Sun, Jul 09, 2000 page9

• Saving rates are catalyst for Asia's economic woes

  As Asian countries are saving more now in fear of not having enough later, they are only doing a disservice to their economies

  • By Christopher Lingle
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  A high rate of saving among Asians was once credited for its important contribution to the remarkable performance of their miracle economies. Japan recession and China deflationary cycle indicate that a high rate of saving does not guarantee high growth. This is because high savings reduces overall spending by households and companies. It may also lead to high public and private debt due to relatively low borrowing costs.

  It has become clear that neither aggressive investment spending nor high saving rates can guarantee sustainable growth. Now, high savings should be interpreted as a symptom of despair of East Asia economies. A considerable part of the investments over the past decade has evaporated in a property bubble or disintegrated into excess capacity of production facilities. This destruction of wealth represents one of the greatest heists in modern time.

  As many of the region economies are reviving from slowdowns or full-blown recessions, uncertainty about the future is inspiring Asians to save even more money. Obviously, the increase in savings means there is less buying. In turn, companies find themselves holding growing inventories and lower profits as they resort to price-cutting necessary to shed unwanted stockpiles. At the same time, there will be reductions in employment that induce households to begin another cycle of saving more saving and spending less.

  Biggest culprits

  In South Korea, according to estimates from ADB and IMF, where unemployment moved towards an all-time high of 2 million or just over 9 percent and the economy is suffering from stagnating growth, gross national savings rose to over 35 percent of GDP in 1998 from about 33 percent in 1997. The figure for Japan is 27 percent, just over 30 percent for Hong Kong, and over 45 percent for Malaysia and Singapore while in Thailand savings are 34 percent of GDP. Similar results are being observed in China. Although always high (about 44 percent), its marginal saving rate climbed substantially during 1999. Pressures from a deflationary spiral of declining prices induce households and businesses to defer spending.

  Japan saving rate of 33 percent is likely to continue to be pushed higher. Households there have been ignoring rising public expenditures, entreaties from political leaders, even free sales vouchers. Instead they continue to add to their savings. There is little wonder why.

  Japanese workers do not spend because they are worried about whether they will lose their job. And then demography works against rising consumption due to Japan's swelling ranks of elderly who are not big spenders in any country. Taxpayers face huge bills for recapitalizing Japan banks and for the additional government spending must put away funds in anticipation of rising taxes in the future. Then young Japanese are finding fewer prospects for employment and many may face a difficult choice to emigrate. In this tough environment of tight-fisted consumers, it is difficult imagining businesses wishing to invest. Even were they willing or able to expand, the banking crisis makes it unlikely that find banks would be willing to lend.

  And so it is domestic woes that have been the undoing of countries that staked their economic futures on exports. As a consequence of their neo-mercantilist approach to development, most East Asian economies had 2 distinct sectors. Their international sectors tended to be modernized and geared up to meet and beat competition from global competitors.

  Companies operating locally found themselves shielded from internal and external competition so that years of protection behind regulatory walls kept them from being cost conscious or stripped them of incentives to be innovative. As in most economies, their domestic sectors were the largest component, and it is this sector that is pulling these economies down and holding them back from recovery.

  Political leaders seeking to see their countries escape the economic doldrums need to understand there must be massive restructuring of their domestic sectors. And this should be done quickly so that their economies can stabilize before they can recover.

  Trade disadvantages

  The advantages from trading are not from exporting. Instead, advantages from trade arise from allowing producers and consumers to buy from the least cost provider to inspire efficiency as a basis for growth.

  Import-led growth arises from foreign competitors imposing pressures upon domestic producers that must become efficient in order to survive. When these improvements lead to gains in labor productivity, wages rise and provide the basis for higher consumption. Productivity gains also lower unit costs while allowing growth in profits to enhance shareholders wealth that can boost consumption and investment.

  And then, the benefits begin to extend to the international sector. Allowing inputs or intermediate goods to be imported for the export sector leads to lower operating costs. As production costs fall and productivity increases, the capacity to sell in an export market rises. As multinational enterprises experience rising profits, they are able to shop around for overseas production facilities and better sources of raw materials.

  East Asia economies have to undergo a radical transformation that focuses upon inward development through a further opening and liberalization of their trade and financial markets. Savers deserve to have higher returns on their assets. This will inspire greater efficiency arising from competition and provide a solid base of domestic demand to ensure sustainable economic growth. Ironically, the clearest signals of recovery for the crisis economies will be when savings decline and imports rise.

  Christopher Lingle is Global Strategist for eConoLytics.com.
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