For further information: Gail Fosler (212) 339-0301
Tom Higgins (212) 339-0314
For Immediate Release Release #4437A
ASIAN ECONOMIC DECLINE SLOWING, BUT DEEP PROBLEMS REMAIN, SAYS CONFERENCE BOARD
Financial Markets Exaggerating Asia's Weakness
September 3, 1998 -- The pace of economic decline in most Asian countries is slowing, particularly in Korea and Thailand, according to an analysis released today by The Conference Board.
"When several economic indicators, such as imports, exports, industrial activity, employment, GDP, retail sales, and non-wage incomes, are considered together, the situation in Asia looks better than one might think," says Gail D. Fosler, senior vice president and chief economist of the Conference Board in the latest issue of StraightTalk, her monthly newsletter prepared exclusively for Conference Board associates.
Most Asian countries, with the possible exception of Indonesia, are using relatively favorable budget balances to continue public works spending, an important fiscal countercyclical measure. The Conference Board report says that the strength of the U.S. domestic market should also help these countries as they increase their experts to the U.S. for the Christmas season.
EXTERNAL FACTORS DETERMINE THE MAGNITUDE OF THE RECESSION
The persistent pressures on the currencies and interest rates in Asia make it very difficult for the normal countercyclical forces, such as lower interest rates and increased liquidity, to take hold. Unlike the larger industrial countries that control their own monetary policies, financial market conditions in these smaller countries are largely determined from the outside. Weaker currencies, spurred by a renewed decline in the yen, have pushed interest rates up as local stock markets have fallen sharply. Declines in both currencies and financial markets reflect external factors, so they're likely to overshoot underlying real economic performance on the downside as they did last year on the upside.
"There is still reason to believe, though, that the magnitude of the Asian recession will be less severe than Mexico's , despite the severity of the currency devaluations," says Fosler. "Only Indonesia appears likely to experience an even deeper recession than Mexico."
THE CHALLENGES OF OPEN MARKETS
A key difference between emerging markets in the '90s versus those in the '80s is that today's emerging markets are open economies and structurally predisposed to rapid increases in imports of capital goods and industrial materials and growing trade deficits. In order to constrain their growing current account deficits-often out of concern for currency stability-such economies, like those in Asia, must slow domestic growth, which makes it virtually impossible to sustain solid per capita income gains, increase exports, or find alternative financial support.
These trade deficits are not due to massive government spending, but reflect basic material, intermediate parts for fabrication, or capital goods to support the technological diffusion that accompanies foreign investment and rapid industrialization. Emerging market risks are compounded by the fact that commodities account for a relatively large share of exports in many countries, says the Conference Board report. Developing country sources of ready external private financial capital are drying up.
"As long as developing economies like those in Asia remain open-and there is substantial evidence that this is the most efficient path to progress-they will experience periodic currency crises or be required to dramatically restrict their domestic growth in order to stabilize their external accounts," concludes Fosler. "The extraordinary liquidity of the early '90s created an illusion that private markets alone would finance developing country growth. As the global economy enters the less-liquid phase of the business cycle, the availability of private capital will continue to shrink. Emerging markets will either have to raise export growth on a sustainable basis, curtail the pace of domestic growth, or find new institutional structures in both finance and currency management."
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Source: StraightTalk, Vol. 9, No. 8, September 1998, The Conference Board
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