Welcome Whats Going on in East Asia Implications for American Business

1
Welcome Whats Going on in East
AsiaImplications for American Business

• F. Gerard Adams
• Syllabus
• Readings
• Nidas Company Case Presentation/Discussion
• Participation
• Research Paper

2
Focus of discussion

• Asian Developments in Light of New Economy

3
Whats Going on in East Asia
4
Whats Going on in East Asia From
Miracle to Meltdown

• From the perspective of international economics
  and business, the defining event of the l990s
  decade has been the miracle and meltdown of East
  Asian growth, just like the Latin American debt
  crisis was in the l980s and the oil shock in the
  l970s

5
Whats Going on in East AsiaFrom Miracle to
Meltdown

• --The experience
• --the growth miracle
• --the l997 meltdown
• --the recovery?

Optimism
Stability
1997
Pessimisim
6
East Asian Economic Growth A Miracle?

• Development economics as the dismal science

7
Vicious Circles

• Malthusian
• Low Income and Low Saving
• Low Prices of Primary Products
• Low Skill
• Low Scale of Production

8
Virtuous Circles

• Decline in Population Growth
• Turn to Export Manufactures
• High Saving and Investment
• Declining Resource Costs
• Increases in Scale of Production
• Introduction of Technology

9
Nature of East Asia

• Today
• Export oriented manufacturing
• Incomes range from 1000 (Vietnam) to 25000
  (Singapore)
• Some urban( HK) but other still have rural
  population(Thailand)

10
Nature of East Asia
11
Nature of East Asia

• free market economies v. transition economies

12
East Asian Economic Growth GDP Growh
1970-80 1980-90 1990-1998

• Hong Kong 9.2 6.9
  4.4
  
• Singapore 8.3 6.6
  8.0
• S.Korea 10.1 9.4
  6.2
• Indonesia 7.2 6.1
  5.8
• Malaysia 7.9 5.3
  7.7
• Philippines 6.0 1.0
  3.3
• Thailand 7.1 7.6
  7.4
• China 5.5 10.2
  10.1
• US 2.8 3.0
  2.9
• Japan 4.3 4.0
  1.3

13
The S-Curve of East Asian Growth
GDP 000 per capita
US
Ja
Si
20-
Hk
Ko
Tai
10-
Ma
Th
5-
Ch
Ph
2-
10
20
30
40
50
Years from Start
14
The East Asian Development Ladder Flying Geese
Pattern
15
The Development Ladder--Stages
Stage 1 Stage 2 Stage 3 Stage 4
Primary Products Labor Intensive
Manufactures Hi Tech Manufactures Services
(high level)
Abundant cheap land and labor Low Cost
Labor Capital Intensive, Technically
Sophisticated Products Domestic and International
Services
16
The Relay Race
Less Advanced Country
More Advanced Country
Industry
17
The Stages of the Product Cycle Process
1950-65 1965-1980 1980-1995
1995-2010
China Korea Taiwan Philippines Malaysia Indonesia
Thailand Singapore
Stage 1
Indonesia Philippines Vietnam
Thailand Malaysia China Indonesia Philippines
Laos Cambodia Myanmar
Japan Hong Kong
Taiwan Singapore Hong Kong Korea Japan
Stage 2
Thailand Malaysia China
Indonesia Philippines Vietnam Thailand China
Taiwan Singapore Hong Kong Korea Japan
Stage3
Malaysia Taiwan Korea Japan
Stage 4
Singapore HongKong
18
Where Does the New Economy fit here?
19
Economics and the New Economy

• What is the New Economy
• Renewed Growth of Productivity in the Advanced
  Countries
• Without inflation or Unemployment
• Globalization of hardware and software production
• Why?

