(Reprinted from HKCER Letters, Vol.41, November 1996)
Pacific Economic Dynamism:
US and Asian Perspectives
I have been asked to talk today on a very broad topic, which gives me a lot of freedom to touch on a number of important issues facing the economic growth prospects of the Pacific region. I want to organize my talk as follows. First, I want to discuss just what Pacific economic dynamism is, and our views on the recent slow-down in economic and export growth in East Asia. Secondly, I want to look at the recent APEC meetings in the Philippines and the Singapore WTO Ministerial meeting in the context of Asian and U.S. perspectives of Pacific economic regionalism. Thirdly, I want to talk briefly on the prospects for China's and Taiwan's entry into the WTO. I will close with the three major challenges that I see for the U.S. and Asia for maintaining well into the future the progress that has been accomplished.
I see two defining characteristics of Pacific economic dynamism. First, the spectacular growth and increase in commercial activity that has occurred in the region over the last twenty years has been largely a result of government policy reforms in the developing economies of the region, especially in East (including Southeast) Asia. If you look at measures of growth in the region, the East Asian developing economies stand out. Looking at average growth rates from 1991 to 1994, Indonesia grew at 7.7 percent, Thailand at 8.4 percent, Malaysia at 8.8 percent, Korea at 7.2 percent, Singapore at 8.5 percent, Hong Kong at 5.7 percent, and of course China at 12.4 percent. The developed economies, including Japan and the United States, grew at much lower rates. What has changed in the region is that governments in developing economies shifted their development strategies toward policies that have promoted market-oriented, export-led, private-sector-driven economic growth.
Why all these governments have shifted to the market has not been studied sufficiently. Somewhat simplistically, I explain this historic shift by noting that political leaders in the region gained their political legitimacy not through elections but by delivering social stability and rapid economic growth that is well-distributed throughout most of the population. After some trial and error with import substitution strategies in the 1960s and 1970s, country after country in East Asia shifted to the new, market-oriented growth regime. Of course, as you all know well, once an economy becomes integrated into the world economy and is reliant on export growth and attracting foreign investment, it is forced by market pressures to reform continually, to build up its social and physical infrastructure, and to improve its business environment in general. This, of course, has become the core of the concerted unilateral approach to trade liberalization in Asian Pacific Economic Cooperation (APEC). This is much more important for the ASEAN economies and China, with strong foreign direct investment (FDI) needs, than it is for the Northeast economies of Japan, Korea and Taiwan, which have much more limited reliance on FDI. Since these policy reforms are market-driven and not negotiated, however, there has always been a suspicion about East Asian liberalization among some U.S. trade policy makers and analysts, especially those with background knowledge on Europe, Japan and the WTO.
The second distinctive feature of Pacific economic dynamism is that this is the fastest growing economic region in the world and a region that is becoming increasingly integrated within the region. The APEC economies accounted for almost 55 percent of world income generated in 1995, compared to 46 percent in 1980. APEC's share of world trade has increased from 42 to 50 percent from 1985 to 1994. The Pacific economies, but particularly the East Asian economies, are contributing to huge increases in consumption and infrastructure development, which is not news to any of you. For example, the World Bank has estimated that around half of the world's increase in new demand will be generated in East Asia over the next decade. A bit more surprising, however, the share of trade flows within the region compared to the rest of the world has increased substantially as well, from 57 percent in 1970 to 73 percent in 1994. This percentage is greater than for the European Union economies.
Has the East Asia Miracle Run Its Course?
Building on this regional analysis, let us look at the so-called "economic slump" in East Asia, which has been characterized by a moderate decline in economic growth and a large reduction in export growth for a number of economies. Some reports have called this phenomenon a "growth recession," or the beginning of the end for the East Asian Miracle and the drive for the Pacific Century. As time has passed, I think most analysts see the recent events as largely cyclical in nature, although we can highlight significant structural problems in almost every economy in East Asia.
To understand this story, we need to go back to 1994. The analysis that I will use here comes from the Pacific Economic Outlook, which is an annual publication of economic forecasts for the region, organized by The Asia Foundation on behalf of the Pacific Economic Cooperation Council (PECC) . In 1994, most of the region, with Japan being the major exception, was booming. Growth rates were high, and inflationary pressures were mounting. Starting with the series of interest rate increases initiated by Alan Greenspan at the U.S. Federal Reserve, and the complementary reductions in the U.S. government budget, macroeconomic managers throughout the region followed suit to tighten up monetary and fiscal policy. By 1995 and into 1996, growth rates began to fall somewhat, while inflation in most cases peaked in 1995 and began to taper off in 1996. Much of the so-called downturn that we experienced recently has in fact been a well-managed "soft landing." Most forecasts show economic growth leveling off and increasing moderately over the next two years, with, in general, quite reasonable inflation numbers. The region seems positioned, just as is the U.S. economy, to grow on a steady basis at solid but moderate growth rates with well-controlled inflation.
Also closely related here is the recent export slump in the region, which really manifested itself from January-June 1995 to January-June 1996. Over this period, export growth rates collapsed in many East Asian economies. For example, China's export growth rate fell from 44.8 percent to negative 8.2 percent, Hong Kong's from 18 to 6.1 percent, Korea's from 33.5 to 12, Thailand's from 31.7 to 3.8, and Japan's from 18.2 to a negative 8.4 percent. No East Asian economy escaped this slump, but Indonesia and the Philippines weathered it best of all. The reasons for the slump, again, appear cyclical. There was a substantial decline in import demand from the OECD economies over this period, which has begun to pick up. The collapse in the electronics market was a major factor as well, but with some good news on this front as well, as electronic sales began to pick up again.
