Running Out of Steam

By Charles P. Alexander

Throughout 1983 and '84, the U.S. was the churning locomotive of the world economy. But when that engine of growth sputtered and slowed this year, many of the trading partners it was pulling along practically lurched off the track. The jolt was particularly rough on the export-driven economies of the Pacific Basin. In Taiwan, which depends on the American market to absorb nearly half its exports, growth in the production of goods and services, adjusted for inflation, has fallen from 10.9% in 1984 to a projected 4.2% this year. Over the same period, Singapore's rate of expansion has dropped from 8.2% to an estimated .5%. All around East Asia, the world's most dynamic economies have suddenly lost much of their steam.

Will the slowdown continue? That was the main question taken up at a meeting of TIME's Pacific Board of Economists in Hong Kong. In their annual forecast, the economists agreed that East Asia would spend another year in the doldrums. Though the board members expect a slight acceleration of growth rates in South Korea, Taiwan and Singapore, they foresee further declines in Japan, Hong Kong, Malaysia, Thailand and New Zealand. Said Edward Chen, a board member and director of the Center of Asian Studies at the University of Hong Kong: "I do not see a very bright picture for 1986." Only China, where capitalist-style reforms have helped drive growth to an estimated 12% this year, is expected to expand at a very rapid clip.

Asia can count on little help from the U.S. next year. Board Member Lawrence Krause, a senior fellow at the Brookings Institution in Washington, noted that America's exploding foreign debt, which is now approaching $100 billion, is unsustainable. It will put limits on what the U.S. can afford to buy from abroad.

Another factor that will restrain U.S. imports is the falling value of the dollar. Since early March, it has dropped 17% against an average of other major currencies. The finance ministers of the so-called Group of Five--the U.S., Japan, West Germany, France and Britain--announced in September a coordinated effort to bring down the rate of the dollar. A cheaper currency will make imports more expensive for Americans and thus help the U.S. cut its $150 billion annual trade deficit. But it will also inflict further dam age on Asia's export industries.

If the dollar does not stay down, American industries will keep pushing hard to raise import barriers. Last week the U.S. Senate approved a measure similar to one already passed by the House of Representatives that would curb textile and apparel shipments from a dozen exporters, including South Korea and Hong Kong. In addition, the U.S. International Trade Commission issued a preliminary ruling that low-priced Japanese products were hurting the American semiconductor industry. That could lead to import restrictions on computer chips.

Such threats frighten the East Asian nations, which have come to rely upon the U.S. as a benevolent trading partner. Said Narongchai Akrasanee, managing director of Thailand's Industrial Management Co.: "Our big brother, the U.S., is threatening to declare a trade war with the rest of the family." Complained Suh Sang Mok, vice president of the Korea Development Institute: "A lot of people in South Korea feel that it is being picked out as a sacrificial lamb."

The uncertainties swirling around world trade put a damper on the Asian economists' usual optimism. Their forecasts for major Pacific nations:

JAPAN. The focus of the American protectionist furor is Japan, which racked up a $37 billion trade surplus with the U.S. last year. Trying to curb that imbalance, Prime Minister Yasuhiro Nakasone has moved in 1985 to modify regulations that block imports and has gone on national television to urge the Japanese people to buy foreign goods. Nakasone also hopes to spur imports by stimulating the Japanese economy. Last month the government unveiled a program to boost real estate development and ease restrictions on consumer loans.

Bunroku Yoshino, president of the Institute for International Economic Studies in Tokyo, predicted that Nakasone's modest plan would have little impact. He expects the Japanese growth rate to slip from 4.5% this year to 4% or even 3.5% in 1986, primarily because the country's exports will increase at a slower pace. The government is reluctant to adopt more potent stimulative measures, like large tax cuts, because it wants to keep the Japanese inflation rate, only about 2.5% this year, firmly under control.

SOUTH KOREA. From January through September, South Korea's exports were down 1.3% from the same period a year ago. Some of the most important industries were hardest hit: steel exports fell 8.4%, and electronics shipments were off 7.2%. The export decline helped slice South Korea's growth rate from 7.5% in 1984 to about 4.8% this year.

The government is now stimulating the economy in hopes that increased demand by Korean consumers will make up for lost exports. Public spending is up about 10% this year, and the money supply is expanding at a 15% clip, compared with 10% in 1984. Economist Suh forecast that the government's generosity will help boost the South Korean growth rate slightly, to 6.2%, next year.

CHINA. Under Deng Xiaoping, China is rapidly transforming its economy by loosening centralized Communist control. State-owned businesses can now keep part of their profits and thus have an incentive to be more productive. Most important, China is opening its door to the Western consumer culture. Color television sets, washing machines and refrigerators are becoming commonplace in big cities.

