This North-South Split Shows There's no Asian Model
(Bloomberg Opinion) -- The grinding recovery from the epic global recession has generated a deep divide within Asia: Economies in the north are ascendant and their once faster-growing southern neighbors are mired in a deep funk. Executives and officials should take note of the forces driving the split when they consider the “Asian model” in the post-pandemic commercial order.
The chasm can be seen in recent gross domestic product numbers. China’s recovery hastened, and Taiwan returned to growth last quarter. South Korea's better-than-forecast results suggest it's not far behind. The contrast with once flashy emerging markets is stark. Far from finding an exit ramp, Indonesia entered recession. The Philippines mustered a merely less catastrophic contraction of 11.5% in GDP from a year earlier, according to figures released Tuesday. That followed a decline of 16.9% in the second quarter.
The North’s outperformance is driven by exports and success in containing Covid-19. Manufacturing heft helps ride the wave of demand for the technology it sells. From Melbourne to Milan, the shift to working from home puts countries like China and Korea in the sweet spot. Another ingredient is effective fiscal and monetary stimulus, and not just their own. Largesse deployed in the U.S. has been at least as influential as domestic measures. Premature withdrawal of budget support under Joe Biden’s presidency because of Republican Senate intransigence would be unhelpful, though it wouldn’t fundamentally redraw this new map.
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Looking for a superior Asian model would be misunderstanding the problem. There is no one Asia; not this year. There are clusters of countries better positioned because of industrial framework, health systems, geography and the ability of their political systems to respond to the pandemic. Other places, in South and Southeast Asia, are still enduring economic hits that will set back development years.
Still, projections look good from 30,000 feet. As a whole, Asia’s economy will shrink 2.2% this year, and bounce 6.9% in 2021, according to International Monetary Fund predictions last month. That’s superior to numbers penciled in for the U.S. and far ahead of the euro zone, which is forecast to contract a whopping 8.3% in 2020. But look closely at those Asian predictions. They’re flattered by rebounds in China, Korea, Taiwan and, to a degree, Japan. Most other countries are languishing.
There are underlying forces at work that don’t depend on the anticipated gridlock following the U.S. election. Being an export powerhouse is necessary, but insufficient. You have to get your factories up and running, as China did through fiat and South Korea and Taiwan managed through contact tracing and social distancing. Seoul never imposed a national lockdown, nor did Taipei. In Southeast Asia, agonizing shutdowns and curbs on activity have become the norm.
What’s exported matters, and technology is key. Sales of other products are struggling. Korea's steel and chemicals exports trail the surge in tech. Memory chipmakers are benefiting from demand for cloud computing, and Taiwan’s semiconductor foundries are buoyed by smartphone upgrades, according to Vincent Tsui, an economist at Gavekal Research in Hong Kong. China is massive in most supply chains. “Northeast Asia is the key engine,” Tsui said. “For the rest, it’s less clear; there are some signs of recovery, but they have yet to catch up.”
The Philippines’ major export is people. The archipelago never really became a significant part of global manufacturing supply chains. Same with Indonesia, where multinationals churn out goods primarily for local consumption. About 10% of the Philippine population was abroad before the pandemic, performing roles vital to Singapore, Hong Kong, the Gulf states and global shipping. But they leave the Philippines vulnerable to a collapse in host-country labor markets. Many have returned home to mounting unemployment.
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Stimulus matters, too, and the right kind. Fiscal has led the way in many of the places doing better. It's especially striking in Korea, which had a longstanding reticence about budgetary expansion. But stimulate it has, to the tune of about 14% of GDP. Indonesia, by comparison, has been all over the shop. The government has committed funds, but is having trouble getting them out the door. Jakarta has gone so far as to have the central bank monetize debt. That adventurism works if you can actually spend it.
No country is entirely master of its own destiny. If the world economy took a fresh nosedive, the fracture within Asia would be aggravated. Thankfully, the Federal Reserve stands at the ready. The central bank sure could use help, though. If Senate Majority Leader Mitch McConnell digs his heels against meaningful fiscal stimulus, the Fed will carry a great burden, as it did in the years following 2010 when austerity became fashionable.
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Some export fans see a weaker dollar as a potential threat to Asia because, in theory, it would tend to make American products more attractive on price. I’m skeptical this is a major problem; the greenback was relatively strong in the decade after the great financial crisis, when the Fed’s quantitative easing sluiced markets. The runaway inflation and dollar debasement supposed to follow were largely absent.
Don’t get me wrong. Asia could use help from Biden and McConnell. But there's unlikely to be much. The kitchen-table conference rooms whetting appetites for tech from Korea, Taiwan and Japan have the floor.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.
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