Asian Tiger Looking Skittish

Meanwhile, a lack of domestic demand to cushion the economy from the current global downturn is exacerbating the problem, prompting economists to predict a slowdown that is far more severe that first thought and then a impotent recovery to follow in 2002.

The prospect of another slump emerged with the release of first quarter growth figures showing East Asia has hit a wall. Following hot on the heels of two successive years of strong, 7 per cent growth, all the countries of East Asia, with the exception of China, are experiencing a sharp slowdown.

The slump, which bears a striking resemblance to the financial crisis of 1997-98, has several banks predicting 2001 will reveal the second-worst GDP growth performance in Asia for 20 years, second only to the time of the Asian crisis. But unlike that time, when only Asia was slumped, the current economic slowdown is increasingly synchronised, with Europe and the US joining Asia in its decline - a fact that only adds to the concern.

The US economic slowdown, in particular, has caused a collapse in America's information technology investment in the Asian region. This sharp drop-off in IT investment has taken the role of a new form of economic contagion that is spreading recessionary fears throughout Asia.

The US, currently suffering from a loss of economic momentum, is one of East Asia's two largest export markets. Japan, currently in recession, is the other. As a result, exports from East Asia, excluding China, fell by 10 per cent last year. Even Chinese export growth fell from 40 per cent to 4 per cent over the past year, despite a reasonable performance in GDP growth.

US IT investment as a form of economic contagion means the US has exported away a portion of it's recession to small East Asian countries, most of which have particularly open economies. The openness of these economies, which rely on exports to comprise up to 50 per cent of GDP, makes them very vulnerable to a global slump.

In contrast, China's economy has been insulated from the contagion somewhat, given its more relaxed reliance on exports. China has therefore been less hurt by the global slowdown.

However, for the rest of East Asia, a lack of domestic demand that would have acted as a cushion to the global downturn, is merely a symptom of its reliance on exports to recover from the Asian crisis in the late 1990s. Rather than building up domestic demand by completing structural reforms as promised, East Asia used exports as a medium to transfer the effects of the US boom as a "quick-fix" to its crisis.

So East Asia's quicker-than-expected recovery from the crisis stopped myopic policy makers from implementing reforms, so even when the global economic situation turns for the better, it's unlikely there will be any significant improvement in private sector investment. Fragile banking systems and inadequate corporate restructuring will ensure that. Also, banks remain hampered by bad loans and governments have failed to stimulate domestic demand.

The risk now is in East Asia's policy makers blaming their economic woes on the global slump rather than on the inherent instabilities in their own economies. The East Asian governments may now avoid reforms of the painful short-term economic, social and political costs that are associated. However, that is exactly what is required to cushion Asia from the export slump caused by the global slowdown.

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