/ News&Analyses / Asia & Pacific Economics & Finance
Cheaper Isn't Better
(...) [T]he widely held view until a few months ago was that Asia was coming into its own in economic terms. The mere mention of the continent would conjure up images of booming growth, surging consumer spending and buzzing entrepreneurial energy.
But the reality is that outside of the sensational stories of China and India, domestic demand in much of Asia has been moribund, even during the golden era of high world economic growth from 2003 to 2007. That left the region as dependent as ever on exports. And now with global trade collapsing, the Asian model of "exporting your way to prosperity" stands well and truly broken.
For years the popular thinking among economists was that the fastest path to development was to ship out cheaply produced goods to the industrial world, while undervaluing one's currency to make those goods even less expensive in export markets.
The model worked well in the 1980s and '90s, when only a few Asian countries such as South Korea and Malaysia were playing the export field and the United States was in the midst of a consumption binge. But the export pie is finite, and cracks began to show up in the mid-'90s with the growing presence of China. The sharp devaluation of the Chinese currency in 1994 was cited as an important factor in the eventual outbreak of the region's economic crisis in 1997-98.
Back then, a slowdown in the export growth of countries such as Thailand resulted in trade deficits widening to unsustainable levels. But instead of rebalancing the economy to rely more on domestic growth, Thailand increased its reliance on exports in the aftermath of the late-'90s financial crisis. It was the easy way out, since the global economy was booming. Currently, exports form a larger part of the Thai economy than domestic consumption—a rather anomalous situation. (...)
Some of Thailand's problems stem from the fact that the political class has spent the past few years engaged in a standoff over the controversial leadership of exiled ex-president Thaksin Shinawatra and his successors, rather than reforming the economy. Thailand has had three different prime ministers since September 2008, while other governments been focused on countering the economic meltdown. (...)
Thailand's leaders need to get their act together. To move to the next stage of economic development, Thailand must unlock domestic demand by creating the right economic incentives for private enterprise to flourish within the country. Businesses cite the poor regulatory environment, cumbersome labor laws, long customs procedures and the poor education system as factors holding back local growth. Thailand itself has not seen an investment upturn since the 1997-98 crisis, leaving its infrastructure in need of a fix as well, something critical in boosting domestic demand.
Following the Asian financial crisis, Thailand, like many of its neighbors, focused on fortifying themselves against any external shock by building up massive foreign-exchange reserves and running current-account surpluses. The one positive result of such mercantilist policies is that much of the region is currently not stretched in credit and investment terms. The deep psychological scars from the 1997-98 financial crisis prompted consumers and companies in the region to pay down debt and stay away from taking any excessive leverage resulting in record-low loan-deposit ratios in the banking system.
But in the effort to protect themselves from any homegrown crisis, these countries ignored the potential negative effects from a falloff in global demand. Malaysia, for instance, continues to gear its economy mainly to manufacture electronic goods, which are now also produced in lower-cost economies including China and Vietnam. Meanwhile, the larger and relatively more advanced economies of South Korea and Taiwan have been unable to shift to a service-sector-oriented model that would allow them to grow at a faster rate. Little wonder that apart from Thailand, Korea and Taiwan are the other developing Asian economies set to contract this year. (...)
The "exporting your way to prosperity" model served many of the East Asian economies well when U.S. demand was ripping ahead, and some of the large emerging markets, such as India and Brazil, were still only marginal players in the export markets. But now, with the developed world set for a protracted period of subpar growth and newly emerging economies including Vietnam and Bangladesh arriving on the global scene to get a piece of the action in the low-value-added export segment, it's time for economies like Thailand to seek new direction. Otherwise, they risk becoming just nice places to visit—and not even that when their restless people are blocking the airports.
