank of International Settlements - with the capital of the Japanese banks. But of course, to use a word that's rather modern, fashionable, we know that at that time the Japanese bank equity was rather 'virtual.'
So here you are sitting and looking a loans at 2.6, 2.5, 2.4 trillion dollars off a real equity base of 1.3 trillion dollars. What happens if you get paid back 65 cents on the dollar? Do you think you'll get 65 cents from the Russians? Do you think Indonesia will pay 65 cents? The auctions in Thailand have gone at 17-18 cents on the dollar. In Korea they went at 37-38 cents on the dollar. So the banks only got, the global banks only got paid back 65 cents on the dollar, which actually would have been good, given this environment we're in. they would then have to pull loans from so many other countries and companies because their equity would have been cut in half. And that's what led us through the summer of '98 and through the fall of '98 into the beginning of a global credit crunch where we were this far from falling into a crisis like the 1930s. That's how it's all linked together. It's not driven by a country with a GNP of what...? What's Thailand's GNP? 125 billion dollars. It's a quarter of the size of the market capitalization of Microsoft. If Microsoft happened to be badly managed and let's say, disappeared, some people would be unhappy, but it wouldn't trigger a global financial crisis. The global crisis comes from the forces of the big countries changing direction and the smaller countries not being ready for those changes - not being vigilant - managing their economies like dinghies rather than racing yachts, simply got swamped.
And so, as we move through '98 and '99, the authorities in the main countries had to react and did react. And they engaged over the last year and a half, the greatest effort probably in history to re-create growth in the world economy -- to re-flate the world economy. And in that period we've had 133 interest rate cuts by central banks in just the OECD countries - unprecedented in such a short period of time. And of course, in the emerging markets you've had many more - and deeper interest rate cuts. Japan in the last fifteen months has committed about 1.3 trillion dollars in extra spending to try to stabilize its economy. The IMF and World Bank committed about 225 million dollars in the emerging markets by taking onto the government books much of the bad debt of the banking sector has in effect also added about 650 billion dollars of fiscal stimulus to these economies. So think of it, you've had more than two trillion dollars of fiscal stimulus to the world economy in the last year and a half. Unprecedented interest rate cuts. And guess what? The world economy is into the beginning phases of what looks like a very powerful upturn. And that powerful upturn, given the new environment of East Asia, essentially is at the core of the turn-around of our economies in the region. Because...
Let's take Korea as our example. What has Korea done? Not to put too fine a point on things: It slashed its currency. Wages have come down. Some red tape has been cut back. Rents and properties become cheaper. Some companies have re-centered a little and assets, some assets have been sold off. And everything has been driven to cut costs into export. And that's how you go from zero foreign exchange reserves at the beginning of 1998 to the latest number of 81 billion dollars. And that's how you go from a current account deficit of eight percent of GNP in 1997 to a current account surplus of over ten percent of GNP last year. And through the generation of these huge current account surpluses as East Asia today has dramatically cut its cost structure -- exporting into a growing world economy. Of course, that's where you get the funds to try to start bringing down your debt, and to get it down to levels that are sustainable. And that model, more or less, is being followed in all the crisis countries of the region. Of course its more problematic in Indonesia. But even there we've had an echo of the same type, broadly, of rebound that seems to be building. With the added benefit of course, that with more growth in the world economy, the price of commodities has gone up and that is also very positive for that economy.
But the reality is simple. If you today, can produce a car at 7,000 dollars and export it at a profit; or make 400 dollar desktop computers; or forty dollar microwave ovens, you don't have a problem. Your competition has a problem if it hasn't adjusted. So I would say today that, we used to call these economies 'tigers,' but they were actually 'pussycats' - compared to the tigers they've become. Today they have got real claws and are very powerful competitors.
So it we have strong growth in the world economy this year and next, as I believe we will, the East Asian economies that have been strong last year will be just as strong. And that move up will continue. If we only have moderate growth in the world economy, let's say instead of 4 to 4 1/2 percent we have say, 2 to 21/2 percent, then I would say, "Watch out, Brazil and Portugal. Watch out Poland and Greece" - countries that haven't made the same adjustment that's occurred in Asia. Because they're producing similar products and as we still have lots of excess capacity, if growth slows down, those economies will be the ones that get into the most trouble next time.
