SYDNEY — A high rate of saving among Asians was once credited for its important contribution to the remarkable performance of their “miracle” economies. It has become clear that neither aggressive investment spending nor high saving rates can guarantee sustainable growth. Now, high savings should be interpreted as a symptom of despair of East Asia’s economies in crisis. A considerable part of the investments over the past decade has evaporated in a property bubble or disintegrated into excess capacity of production facilities.
And now with the region’s economies struggling to recover from slowdowns or full-blown recessions, uncertainty about the future is inspiring Asians to save even more money. Obviously, the increase in savings means there is less buying. In turn, companies find themselves holding growing inventories and lower profits as they resort to price-cutting necessary to shed unwanted stockpiles. At the same time, there will be reductions in employment that induce households to begin another cycle of saving more saving and spending less.
In South Korea, where unemployment moved toward an all-time high of 2 million, or just over 9 percent, and the economy is suffering from stagnating growth, gross national savings rose to over 35 percent of GDP in 1998 from about 33 percent in 1997. Over the same period, Malaysia’s savings rate also climbed about 2 percentage points to just over 41 percent, while in Thailand savings went up 1 percentage point to 34 percent.
Similar results are being observed in China. Although always high (about 44 percent), China’s savings rate climbed substantially to as much as two-thirds of GDP during some periods in 1999. Pressures from a deflationary spiral of declining prices induce households and businesses to defer spending.
Japan’s savings rate of 33 percent is likely to continue to be pushed higher. Japanese households have been ignoring rising public expenditures, entreaties from political leaders and even free sales vouchers. Instead they continue to add to their savings. There is little wonder why.
Japanese workers do not spend because they are worried about whether they will lose their job. And demography works against rising consumption due to Japan’s swelling ranks of elderly, who are not big spenders in any country. Taxpayers, facing huge bills for recapitalizing Japan’s banks and for additional government spending, must put away funds in anticipation of rising taxes in the future. Young Japanese are finding fewer prospects for employment and many may face a difficult choice to emigrate. In this tough environment of tight-fisted consumers, it is difficult imagining businesses wishing to invest. Even were they willing or able to expand, the banking crisis makes it unlikely that find banks would be willing to lend.
And so it is domestic woes that have been the undoing of countries that staked their economic futures on exports. As a consequence of their neomercantilist approach to development, most East Asian economies had two distinct sectors. Their international sectors tended to be modernized and geared up to meet and beat competition from global competitors.
Companies operating locally found themselves shielded from internal and external competition, and years of protection behind regulatory walls kept them from being cost conscious or stripped them of incentives to be innovative. As in most economies, domestic sectors were the largest component, and it is this sector that is pulling these economies down and holding them back from recovery.
Political leaders seeking to help their countries escape the economic doldrums need to understand that there must be massive restructuring of their domestic sectors. And this should be done quickly so that their economies can stabilize before they can recover.
The advantages from trading are not from exporting. Instead, advantages from trade arise from allowing producers and consumers to buy from the least cost provider to inspire efficiency as a basis for growth.
Import-led growth arises from foreign competitors imposing pressures upon domestic producers that must become efficient in order to survive. When these improvements lead to gains in labor productivity, wages rise and provide the basis for higher consumption. Productivity gains also lower unit costs and allow growth in profits that enhances shareholders wealth, providing another boost for consumption.
And then, ironically, the benefits begin to extend to the international sector. Allowing inputs or intermediate goods to be imported for the export sector leads to lower operating costs. As production costs fall and productivity increases, the capacity to sell in a competitive export market rises. As domestic multinational enterprises experience rising profits, they are able to shop around for overseas production facilities and better sources of raw materials.
East Asia’s economies have to undergo a radical transformation that focuses upon inward development through a further opening and liberalization of their trade and financial markets. This will inspire greater efficiency arising from competition and provide a solid base of domestic demand to ensure sustainable economic growth. Ironically, the clearest signals of recovery for the crisis economies will be when savings decline and imports rise.
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