20
The Sources of East Asian Growth

• Input-based Growth
• Technical Change

21
The Sources of East Asian Growth

• Input-based Growth
• Savings and Investment
• Foreign Direct Investment

22
Investment and Growth
23
The Sources of East Asian Growth

• Input-based Growth
• Technical change

24
Production Possibilities--production functions
GDP/L
C
Advanced Technology
B
Traditional Technology
A
K/L
25
The Sources of East Asian Growth Policy

• Development Policy
• Export Promotion versus Import Substitution
• Exchange Rate Policy

26
Exports and Growth
27
The Sources of East Asian Growth Policy

• Development Policy
• Export Promotion versus Import Substitution
• Exchange Rate Policy

28
The Sources of East Asian Growth Policy

• Development Policy
• Export Promotion versus Import Substitution
• Exchange Rate Policy
• Macro Policies For Stability

29
Was Culture Responsible for the East Asian
Miracle?

• Class Discussion
• Positive elements of East Asian Culture
• Negative elements of East Asian Culture

30
Was Culture Responsible for the East Asian
Miracle?

• Social Objectives
• Personal Objectives
• Business Practice
• Is there an Asian Style of Management?

31
The Sources of East Asian Growth Policy

• Basic Government Services
• Infrastructure investment
• Education and technology
• Environmental Policies
• Legal Structure and Property Rights
• Supervision of Banking System

32
The Sources of East Asian Growth Policy

• Selective Industrial Policies

33
The Nidas Case--Discussion
34
What countries are the sources of

• capital
• technology
• management

35
What does it mean for competitiveness
36
Does it support the development ladder concept?
37
What is likely to be the ultimate destination of
shoe production?

• What considerations are likely to be important?
• Labor cost
• quality
• government regulations and incentives
• transport cost
• characteristics of the product

38
How can Nidas deal with charges of political
activists?
39
Was East Asian Growth Miraculous?

• (Question for class consideration)

40
Was East Asian Growth Miraculous?

• Yes
• Growth was very rapid (more than 7 p.a.)
• A large productivity factor (4-5 p.a.)
• Obvious shifts to advanced technology
• No
• Krugman--input based growth and diminishing
  returns
• Not if we take into account the contribution of
  knowledge and the interaction between investment
  and technology

41
Was Government Policy Responsible for the East
Asian Miracle?

• (Question for class consideration)
• Was growth the result of government intervention?
• Was growth the result of the free market?

42
Was Government Policy Responsible for the East
Asian Miracle?

• No -- Neoclassical - Free Market Hughes Just get
  prices right Growth would have been even
  faster if reforms had enabled intervention to be
  reduced.
• Yes -- Revisionist, - State-Led Wade The
  Developmental State the existence of a state
  apparatus..that used its power to pursue the
  goals of military strength and national economic
  wealth.

43
Was Government Policy Responsible for the East
Asian Miracle?

• World Bank (The East Asian Miracle, Washington
  World Bank, 1993)
• Fundamentally sound development policy was a
  major ingredient in achieving rapid
  growth..Macro management, saving promotion
  policies, education, agricultural productivity,
  .. But these do not tell the whole story.
  Government intervened..targeting selected
  industries, promoting exports, low interest
  rates, protecting certain industries,.. ..rapid
  growth has at times benefited from careful policy
  intervention
• ..the promotion of specific industries generally
  did not work. The fact that interventions were
  an element of some East Asian economies success
  does not mean that they should be attempted
  everywhere.

44
The East Asian Crisis What Happened? (change of
GDP)
45
The East Asian Crisis What Happened?

• Thailand was the first country in trouble
• 1996 Unsustainable Investment Boom
• Loss of competitiveness Trade slowdown Trade
  deficit 8 of GDP
• late l996 attack on the baht

46
The East Asian Crisis What Happened?

• early1997, collapse of the finance companies and
  bank runs
• July l997 collapse of the baht
• Intervention of IMF
• high interest rates, credit crunch
• cut in budget deficit
• Drop in demand, investment, consumption, etc

47
The East Asian Crisis What Happened?

• 1998 Deep Recession
• Decline in GDP -10 percent, industrial
  production -20
• Change of government.
• Late l998, signs of stability at low level

48
Spread of the Crisis

• Indonesia
• Malaysia
• Korea
• Russia
• Brazil
• The World?????

49
Spread of the Crisis

• Not so much to China or Taiwan Why?

50
Evaluation of the Thai Business Environment
Before the crisis 1995-6 After (8/98)
(8/99) (8/00)

() ()
() ()10, very optimistic 28.6
2.4 1.5 1.1 5,
moderat. optimistic 45.2 4.9 24.7
27.2 0, uncertain 11.9 11.0
34.5 25.0 -5, worried 13.1
37.8 36.1 41.3 -10, very
pessimistic 10.2 43.9 3.1
5.4
51
The East Asian CrisisWhat Happened?

