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Asia and the American Model

Has Southeast Asia followed a U.S. example for economic growth?

August 2, 2002

Has Southeast Asia followed a U.S. example for economic growth?

A new model of consumer-led growth is beginning to emerge in the tiger economies — in South Korea and Thailand, in particular.

This model owes a lot to the U.S. model. But in this instance, it is not the model which that the U.S. Treasury and International Monetary Fund, both Washington-based institutions, have been peddling for more than a decade.

Rather, it is the American post-war success story of consumer and government-deficit led growth that has made the United States such a prosperous middle-class economy.

The evidence is in the numbers. In 2002, Korea is expected to grow by approximately 5%, Indonesia by 3% — and Thailand by 2.5%. These figures are not spectacular by historic standards.

But given the world economic slowdown, which has also depressed growth rates in emerging economies, they represent significant progress.

In essence, Korea and Thailand have succeeded by doing as America does — not as its officials have said. In fact, the policies they have pursued in the aftermath of the Asian financial crisis fly in the face of the policy recommendations offered by the Clinton Administration and the IMF the time of the crisis.

Given that fact, it is even more perplexing that these recommendations are still being advocated in the beleaguered Latin America economies today.

Following the 1997/8 financial crisis, and owing to an immense contraction in the nation's economy, Korean officials decided to ignore the Clinton Administration and IMF doctrine of tight monetary and fiscal policy.

Instead they opted for an American-style consumer-led growth initiative.

That is why, in 1998, Korea lowered its interest rates — and began to pursue an expansionary fiscal policy. Shortly thereafter, other Asian economies followed suit.

As a result, Korea's central government expenditure increased from approximately 22% of GDP in 1997 to 26% of GDP in 1998. The policy change was based on the idea that increased government spending financed by the issuance of government bonds would be able to revive many small and medium-sized firms.

It was the same strategy that America introduced of an expansionary fiscal policy after World War II. That strategy also achieved great success at the time.

The break with Clinton Administration and IMF monetary policy in 1998 came after the Korean government had raised interest rates from 11.8% to 15.1%. This was deemed unsustainable.

The Korean government then slashed rates by almost 6 percentage points in 1999 — and continued to cut rates. By the end of 2001, Korean interest rates were down to 7.7%.

That decrease has helped create the consumer-led growth which has become prominent in Asia over the past couple of years.

To this day, targeted fiscal measures aimed at further increasing consumer confidence and strengthening the social safety net continue in several key countries in Asia.

The restructuring of Korea's banks and the severe financial problems experienced by many of the country's chaebol helped indirectly to create strong consumer credit markets.

How so? Well, it ensured an increase in the supply of consumer credit in relation to corporate credit. This triggered an important development: Domestic demand for consumer products is now on the increase. In addition, the savings rate is falling and Korea's over-reliance on export-led growth is gradually declining.

All of that stands in sharp contrast to Latin American countries. Many of them have followed U.S. Treasury and IMF guidelines quite religiously. And yet, by and large they but have failed to obtain many of the promised results.

Beleaguered Argentina, once heralded as the paradigm of IMF success, is experiencing its most severe economic, social and political meltdown to date.

Brazil is teetering on the edge of collapse. Venezuela, Colombia, and Uruguay are all facing harsh economic and political predicaments.

The other Latin American economies are only experiencing measured success — with inflation rates equaling, if not exceeding, those in Asia.

Why is that so? Certainly, it is important to recognize the structural differences that exist between Asian and Latin American economies. Unlike Latin America, the Asian tigers have a history of productive exporting and high savings rates.

Nevertheless, some lessons can be learned from the Asian experience, especially given the slowdown in developed economies. Most important is the importance of growth to investor confidence.

The U.S. Treasury and the IMF argue that currency stability is the most important variable in determining investor confidence in a country. This may be the case for short-term, speculative investments.

However, those wishing to invest on a longer-term basis — the kind of investment that creates stability — will be more interested in the growth prospects of an economy.

After all, an economy's growth is perhaps the key variable that determines long-term investor profits.Evidently, the Asian tigers still have a way to go in their economic reforms, both in the private and public sectors.

In particular, they still need to pay close attention to the possibility of inflationary pressures that are often caused by a loosening of fiscal and monetary policy and by an increase in the availability of consumer credit.

Still, the results observed in Asia hint at a policy prescription for ailing economies. The idea is to encourage the availability of consumer credit and support growth through consumerism.

Most important, draconian fiscal and monetary restrictions should never be valued over economic growth. In the final analysis, it is just the sort of model that has enabled the United States to flourish over the past sixty years.