Hooked on Growth

By Charles P. Alexander

TIME'S Pacific Board of Economists assesses the region's future

In industry after industry, from textiles to steel, the leading edge of economic growth has moved from the once dominant U.S. and Western Europe to the fast-rising nations bordering the western Pacific. Since 1960 the gross national product of many Asian countries has grown, after adjusting for inflation, at an average annual pace of nearly 10%, more than twice the rate of the Western economies. To analyze the increasingly important role this region plays in the world economy, TIME has formed a Pacific Board of Economists, bringing together experts from four Asian states, Australia and the U.S. A report on the board's inaugural meeting this month in Hong Kong:

While economic performance around the Pacific rim remains the envy of the world, the global recession has helped drive down average growth in the major Asian nations from 6% in 1981 to about 4% this year. TIME'S economists foresee a modest upswing for Asia beginning in 1983 (see table), but that expectation depends heavily on what happens in the U.S., the single biggest Western market for Pacific exports, and Japan, an increasingly important customer for its neighbors. The U.S.'s G.N.P. has declined this year by about 2%, and even a modest rebound could dramatically help America's trading partners. A big push is also needed from Japan, where production is now rising at a rate of only 2.5%. TIME'S economists predict that America and Japan will pull out of their doldrums and help most Pacific nations achieve growth rates between 5% and 8% next year. Their views on some key economies:

JAPAN. For decades, export has been the engine of Japanese expansion. Domestic consumption has taken a back seat to investment in industries that could sell products overseas. Suddenly, the global slump has thrown that strategy into jeopardy. Japanese exports have fallen by 10% in the past year. "There are no more Japanese miracles," said Board Member Saburo Okita of Japan, president of Tokyo's International University, who explained that lack of purchasing power everywhere was causing stagnation.

Other members of TIME'S board suggested that the Japanese government should respond to the export shortfall by increasing spending to stimulate domestic consumption. Okita countered that such a course would be difficult because the government is already running a revenue deficit equal to 30% of its expenditures.

Board Member Peter Drysdale, executive director of the Australia-Japan Research Center at the Australian National University, maintained that with a current inflation rate of only 1.7%, Japan is in a uniquely strong position to adopt a stimulative policy. Said he: "Japan can be seen as a kind of excessively cautious giant at this time, hesitating to expand its economy for fear of rekindling inflation."

Okita believes that Japan nonetheless will double its growth rate, to 5%, by the end of 1983--but only with an upturn in the sluggish Western economies. Said Okita: "Japan cannot remain an island of prosperity in an ocean of recession."

SOUTH KOREA. After a coup and an economic downturn in 1980, South Korea's economy has rebounded to become one of the strongest in Asia. The country's success in heavy industry shows in its exports of steel, ships and construction services. The government of President Chun Doo Hwan is now gearing up a "second engine" of growth: a sweeping program of construction. The government is building rural highways, big housing projects and a subway for Seoul, the capital.

Kim Ki Hwan, director of the Korean Development Institute in Seoul, predicted that such projects will help boost South Korea's growth rate to 8% in 1983, from 4.6% now. The economy has had a lift from what Board Member Kim calls "a remarkable price performance." The inflation rate has slowed to 5.5%, from 12.6% in 1981, which Kim attributes to the willingness of workers and farmers to accept smaller wage and price rises.

ASEAN. For the five countries of the Association of South East Asian Nations (Singapore, Thailand, the Philippines, Malaysia and Indonesia) the world recession has brought a slowdown in growth and a rise in unemployment, but also some relief from inflation. As a highflying exporter of industrial goods, Singapore had the furthest to fall: its G.N.P. grew by almost 10% in 1981, and is rising by only 5% now. At the same time, inflation has dipped from 8.2% to 5%. Board Member Narongchai Akrasanee, an economic adviser to the Industrial Finance Corporation of Thailand, finds the economy healthy: "Singapore has achieved a good standard of living, and the people should be satisfied with 5% growth."

In the economies of the less developed ASEAN nations, which have been hard hit by falling commodity prices, growth has slowed by 1 1/2 to two percentage points. Despite this, Narongchai sees many hopeful signs. The Philippines and Indonesia have strengthened their agricultural output. Thailand is rapidly developing its natural gas-and oilfields. As a result, all the ASEAN members should have a modest acceleration next year, predicted Narongchai.

HONG KONG. The recession, along with rising unease about what will happen to Hong Kong when Britain's lease on most of the colony expires in 1997 (see box), has slashed the island's G.N.P. growth rate from 11% last year to about 4%. Hong Kong's real estate market is sagging: land and building prices have dropped by as much as 30% in less than three months. Several real estate firms are heavily in debt to the banks. Said Board Member Edward Chen, director of the Center for Asian Studies at the University of Hong Kong: "Hong Kong has put too much emphasis on real estate, and once that business is in trouble, the banking sector is in trouble. That could damage the whole economy." Chen predicted another slow year of 4% growth for Hong Kong in 1983.

