Commentary: Is The East Asian Juggernaut Sputtering?

From Seoul to Singapore, Asians accustomed to thinking of themselves as immune to economic downturns are starting to wonder. After years of torrid growth, Tigers are suddenly reporting sharply slower exports, deteriorating current accounts, and lower gross domestic product forecasts. In South Korea, the finance minister has been forced to resign over a record first-half current account deficit of $9.3 billion. In Thailand, export growth in the first half plunged from 23.4% in 1995 to 4.4%, and the current account gap is expected to hit $15 billion by yearend. In China, exports actually dropped 8% after gains of 32% and 23% in 1994 and 1995.

The downturn has sharpened a debate among economists. A few Westerners, such as Paul Krugman, argue that the region is having a hard time finding growth through greater productivity and technological innovation. The big gains from capital investments and mass mobilizations of workers are over, they maintain. But many more economists argue that the downturn can be explained by cyclical factors such as currency fluctuations, a plunge in semiconductor prices, and policy changes in China. Asian economies should be humming nicely by next year, they predict.

Certainly it is far too early to say that the East Asian dynamo is finished. Still, as Asians gaze into the future, they should see that their export-led model needs an overhaul. One problem is the overcapacity in next-generation industries. Much of the region is counting on petrochemicals, autos, consumer electronics, and semiconductors to move up the value-added ladder as they lose their cheap-labor advantage in garments, shoes, and toys. South Korea and Taiwan are scrambling to catch up with Japan. And China, Indonesia, Malaysia, and Thailand are vying to be the next South Korea and Taiwan.

But East Asia's technocrats may have miscalculated. Clearly they have overshot global demand. Perhaps more important, they may have been too hasty in assuming that Japan and the West would walk away from these industries. The troubles facing South Korea can't be encouraging. Some of the hardest-hit sectors were semiconductors, petrochemicals, and steel, which accounted for 28% of 1995 exports. In each, says Lee Kyoung-Sook, a researcher at the Korea Institute for Industrial Economics & Trade, "oversupply pulled prices down."

True, few anticipated the falloff in demand that led to this year's 60% crash in memory-chip prices. But even if demand picks up, prices will be depressed by the dozens of wafer fabs going up in Singapore and Taiwan. In autos, Hyundai, Daewoo, Samsung, and Kia are boosting output. But China, Thailand, and Indonesia, all vying to be Asia's new export base, are adding more capacity than their markets can absorb. It's a similar story in telecom equipment and computer peripherals. Says Standard Chartered Bank's economist Kwok Kwok-chuen: "Overcapacity is becoming conspicuous. Ultimately, there will be a shakeout."

YEN AGAIN. Misjudgment of the yen is one reason why East Asia's Tigers overexpanded. When the yen hit 80 to the dollar last year, even many companies in Japan moved production elsewhere in the region. But since then, the dollar-pegged currencies of South Korea, Taiwan, Thailand, and China have gained more than 20% against the yen.

Most economists believe that as Japan gets rolling again, the yen will rebound and East Asia's export woes will vanish. What's more, most Tigers are likely to cushion themselves by broadening their currency baskets to include more yen. But such fluctuations are only part of the story, contends Kenneth S. Courtis, Tokyo-based chief economist for Deutsche Bank Capital Markets Asia. Thanks to corporate restructuring, Japan may not cede as much industrial base as expected. "The Japanese haven't been navel-gazing for the past four years," says Courtis. "They've cut costs."

If South Korea is having a hard time competing as a cheaper Japan despite its highly skilled work force, giant industrial groups, and a decade of experience in high-end exports, what does this say for the likes of Thailand, Malaysia, and Indonesia? They had better focus more of their industrial policies on their consumers, rather than counting on foreign markets to soak up their excess output. This summer's export slowdown could well turn out to be a blip. But if megafactories keep going up at the same pace, it could look mild compared to a more wrenching shakeout that looms in the future.