• Evaluation of Return to Rapid Growth in
  Thailand
• (8/98)
  (8/99) (8/00)
  
  () ()
  ()
• 10, very optimistic 10.4 5.3 1.1
  
• 5, moderat. optimistic 31.2 43.3
  31.2
• 0, uncertain 13.0 23.5 29.0
  
• -5, worried 33.8 25.1 28.0
• -10, very pessimistic 11.7 2.7
  10.8

52
What Happened to Exchange Rates?
53
The East Asian Crisis What Went Wrong?

• (Question for class discussion)
• Was it a business cycle swing (bubble economy)?
• Was it institutional (cronyism)?
• Was it caused by capital flow liberalization?
• Was it a loss of confidence in Asian currencies
  (contagion)?
• Was it caused by international speculators?

54
The East Asian Crisis What Went Wrong?

• Domestic Considerations
• Speculation and the Business Cycle
• Cost and Capacity pressures
• Overinvestment
• Failures of Regulation
• Crony Capitalism

55
The East Asian Crisis What Went Wrong?

• International FactorsOvervaluation of Exchange
  Rate
• Loss of Trade Competitiveness
• Excessive Short Term Capital Inflows
• International Contagion

56
The Role of the International Monetary Fund ( IMF)

• International organization whose aim is the
  stability of the international monetary system
• Provides emergency loans
• Conditional on
• Devaluation
• Higher interest rates
• Reduced budget deficits
• Restructuring (closing) of banks

57
Is the IMF Doing a Good Job?

• (Question for class discussion)

58
Is the IMF Doing a Good Job?

• NO
• Restrictive IMF policies caused or worsened the
  crisis
• The IMF missed by forecasting too small a crisis
• The IMF forced up interest rates and drove the
  countries into recession
• The IMF does not provide a social safety net,
  destabilizing the countries politically
• YES
• The IMF did right and prevented a worldwide
  collapse
• The need for confidence, requiring higher
  interest rates and lower deficits
• The need to rein in excessively booming economies

59
Is Recovery Under Way?

• (Question for class discussion)
• Has there been a turnaround
• How quickly will the economy recover?
• Will the growth miracle resume?

60
Is Recovery Under Way?

• Real GDP Growth
• 1997 1998 1999
  2000
• China 8.5 7.8 7.3 6.9
• H.K . 5.3 -5.1 1.2 3
• Indsia4.9 -13.7 -1.1 3.2
• Japn 1.4 -2.9 1.3 1.4
• Masia 7.7 -6.7 4.9 5.8
• Phili 5.2 -0.5 3.2 4.8
• Sing 8.9 1.5 4.9 5.9
• S. Ko 5 -5.8 9 5.9
• Taiwn6.8 4.8 5.3 6.7
• Thai -1.3 -9.4 3.8 4.2

61
Trade balance (billions of US ) 1996
1997 1998 1999 2000 20 46 49 27 23
China -18 -20 -10 -3 -6 HK 6 10 18 17 16
Indo 84 101 123 119 92 Jpn 4 4 17 23 22
Mal -11 -11 0 3 1 Phi 2 1 17 13 11
Sing -14 -3 41 29 22 SK 18 14 11 15 16
Tai -9 2 16 14 12 Thai
62
The Barriers to Recovery

• Political Instability (Indonesia, Thailand)
• Continued NPLs in banks (credit crunch)
• Infrastructure
• Education

63
Implications for Business

• Depends on the nature of the business and its
  objectives!

64
Implications for Business

• Opportunities
• Barriers

65
Implications for Business

• Opportunities
• Favorable Exchange Rate
• Fire Sales
• Linkages to growing industries--e.g. auto parts
• Barriers
• Recession in local markets
• Uncertainty about exchange rate
• Risks of Political Change
• Insufficient skilled engineers and managers

66
Implications of New Economy?

• For Hardware Industry
• For Software Development
• For Applications

67
The Gainers and the Losers

• Gainers--High tech
• Taiwan
• Singapore
• Korea
• Malaysia
• Gainers--Low wages
• China
• Vietnam
• India
• Loss of Competitiveness
• Thailand
• Indonesia

68
The Future ?????

• Can we be moderately optimistic?