At least for the past decade, a great deal of hope was placed on the continued economic growth in the Asian region despite some political disturbances while the industrialized economies have suffered from slow rates of growth.

Much has changed of late, however, as it has become obvious to all that China’s economic bubbles are bursting, that India has plunged again into economic stagnation, that wage increases and active personal consumption that have served as growth engines for the member nations of the Association of Southeast Asian Nations (ASEAN) are starting to lose steam, and that a fear of another financial crisis has begun to surface.

All these phenomena appear to indicate that Asia’s economic growth is taking a pause, which, depending on circumstances, could last for at least three years.

The bursting of China’s economic bubbles has already become a stark reality. Since January, a number of high-yield “wealth management products” have defaulted, forcing the government to come to the rescue in an opaque manner as the ruling Communist Party had to prevent defaults from spreading further at all costs.

While the National People’s Congress was in session in March, Shanghai Chaori Solar Energy Science and Technology Corp., a major photovoltaic panel manufacturer, became incapable of paying interest on its corporate bonds. In mid-March a real estate developer in Zhejiang Province went bankrupt with its liabilities amounting to an equivalent of ¥57.8 billion.

What enabled China to recover quickly from the 2008 crisis triggered by the bankruptcy of Lehman Brothers was the wealth management products that financed local governments’ investments in public works projects. With these financial instruments no longer available, a rush of bankruptcies hit many industrial sectors that could not maintain excessive production capacities without government investments.

Real estate transactions that encouraged ordinary citizens to buy high-priced items have slowed down, with a large number properties being dumped for sale. In Shanghai, in particular, many wealthy and middle-class people who have bought from several to dozens of properties are now selling in panic.

Had China been the only source of trouble, the Asian economy could have been relieved by other growth engines like ASEAN and India. But these engines have also started to stall.

Late in February, what may be called a “Thai shock” emerged with an announcement that automobile sales in Thailand in January plummeted by 45.5 percent year on year to 68,508 units, creating serious concerns among Japanese manufacturers that have moved their production bases to Southeast Asia. For the entire 2013 calendar year, car sales in Thailand were down 7.7 percent, with the December figure falling by 24.9 percent from a year before, the sharpest drop in years. Sluggish sales also hit motorcycles, as they sold 30 percent less in January than a year before.

One of the factors slowing down the sales pace in Thailand was political instability as evidenced by the confrontation that flared up last autumn between Prime Minister Yingluck Shinawatra and anti-government forces, which led to the blockading of Bangkok by those who demanded her resignation.

Personal spending had remained unaffected by political instability in the past, but the current situation has caused a slump in consumption, resulting in dwindling sales in a wide range of commodities including durable consumer goods and luxury items.

Indonesia, Thailand and Malaysia, which account for 70 percent of the combined gross domestic product of the 10 ASEAN member nations, are beset by three common serious problems: deterioration of their international balance of payments, decreases in foreign exchange reserves and falling value of their currencies against the dollar.

The worsening of those three countries’ balance of payments has been caused primarily by sluggish exports and not by a rise in imports, which sometimes happens at the time of an economic boom.

Asia developed by becoming “the factory of the world” to produce items that are exported to the industrialized countries. The three countries have come to rely heavily on exports to trading partners within the Asian region since 2008.

Especially hard hit are exports to China and India. A drop in demand from China will deal the three countries a serious blow that they have never experienced. China buys 40 percent of Indonesia’s total exports, 25 percent of Malaysia’s and 20 percent of Thailand’s.

The fall in foreign exchange reserves reminds ASEAN member nations of the nightmare of the 1997 financial crisis. Brought about by a massive drain on foreign funds, the crisis made it difficult for those countries to pay for imports and repay debts, and sharply reduced the values of their currencies.

Indonesia, Thailand and Malaysia succeeded in building up their foreign exchange reserves after the crisis. Indonesia still has $86 billion, Thailand $160 billion and Malaysia $130 billion. But their current totals are about 10 percent less than a year ago.

All these factors have lowered the values of their currencies. Although conventional wisdom has it that a weaker currency helps boost exports, that is not happening because various economies are simultaneously suffering from a slowdown. Instead, rising prices of imported crude oil and raw materials are fanning inflation. Indeed, the consumer price index of Indonesia rose 8.2 percent in January compared with the 3.8 percent a year earlier.

In Malaysia, the corresponding figure was 3.4 percent compared with the 1.3 percent a year before. Although prices remain steady in Thailand, the rising costs of the imported fuels are weighting down the economy.

The Indonesian central bank raised its policy interest rate by a quarter of a percentage point last November. But the other ASEAN countries have no choice but to keep their rates high in order to prevent inflation and a further fall in currency values. This means they cannot take any effective step to stimulate the economy.

The factors that have so far sustained the ASEAN economies are direct investments from abroad and inflow of speculative money. Their structure does not allow for a multiplier effect from the internal turnover of funds, although the ASEAN economies are healthier than China in a sense that their domestic demand is led by personal consumption.

