Asia’s Export Economies-A Failed Model?

The Wall Street Journal has a dry but important piece this morning on the decline in Chinese manufacturing. The numbers that the Chinese are reporting may or may not accurately reflect the reality of the current state of the Chinese economy but even if puffed up they point to an economy heading towards recession.

Which leads into an article on the site by Ambrose Evans-Pritchard who argues that the economies of Asia and the West have locked themselves into an unholy alliance that threatens to spiral down to a global depression. After reviewing the numbers, he gets to the meat of his argument:

A stale debate simmers over whether the Great Bubble was caused by Anglo-Saxon and Club Med hedonism, or by an Asian “Savings Glut” spilling into global bond markets and fuelling asset booms, as Washington claims. It was obviously a mix.

Two cultural systems interacted through globalisation, locking each other into a funeral dance.

The point is that this experiment has now blown up. Whether or not we slam straight into a global depression depends on how we – East, West, all of us – handle this.

The top sources of net global demand as measured by current account deficits over the last 12 months have been the US ($697bn), Spain ($166bn), Italy ($71bn), France ($57bn) Australia ($57bn), Greece (53bn), Turkey ($47bn), and Britain ($46bn).

Most are tightening their belts drastically, and in the case of Britain the shift has been so swift that the arch-sinner may soon be in surplus. If they are draining world demand, then world demand is going to collapse unless others step into the breach.

The surplus states – China ($378bn), Germany ($266bn) Japan ($176bn) – have not yet done so, which is why the global economy went off a cliff in October, November, and December. Beijing is planning a $600bn fiscal blitz.

Pritchard seems to have substantial doubts as to the commitment of the Chinese and others to spend in order to prop up demand. To my mind, he doesn’t fully explore the issue of what happens in the medium term. Certainly countries can step in and create demand but that is hardly a prescription for viable long-term global growth. If the Western consumer truly does permanently cut back either voluntarily or because credit availability is reduced, that component of consumption has to be somehow replaced. Can the Asian countries make that sort of adjustment.

Perhaps in the long run they can but doing so requires a massive shift in preferences among their citizens. The fact that most of the countries in the region lack viable social safety nets only contributes to the propensity of their populace to save rather than consume. Changing these behavioural patterns is most likely something that will only occur generationally. It’s doubtful that salvation will come from Asian consumer.

Pritchard, like so many others, is dancing around the central problem. If the West does indeed see its consumers pull back and the credit jet fuel restricted then there is simply going to be a smaller economic pie for everyone to cut up. How we do that is the question no one seems to want to address. It would be useful to begin to describe what we mean by normal as we aspire to recover from this downturn. If it’s a different normal than what we have been used to, and by that I mean a smaller normal, then we need now to begin talking about how we live with it and structure societies around it.

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