Let's say we even had a worse scenario. Let's say we had zero percent growth, which I think highly improbable. Then given that debt loads around the world continue to be at almost unprecedented levels in so many countries, then I think we would very quickly go back to the conditions that we saw in the second half of 1998. If we start to slide in that direction then, instead of these mid-term adjustments that are coming out of the Fed today, the Fed would very quickly start cutting rates again.
So my bottom line for the crisis economies of East Asia is that they are going to do well this year and next - and their stock markets will continue to do well.
If I could turn briefly to China, a country with... like Hong Kong, still tied to the US Dollar. China has pulled virtually every Keynesian lever imaginable to try to stabilize its economy. And with the world economy starting to pick up and Chinese exports picking up, it looks like they've pulled it off, at least for the moment. Longer term, of course, there are two fundamental issues that have to be resolved for China to put its economy on a stable, healthy, sustainable basis. The first was referred to earlier by Mr. Moore. -- it was referred to also by Helmut. It's the... also the objective of everyone in this room - of this organization. It's that China become a full member of the WTO. Why is that so important? Because it will drive, increasingly, the opening of the Chinese economy and therefore, the reform of that economy so that it is more competitive on a global basis -- and so that its structures and its regulations and its institutions are compatible with what is common and accepted practice around the world. So that's number one.
Number two, is that China has a capital system today which takes this great pool of Chinese savings and channels them largely to state companies. Companies that produce more and more products which fewer and fewer people want to buy. And because these companies have their great political power, the banks continue to lend to them, but these companies have trouble paying them back - and so the bad loans get bigger and bigger. To try to deal with this the companies produce more and more goods, but because fewer and fewer people want to buy them it drives down prices across the economy. So you've got a double deflationary dynamic pushing the economy down. And the only way to untangle that really, is to open up the financial markets of China; so that the savings of the Chinese people can increasingly flow to the really private sector of the economy -- which over the last twenty years has been such a fantastic success with no government support. That's what creating the jobs. That's the part of the economy that's paying increasingly, the taxes. That's the part of the economy that's growing 4 1/2 times faster than the state sector. And if the financial sector can be opened up, so that private companies can list on the stock markets, that then also means that you would have to put in place the proper surveillance structure, regulatory structure, legal system. And so that then allows China, those two reforms, to make a really, very strong step ahead.
China, of course has increasing - Beijing, of course, has increasing difficulties dealing with the development of democracy in Taiwan. Of which we've just had a brilliant example over the weekend. Beijing really doesn't have any good options, because it's fighting history. That will create lots of tensions in the region, but for the moment I don't see it destabilizing the broad historic course that we're on.
It's a really problematic situation in Asia - and it's not just problematic for Asia and the rest of the Pacific, but for the world economy - is the situation of Japan. There's a lot of optimism that growth is starting to build - that the new economy is coming on, coming on strong; and I hope that that's the case. But you have to ask yourself, if a government spends one and a quarter trillion dollars in less than a year and a half to stabilize its economy, and yet the economy is still contracting, there must be major structural problems still to address. Even before the budget for the next fiscal year was adopted, the current fiscal year that starts from April, the Ministry of Finance bureaucrats were busy preparing a new supplementary budget to announce before the summer. Because it looks like the economy, without that government spending, hasn't yet gotten to a position of sustainable growth.
