Andrew Tylecote
The developing countries of East Asia, led by China, have been the locomotive of the world economy this decade. An enormous inflow of capital has allowed them to run large current account deficits. This has done a great deal to boost demand in the West.
Any such capital inflow depends on confidence that the funds are being well- invested. In this case, the confidence arose because some countries such as South Korea had already borrowed their way to more or less developed status. Taiwan, even without much borrowing, has made it and is now able to run a large current-account surplus. Japan, of course, has been a successful developed country for decades.
That experience has led most western analysts, as well as locals, to be optimistic about the prospects for Malaysia and Thailand, then Indonesia, China and even Vietnam following the same path.
They remain optimistic, and see the current setback to growth in the region as no more than a necessary corrective to an excess of enthusiasm – and deficits. On a longer perspective, however, the outlook is ominous, for two reasons.
First, East Asian countries vary. Japan and the “four little dragons” which followed it had a much sounder foundation for rapid growth than those which seek to follow them now: in land reform, for example, technical education, and the machinery of state. The two biggest “followers”, China and Indonesia, are particularly corrupt and have at the core of their economies enterprises that depend on state subsidy and favour not just for growth (like the enormous Korean industrial conglomerates) but for survival.
Second, at the level of the world economy the arithmetic looks very different. The followers can only hope to pay their way, as the four little dragons have done, by a massive expansion of manufactured exports – low-technology, labour-intensive goods. But for countries with populations totalling more than 1,25-billion to follow the same road is another matter.
So far, the rest of the world has absorbed their exports of manufactured goods. But the need for industrial employment will be on a scale hitherto unparalleled. In China, for example, it was estimated last year that agriculture would have a surplus of 200-million workers and state enterprises 50-million by 1999. In 1990, China was still a substantial grain and oil exporter; by 2000 it will be one of the world’s major importers of both. Indonesia, a grain importer but for a long time a major oil exporter, is on course to be an oil importer by 2000.
It is flying in the face of the economic laws of gravity for such large countries to expect to add so much to the world supply of low-tech manufactures without their price being pushed down, and to add so much to world demand for food and oil without their price being pushed up.
If world prices move against them, the numbers simply will not add up – the East Asian economies will not be able to go on growing rapidly and perform adequately on their balance of payments. And that is before we reckon on the increasing gloom about the climatic and ecological threats to the region, which suggest its food deficit will grow.
It is difficult to predict when gravity will finally catch up with East Asia because, as we have seen over the past few weeks, much depends on market sentiment – which may be infuriating for East Asian politicians but, when you have a current- account deficit of more than 5% of your national income, it is unavoidable.
Andrew Tylecote is a professor at Sheffield University and author of The Long Wave in the World Economy