Linkname: The Media Finally Notices the Asian Recovery
URL: http://www.stratfor.com/asia/specialreports/special61.htm
The Media Finally Notice the Asian Recovery
0025 GMT, 990830
It is now official. Asia is having an astonishing recovery. From the
cover of the Economist to the New York Times, the mainstream media are
proclaiming the miracle. Asia has clearly bottomed. It is not at all
clear that this is as astonishing as it appears. From Stratfor's point
of view, this has been obvious for months. For example, we wrote on
April 12, 1999 that: "There is no question but that Asia has bottomed
out for the short-term. What is less clear is whether the bottoming is
merely the beginning of a cyclical upturn in a general downtrend or
whether it represents a historical bottom from which new heights will
be reached. In our view, it is likely the former rather than the
latter."
Most conventional observers of economic development suffer from the
disease we call "straight-line fever." They are constantly
extrapolating trends to the point of absurdity. Asia's growth rates of
the early 1990s were extrapolated to predict that Asia would dominate
the 21st century. After the 1997 crash, these same observers seemed to
believe that Asia would sink into a bottomless pit, never to be seen
again. Now, having finally noticed the obvious, they again draw
straight lines pointing to recovery. The world is far more complicated
than conventional linear thinking would have it.
To begin with, it is a misnomer to talk about an "Asian recovery."
There is no longer anything resembling a monolithic Asia. Asia has
divided into two parts at least. On the one side, there Is Japan and
China. On the other side, there are the others. We pointed this out as
far back as January 18, 1999, when we wrote in a piece entitled "Stock
Market Geopolitics: The New Map of Asia," that "A study of the
behavior of Asian markets indicates to us that the region is dividing
into two parts. One part, the Chinese cluster (China, Hong Kong and
Taiwan) and Japan, is in deep trouble. Their markets indicate ongoing
weakness. The other part, the rest of Asia (Indonesia excepted), is
showing remarkable resilience. Their inability to protect themselves
from depression has forced them to restructure their economies over
the past 18 months and their markets clearly reflect a degree of
success." There are obvious errors in this view. Hong Kong and
Indonesia have both done better than we expected. But the basic
perspective remains intact: Asia has fragmented into two parts, one
unable to recover (China and Japan), the other bouncing back. As we
noted: "A cluster of countries is beginning to show remarkable
resilience. Leading this group is South Korea, which doubled since
bottoming in June 1998 and has now lost only about a quarter of its
maximum value. Following closely behind are Thailand, Malaysia, the
Philippines and Singapore."
Second, it is a misnomer to regard a cyclical bounce in a secular
downtrend as a recovery. Nothing moves in a straight line. There are
always recoveries in severe depressions. For example, there were
several upturns in the U.S. depression of 1929-1940. At each upturn,
analysts rushed to announce that the depression was over and that
happy days were here again. They were wrong and remained wrong until a
secular shift, World War II, adjusted the fundamental economic
realities governing the American economy.
To make some sense of the situation, it is necessary to answer a core
question: why have Japan and China not enjoyed the same degree of
recovery as South Korea and the rest of the countries of Southeast
Asia? There is a simple answer to that question. Japan and China had
substantial "arrestor" systems. The others did not. Japan, the world's
second largest economy, had substantial resources to cushion its
decline, keeping businesses going that should have been bankrupt.
China also had strong arrestor systems, primarily political in nature.
The rest of Asia, being much poorer than Japan and less politically
controlled than China, could not cushion the blow. They fell hard,
fast and brutally. In some countries, like South Korea, the fall was
managed. In others, like Indonesia, it was a free fall. But in all of
those cases, there was an uncontrolled bloodletting.
Depressions serve a necessary if unpleasant purpose in economic life.
They cull the weak. Capital shortages, an inherent element of
depressions, raise the price of capital so that businesses whose rates
of return fall short cannot survive. This destruction of inefficient
businesses increases aggregate efficiency. Inevitably, the economy
begins to recover. Indeed, the normal pattern is a fairly rapid
rebound in which the vigor of the recovery matches the brutality of
the decline--at least in the short run.
Now, in Japan, where depression has not been allowed to exact its
brutal toll, there is no recovery. The long-term malaise goes on. We
expect the same to be the case in China. But in the rest of poorer and
weaker Asia, the bloodletting has had its inevitable and predictable
outcome. A massive rebound driven by the surviving enterprises
utilizing capital that would previously have gone to a larger set of
less productive businesses.
But the real question is not whether this reflex recovery is real. It
is real enough and we could see it happening months ago. Rather, the
question is whether these Asian countries can sustain these rates of
recovery. The first question is internal. The easy gains have been
made. What differentiates a cyclical bounce from a breakout is not the
intensity of the bounce, but its sustainability to new heights. The
economies, as opposed to the markets, are not yet breaking out to new
historical heights. It is therefore impossible to declare a recovery
underway. The only thing that is obvious at this point is that the
reflex bounce has taken place.
We do believe that the non-Japanese, non-Chinese Asia may well have
seen its lows. We are not convinced that they are returning to old
patterns of growth. Rather, with this sharp, reflex bounce complete,
the most likely scenario from our point of view is an extended period
of side-ways movement, cycling within a band. In other words, we think
that the counterpoint to depression will be stagnation.
The reason for this view has to do with the region. We have already
seen the decoupling of the Asian economic region from the rest of the
world. Europe and the United States are clearly marching to the beat
of a different drummer than Japan. Part of the recovery has come from
exports to the booming U.S. market, which is importing record amounts
of goods. But the very fact that imports are at record levels means
that they cannot sustain too much more growth. The low-hanging fruit
in the United States has clearly been picked. Growth in sales to
Europe is hardly likely to pick up the slack. Indeed, the contrary is
the more probable scenario.
That leaves two engines for sustaining growth. The first is domestic
demand. However, given the endemic capital shortages of the region as
well as structural relationships that still favor export based growth,
it is extremely unlikely that these countries can sustain growth
through domestic consumption. Indeed, during a period of capital
shortage, doing so would cut savings rates and further undermine
banking systems that are far from recovered from the excesses of a
generation.
That leaves regional growth. But there is no region. The heart of Asia
is the huge Japanese economy. And that economy, protected as it is by
its static wealth, cannot manage to recover. China might recover
first, but it is less an engine to pull Asia than a competitor to
swamp the other Asian countries. In a region of export-oriented
economies all suffering from capital shortages, only a completely
restructured Japan has the ability to pull the train. And that simply
isn't going to happen.
Thus, in our view, the mainstream media have finally caught up with
news that was happening months ago. Parts of Asia have recovered,
while other parts are still sinking. The parts that have recovered
have done so in a classical, reflexive bounce caused by the sudden
availability of a limited amount of capital for highly efficient
firms. That bounce executed, there is little in the global or regional
picture to sustain development. That does not mean that these
economies will hit new lows. It simply means that they will not be
setting records for economic development. But as we expected, they are
still in much better condition than their wealthier or politically
more powerful neighbors. In other words, talking about an Asian
recovery without dealing with Japan and China is like basing European
economic development on countries other than the UK, France and
Germany. It just sort of misses the point.
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