I would argue that Japan has very real and profound structural problems. They are in the financial sector - where we have an insurance sector, part of the financial sector - which is virtually bankrupt. It's their demographics. And because Mr. and Mrs. Suzuki are looking at the future, they know they have to get about a 71/2 percent return on their savings to finance their retirement. And yet, in the last sixteen years the average return they've had on their pension funds is been 2 1/2 percent. And as the pension management system is dereguliz... deregulated, and the financial system is opened up, Mr. and Mrs. Suzuki everyday are saying to their fund manager, 'Stop giving money to companies that don't generate 7 1/2 percent return.' And this, everyday, then is increasing the pressure on those third and fourth tier companies and some of the second tier companies that just haven't positioned themselves to survive in the economy that we have at the moment - and we will have in the future. And so increasing pressure is going to come on costs; and therefore, unemployment and income. And in...it's that environment it's difficult to see how the Japanese consumer all of the sudden, is going to get giddy and excited and spend lots of money.
Japan has missed the technology boom of the 1990s. A decade ago it was at punching level with America and Europe in so many sectors. We could say that this presents a great opportunity - and it does. There will be huge investment opportunities in Japan in the new technologies as Japan tries to close the gap again and catch up. But it's also going to be very disruptive because the newer technologies allow to arbitrage cost out of the system, particularly in distribution. And if there's one sector of the Japanese economy where there's weakness, it's in distribution.
And finally, we could think of the debt level of the government. In 1991 the government debt was fifty-one percent of GNP. By the end of 2001, beginning of 2002, it will be a hundred and fifty-on percent of GNP; and that only included the on balance sheet stuff. None of the off balance sheet obligations of the State would be included in that. How far can you take up the debt before the markets revolt?
So my view is that Japan is getting toward the end game on the current policies. It started, in many sectors, to reform - but the dimension of the problems and the pace of... relative to the pace of change, are such that I believe that we are only at the beginning. And because the government's running out of... getting to a position of where it won't be able to keep spending like this. My sense is that there's... it's only a matter of time before the Japanese authorities are forced to what we economists call 'monetize' the debt - that is print, and print, and print yen to accommodate this huge expansion of government debt. If that happens, as I believe it will happen and begin to happen over this year, of course lots of money will leave Japan to look for higher yields; that will drive the yen down; but lots of money will stay in Japan. It will be a very liquid economy in that situation. It won't go into consumption. The money will be available for new investment - and for driving up the price of the stock market where investors will like the story. New Technologies. Companies restructuring. Lots of cheap cash. But it's a big risk. And it's far from a given. Plus we have to be able to see through the politics of how to manage that. And also, the politics of the Japanese people waking up one day and saying, 'Why is it that my house today is worth one-third of what it was fifteen years ago? Why is it that my life insurance policy is being scaled back in this manner?' Or, 'Am I not going to get the pension I thought I was going to get? ' And 'I've sacrificed for three generations... for thirty... three decades to get this.' - and the politics of that are going to be complicated to manage.
So as I look at the world economy, in conclusion, I see lots of problems. And I see lots of opportunities. As a result, I think we're into a period of much volatility during the next two years. And that volatility then, is going to impose a premium on all of us to be open, to be flexible, to reform, to constantly reposition and restructure.
The central theme of the meeting this year is the 'Economic and Political Implications of the Changing Global Landscape." In the last ten years, since the collapse of the Berlin Wall and the implosion of the ideologies of industrialism and the breaking-up of social structures as we have known them through much of the industrial age, driven by globalization, the new technologies, emerging world economy. It's been very easy for business to say, 'It's the market.' And that's why you have to do these things. But the rumble in Seattle gives us another message. And that message is, that the debate has to be broader. That more and more people no longer will accept just that message.
Eight years ago Bill Clinton came to power with the slogan, "It's the economy, stupid." I think today, it would be stupid to think it's only the economy. And, we've got to broaden that debate and bring more people into that debate so that they feel that they have a stake in developing the system.
I thought, Helmut, in your address, you gave a very balanced and common sense and fundamental, down-to-the-earth view of these issues. I think the PBEC statement that you've prepared - a statement that we share in this room - points us in the right direction. Now is the time, I think, that we have some growth in the region. Not to run away from reform, but to accelerate the pace of reform -- to build our alliances between companies and countries and institutions; to roll up our sleeves and shape that new agenda, address the issues of the changing global landscape, of the new technologies. And if we do that, the 33rd meeting of PBEC will mark a new departure.
Thank you.