CHINA. Across the Shum Chun River from Hong Kong, the People's Republic of China is lumbering along in its quest to modernize a vast economy. Helped by limited experiments in free enterprise, China's growth rate is a respectable 5%, up from 3% to 4% for the past few years. Chen forecasts a lift of more than 5% next year.

China's biggest worry is its 25% urban unemployment rate. Creation of new jobs has been slow, in part because of the government's preoccupation with restraining its spending. "The Chinese," said Chen, "believe in conservative policies even more than President Reagan does."

AUSTRALIA. This nation is suffering a bout of stagflation. Said Board Member Drysdale: "Policymakers are bewildered if not downright rattled by what is happening." Hefty wage demands by Australian workers have fueled inflation, now running at a rate of more than 11.5%. To trim costs, companies have slashed their payrolls, and unemployment has swelled to 7.8%, the highest level in half a century. To make matters worse, Australia's southern and eastern states are enduring their fiercest drought in 40 years.

By the middle of next year, Drysdale predicted, overall economic output may be falling at an annual rate of 2.7%, its first decline in three decades. Beyond 1983, the outlook brightens again. With a cornucopia of natural treasures, from bauxite to diamonds, Australia can almost certainly overcome its current woes.

UNITED STATES. Several signs point to an American recovery, observed U.S. Board Member Lawrence Krause, a senior fellow at the Brookings Institution in Washington, D.C. Krause foresees a further three-point decline in the prime rate at banks, which has already fallen from 16% to 12% since July. A rally in the stock and bond markets has added some $100 billion to the wealth of investors, and should spur consumer spending. By the end of 1983, Krause said, the U.S. could be growing at a rate of 3%, a bracing tonic for Asian export industries.

The chief threat to American prosperity is the ballooning federal deficit, which threatens to top $175 billion next year. Krause fears that the budget gap could lead to a new interest-rate spike that would puncture the recovery.

After presenting their forecasts, TIME'S economists turned to a discussion of the reasons for Asia's remarkable performance, citing a number of Asian advantages:

Flexibility. The members of the Pacific community have been able to adapt to the changing needs and wants of the world. They have built mammoth industries to make oil-drilling rigs and steel, and they have also cashed in on designer clothing and personal computers. Ironically, noted Chen, "the states that have been most successful are those that are very poor in resources, like Singapore, Taiwan and Hong Kong. They have not been tied down like Malaysia to tin and rubber."

Government Cooperation. "In each of these countries," observed Drysdale, "there is an important social and political commitment to a growth orientation." The role of Asian governments in their economies varies widely. Japan's Ministry of International Trade and Industry provides elaborate aid and direction to business. At the other extreme, Hong Kong's government has chosen a laissez-faire approach. In every case, however, governments have been fundamentally probusiness. Asian companies are relatively free from the high taxation and regulations that shackle many Western firms.

Late Entry into the Growth Race. "All of us," said Okita, "are latecomers to development, so we were able to use economic models from North America and Europe." In addition, contended Narongchai, the Asians saw how multinational corporations had exploited other developing areas like Latin America. Said he: "By the time the Asian governments launched their development programs, they were intelligent enough to manage their own resources and not to allow the multinationals to rape their economies."

Hardworking Populations. The people of many Asian countries seem to share an ethos of self-sacrifice and dedication to the common good. Said Okita: "The work ethic and discipline are stronger in this region than in Europe or North America." Fierce competition is often the motivation. Most Asian nations have young, burgeoning populations: about 40% of the people are under 15, which creates enormous pressure for breadwinners to produce.

These sources of dynamism, agreed TIME'S economists, will help propel Asia in the future as they have pushed it in the past. But there are new challenges now.

"All these countries," said Chen, "are entering a second phase, a second industrial revolution that will be much harder than the first." The leaders of Asia will have to shift their economies gradually to exotic specialties like electronics and robotics.

"In the second industrial revolution," said Chen, "some kind of optimum government policy will be vital in guiding the path of economic development." Chen argued that most Asian nations are still groping to find that policy. In South Korea, too rigid government planning has led the country into several unsuccessful ventures like automobile manufacturing. The crucial task for governments, said Chen, will be to seek out a course that is neither too lax nor too heavyhanded.

Perhaps the greatest threat to Asian growth, particularly in a weak world economy, is the proliferation of trade barriers. Said Drysdale: "Protectionism has become a major problem." The Asian nations face formidable restrictions in the West on imports of automobiles, television sets, textiles and machine tools.

The spread of protectionism makes it all the more essential for the Pacific countries to develop trade within their own region. While Japan has been a successful exporter with an increasingly affluent population, its government has not yet fully opened the gates to imports from other Asian nations. China, with its immense population, has isolated itself for decades and only recently begun to look outward. "If both Japan and China were to adapt themselves to greater imports from their neighbors," concluded Krause, "it would generate a dynamic trade expansion that would allow Asia to far outdistance the rest of the world."

Despite the growing pains that the Pacific rim will inevitably face, TIME'S economists agreed that the outlook for the region is exceptionally bright. "Asia is hooked on growth," said Kim. That is not likely to change. --By Charles P. Alexander

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