For the Chinese outlook, TIME's Pacific Board invited its first guest economist from the People's Republic: Huan Xiang, the director general of Peking's Center for International Studies. Huan reported that Deng's reforms have been a tonic for the Chinese economy, but its runaway 12% growth rate is a bit more than the country can handle. The quality of many manufactured goods is suffering, and inflation is a disturbing 8%. A flood of imports has created a record trade deficit of more than $4 billion this year. Said Huan: "We have been on a spree of building too much, spending too much and importing too much."

To slow things down, the government has curbed the money supply and put new limits on foreign purchases. Two weeks ago, for example, Peking slapped a two-year ban on imports of cars and trucks, Huan predicted that all those measures would reduce growth slightly, perhaps to 9%, next year. Despite China's growing pains, Huan thinks the country will stay on its new course. Said he: "We must not be afraid of learning from the capitalists."

HONG KONG. Since the U.S. market has become less inviting, Hong Kong has turned to China to take up some of the slack. The British colony's direct exports to the People's Republic totaled $1 billion during the first six months of the year, up more than 40% from the same period of 1984. But Economist Chen pointed out that this trade could be hurt by China's new restrictions on imports. He said that Hong Kong's current 4.5% growth rate would show no improvement in 1986.

TAIWAN. Already reeling from a drop in exports to the U.S., Taiwan's economy was rocked this year by the collapse of two financial divisions of the giant Cathay conglomerate. The affair has shaken business confidence and hurt investment. Taiwan's 4.2% growth rate this year is weak for a country that averaged 9% annually between 1970 and 1984.

To get Taiwan moving again, the government is launching 14 huge capital construction projects, including a subway system in Taipei, several hospital complexes and a steel mill expansion. Economist Chen predicted that these initiatives would help lift Taiwan's growth to about 5% next year.

ASEAN. Singapore is ordinarily the supernova of the Association of South East Asian Nations, but this year its glow has almost gone out. Its .5% growth rate has come as a shock and an embarrassment to Prime Minister Lee Kuan Yew, who has cut taxes and utility costs and accelerated work on Singapore's new mass-transit system. His program, said Board Member Narongchai, could boost the country's growth to 2% next year.

Several less developed ASEAN countries, including Thailand, Malaysia, Indonesia and the Philippines, are hurt by low prices for many commodities they export, including palm oil and sugar. Said Narongchai: "The way prices are moving, people feel that we might as well dump our commodities into the Pacific Ocean."

TIME's economists forecast that growth in Thailand, Malaysia and Indonesia will stay stuck in the 3%-to-5% range through 1986. The most troubled ASEAN nation will continue to be the Philippines, where the economy is contracting by 5% this year. The regime of President Ferdinand Marcos has stirred political unrest and damaged business confidence. Economist Bernardo Villegas, senior vice president of the Philippines' Center for Research and Communication, predicted that the country will eke out a 1% growth next year, but only because Marcos will pump money into the economy for next January's election. That is not likely to have lasting effects. Said Villegas: "The investment climate will continue to be negative as long as Marcos is around."

AUSTRALIA. Since 1983, Australia's annual growth has been a solid 5% to 6%, and unemployment has fallen from 10% to 8.1%. But the expansion has stimulated imports and increased the trade deficit, which hit a record $364 million in October. The deficit has driven down the value of the Australian dollar and doubled the inflation rate, to about 8%. As prices have risen, interest rates have climbed to the 18% range.

Nonetheless, Peter Drysdale, executive director of the Australia-Japan Research Center at the Australian National University in Canberra, predicted that the country will maintain a 5% growth level in 1986. He noted that the government had persuaded major trade unions to accept wage increases next year that will be two percentage points less than the inflation rate. That could take the pressure off prices.

For the Pacific Community as a whole, the lesson of 1985 is that too much reliance on the U.S. market is risky. "The U.S. cannot continue to be the only engine of growth in the world economy," said Krause. The economists agreed that the Asian nations will have to develop trade among themselves and raise living standards so that they consume more of their own products. Observed Drysdale: "We need a transition from North American-led growth to Western Pacific-led growth."

At the moment, Japan is in the best position to boost its imports. But its neighbors have had an even tougher time cracking Japan's trade barriers than the U.S. has. "There is a growing resentment in the region about access to the Japanese market," said Drysdale.

In the long run, China could become the most attractive market of all. Already Japan sends more goods to China[*] some $9 billion worth so far this year--than any other country except the U.S. "We see no limit to economic relations with China," said Japan's Yoshino. In addition, China is building trade with less developed Asian countries, buying rubber and pig iron, for example, from Malaysia.

Despite the difficulties of 1985, TIME's economists agreed that the year could be profitable if it encourages the Pacific countries to re-examine their economic strategies. Even the threat of Western import barriers could be helpful if it forces countries to find different trading partners and new ways to grow. Concluded Hong Kong's Chen: "Protectionism can be an early signal to adjust. And only countries that learn to adjust can prosper." --By Charles P. Alexander Forecasts by TIME's Pacific Board of Economists

[*] Time's U.S. Board of Economists