But consumers are buying more than they can afford by taking out loans and in anticipation of wage hikes, resulting in a rapid deterioration of household balance sheets in Thailand, Vietnam and Indonesia.

Wage spirals have played havoc with many manufacturing centers in Asia from China to ASEAN, Bangladesh and India. In certain parts of Indonesia, the legal minimum wage was raised by as much as 70 percent last year while Thailand instituted a uniform daily wage of 300 baht (about ¥1,000) throughout the country.

In the Ashulia district in the suburbs of Dhaka, the capital of Bangladesh, where textile plants are concentrated, repeated strikes by workers forced wages to go up by 30 to 50 percent. Even in Cambodia, where workers had been regarded as nonradical, they fought successfully to raise the minimum monthly wage from $65 to $80 within one year, then further to $95.

Labor shortages are not a major factor behind these wage hikes. Although Thailand has a low unemployment rate of 0.9 percent, there is surplus labor in its northeastern farming region. Countries like Cambodia, Laos and Myanmar have abundant supply of manpower.

In the Philippines, whose economy has been growing faster than the other ASEAN members, job creation has not been able to keep pace with the labor force, which is growing 2 percent annually. Despite an economic boom, its unemployment rate rose by one percentage point to 7.5 percent during the past year. Filipino youngsters fresh from high school wait an average of four years before landing permanent jobs.

A major factor behind these wage hikes in Asia is a dangerous gamble being initiated by the governments to raise minimum wages. Should wages go up at a faster pace than productivity improvement, foreign firms that have set up production facilities in the ASEAN region could be forced to relocate to other areas like Africa or cut down on the size of the manpower required through automation and other means.

Japanese companies should take note of a potential danger in relying on the continued expansion of consumer spending because that could soon be disrupted if a government shifts priority from raising wages to maintaining employment levels, which will trigger competition to cut wages.

China, meanwhile, faces two contradictions: an acute shortage of factory workers and increasing difficulties for university graduates in finding jobs. As a result, new college graduates are ready to accept a starting monthly salary of 2,500 yuan (about ¥41,000) while some factory workers are making 4,000 yuan.

This has prompted some people with university degrees to seek blue-collar jobs as they cannot find white-collar positions. This could mean that in the not-so-distant future, wage hikes in China will come to an end with reductions in pay for factory workers.

As for India, many Japanese business people now feel that the country has returned to what it used to be. The Reserve Bank of India, the central bank, cannot adopt an easy-money policy because it is busy fighting a high inflation rate now hovering above 10 percent a year.

While the government cannot start fiscal reform, investments from foreign companies are dwindling. India has failed to nurture strong export sectors, except the one for weapons exports.

India’s domestic auto sales fell by 9.6 percent in 2013 from the previous year despite earlier global expectations that the country would shortly become an auto industry giant.

Its prominence in developing software and system architecture is being eroded by advances being made by the Philippines, Vietnam and Ukraine. The same is true with respect to business process outsourcing, hurting the profitability of Indian companies in information technology and BPO.

A quick look at what has happened during the past two decades shows that production facilities first shifted from the ASEAN region to China and that now these facilities are seeking to move elsewhere. Over the past two decades characterized by those changes, workers’ wages have risen and domestic demand expanded in Asia. In this, many people and countries have come to see the myth of Asia’s economic growth.

A closer look, however, reveals that some Asian countries have simply become home to manufacturing sectors with low added value and have created economic bubbles through fiscal stimulus. In other words, Asia does not have a competitive edge except for the concentration of manufacturing industries and the dense population.

In the near future, Asia is bound to face a collapse of the twin economic bubbles of wage hikes and real estate booms. Lower wages will put the brakes on consumer spending while falling values of land and buildings will leave businesses, the wealthy and the middle class with huge debts.

All this will cause fiscal revenue to plummet and austerity measures would further worsen the economic conditions, creating a negative chain.

The initial step in this vicious cycle has already started in China. If this spreads further to the ASEAN region and India, Asia as a whole will have to relinquish its position as the growth center of the world. Only political leadership can save Asia from this eventuality. A competent political leader with foresight could persuade people to swallow bitter pills such as wage cuts and tax increases. A country with such a leader would not have to wait long to see its economy recover.

Good candidates to play such roles are found in Narendra Modi, who seeks to become India’s prime minister in general elections this year, and Joko Widodo, better known by his nickname “Jokowi,” who is aspiring to win Indonesia’s presidential election, which will also be held this year.

If they come to power and do not take the populist road, their two countries could start walking toward an early economic recovery.

Prospects for recovery in China are opaque because the regime of President Xi Jinping does not seem to have the courage to force his people to take bitter pills, and its economic bubbles are extraordinarily large. A slow recovery in China would delay return to the growth path for all of Asia.

It appears certain that Asia as a whole is in for economic stagnation at least for the next three years.

This is an abridged translation of an article from the April issue of Sentaku, a monthly magazine covering Japanese political, social and economic scenes.

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