Revving for Recovery
By Manu Bhaskaran
April 15, 1999 As the dust settles on emerging Asia's crisis, the outlines of post-crisis Asia are beginning to appear. Two features stand out: Economic recovery will be faster than expected, and new drivers of longer-term economic growth are coming into play. With a bit of luck, the recovery will lead to a period of moderately strong growth.
Sieving through the mass of recent economic information, a number of important developments point to a revving up of key engines of economic activity.
First, imports of raw materials and intermediate goods are beginning to recover. Recent trade data show a steady pick-up in Malaysia, Thailand and South Korea, as well as a reduced rate of contraction of this lead indicator for Singapore and the Philippines. Data from ports in the United States, which aren't distorted by volatile price and currency movements, show a much stronger recovery in volume terms.
Second, bank lending behaviour is beginning to change positively. Corporate failures and financial distress are beginning to decelerate. And as banks are recapitalized, the stronger ones seem prepared to lend to companies with better credit, at least for working-capital financing. This is now showing up in data for new loan approvals in South Korea and Malaysia. Such a change in bank lending behaviour is a crucial turning point in the crisis.
Third, business expectations are improving, as reflected in surveys in Singapore, South Korea and Malaysia. Animal spirits are returning to the Asian business scene. Businesses are adjusting to a new equilibrium, seeking out export markets and restructuring their balance sheets.
Finally, consumers are finding their feet again. Retail sales are edging up month-on-month in several countries. It's clear that the big shock to consumption took place last year and a further contraction is less likely in 1999.
Hence, we see positive economic growth in emerging Asia, except in Indonesia where political uncertainty is handicapping recovery. This, in turn, points to a degree of resilience in emerging Asia that many had underestimated.
All these signs indicate that those parts of the economic machinery that were dislocated as a result of the economic shocks of 1997-98 are falling back into place. As banks are recapitalized, nonperforming loans peak and economies bottom out, banks will see less risk in lending to corporations. In other words, they're likely to fulfil their role as financial intermediaries again. As businesses return to converting opportunities into profits by hiring and paying workers, investing and stepping up production, economic growth is likely to return.
What are the drivers of this new phase of growth that will begin by the end of 2000?
First, rising investment won't be the booster of growth it was before the crisis--not with the massive excess capacity in manufacturing, property and infrastructure in most of emerging Asia. But there will still be some investment growth, as businesses exploit the benefits of devaluation, such as new export opportunities and import-replacement activities. Substantially reduced costs of labour, land and raw materials will help raise returns in many activities that would otherwise have been unattractive. These factors should also serve to attract foreign investment. Restructuring in developed economies, particularly Japan, will give rise to new sources of growth such as outsourcing and remote services such as customer-service call centres that will require new investment.
If investment will be less of a driver, growth in total-factor productivity will be a more important one. In simple terms, TFP measures the underlying efficiency of an economy. The wide-ranging reforms and restructuring in Asia will raise the ability of the region's economies to extract more growth from a given amount of capital, labour and land. Much hinges on how much has really changed in Asia. The fashionable answer is: not much. But if one adds the reforms at the industry level and in trade and investment to the improved regulation of the financial industry, the increased pace of privatization, capital-market development, corporate restructuring and corporate governance, they do add up to a material improvement.
Putting all this together, we should see much of emerging Asia recover in the longer term to growth rates of between 4% and 6%--South Korea and Malaysia are likely to be at the higher end; Taiwan, Singapore and Thailand only a little behind.
True, the restructuring process has a long way to go. And sure, there are still a lot of things that can go wrong--the U.S. economy could slow, Japan could fall into a downward spiral, China might fail to avoid a deflationary death trap and Indonesia could yet explode. But on reasonable assumptions on these global factors, what has already taken place in terms of reform and restructuring is significant enough to raise TFP growth to levels sufficient to produce the rates of economic growth mentioned above.
Manu Bhaskaran is managing director and group head of research at SG Securities (Singapore) Pte. Ltd.