The bottom line for me is that the recent macroeconomic soft landing does not represent a threat to East Asian growth, but rather it is a quite, positive sign. The experience over the last two years shows me that macroeconomic managers on both sides of the Pacific now have the policy instruments and political will to counter overheated economies in a moderate and effective way that does not require a major reduction in economic output. This is a major improvement in macro policy efficiency, with of course the biggest test case continuing to be China, which appears to have finally been able to reduce its inflation rates substantially with only a minor reduction in growth rates.
The Philippines APEC and Singapore WTO Meetings - Steady Progress
Next, let me move away from macroeconomic management and look at the importance of the recent APEC meetings in the Philippines and the WTO Ministerial meeting in Singapore for maintaining growth in the region.
First, let us look at the Singapore WTO meeting. I do not think anyone expects any big announcement out of this meeting. It is very unlikely, for example, that there will be any call for a new comprehensive WTO negotiating round, or that there will be any breakthrough concerning new issues such as labor rights or the environment. The format for the meeting emphasizes a range of important but low-key housecleaning policies monitoring the implementation of the Uruguay Round agreement; getting the built-in agenda back on track, especially for financial services and telecommunications; and developing a framework for handling new issues. The one area where there is some suspense is whether negotiations will be far enough along to make any definitive announcement on the Information Technology Agreement (ITA), which would lower tariffs to zero for many IT goods by the year 2000. This has been a major U.S. policy initiative, which was supported at the APEC meetings and is viewed by many in and out of the United States as a key test for whether the WTO can deliver a substantial sectoral breakthrough that is important for the United States and that can rejuvenate the U.S.'s interest in WTO leadership. From what I hear, the bets are 50-50 that an ITA will be approved, but there will be a lot of pressure to deliver.
Let me step back a bit from the formal agenda of the Singapore meeting and make two comments that are useful for comparing U.S. and Asian perspectives on the WTO and APEC. First, for the United States, the WTO is the key trade and investment policy negotiating forum. The U.S. refuses to offer any policy reforms to APEC on a MFN or non-preferential basis, not just because of a commitment to non-discrimination, but also tactically because the U.S. does not want to allow the EU to free ride. The U.S. is quite supportive of APEC, as we will discuss later, but the WTO is where the U.S. will negotiate seriously on a reciprocal basis. The U.S. sees APEC, in this regard, as a key tactical ally to exert pressure on the EU for reform. It should be fascinating to see how the ITA works out, given President Clinton's personal lobbying effort with the other APEC leaders to deliver a stronger APEC message than was contained in the APEC's Ministerial statement. This effort, by the way, highlights the advantage of the leaders?direct participation in the APEC process, unlike the WTO which is dominated by negotiators with more narrow interests.
From the Asian perspective, although Asian governments all profess full support for the WTO, I sense a lingering legacy of North-South conflict still remaining in the WTO, especially compared to APEC which is avowedly peer-oriented. East Asian economies have been slow to take leadership in the WTO, more typically remaining careful and defensive. For example, most East Asian economies have bound their tariff rates with the WTO at far higher levels than their actual, operative rates. Even Hong Kong and Singapore have not WTO-bound many of their tariff rates at zero. Part of this obviously is explained by the fact that the WTO commitments are legal and binding, while the APEC dialogue is informal and non-binding. But it does appear that there is an additional sense of defensiveness by the Asian developing economies toward WTO that is not found toward APEC, given the same policy objectives.
Now, let us look more closely at APEC. We, the Asia Foundation, and the PECC's Trade Policy Forum have been working closely throughout the year with the Philippine Chair of the Senior Officials meeting. This year was quite a challenge for APEC. This is the first year that a process based on informality, flexibility, and non-binding dialogue relying on peer pressure and unilateral, non-reciprocal commitments, has had to start the effort to deliver concrete deliverables. We all are encouraged by the improved dialogue on economic issues through the APEC process, but APEC's credibility will be clearly tested over the next several years as we see how effectively the APEC economies continue their reform processes, especially as these reforms touch more and more sensitive sectors in many economies.
I think everyone within the APEC process was quite satisfied this year. It was not clear at the beginning of the year whether every economy would even prepare action plans. Much to everyone's delight, each economy presented a comprehensive Individual Action Plan (IAP), and most economies submitted several revisions over the course of the year that strengthened their trade liberalization and facilitation commitments. Importantly, after some discussion, the IAPs were presented on a common format to allow easier comparison and to encourage transparency and peer pressure. All economies also committed to consensus collective action plans on a number of key areas, particularly for customs reform and improved standards and conformance. And all economies participated in a broad-range of joint actions for economic and technical cooperation. These ECOTECH activities, which are quite important for the developing economies in the region, are one of the distinctive elements of APEC relative to the WTO.
Philippine leaders of APEC this year generated more than process results. The APEC commitments include a wide range of WTO, plus actions by almost every economy in the region, with particular success in tariff reduction, including the strong ITA statement, and trade facilitation (especially for customs and standards and conformance issues), the latter being a priority for many businesses. Also this year, building on the Philippine theme "APEC Means Business," a number of strides were made to include business interests more effectively into the government-to-government APEC process. The APEC Business Advisory Council (ABAC) prepared a solid first report and presented findings to the leaders. ABAC has been asked by the leaders to review the IAPs and CAPs to provide a reality test and to make specific recommendations for improvement. The Philippines also hosted for the first time a large APEC Business Forum (organized in part by the PECC), which included over 500 business executives, many at the CEO level, to set business priorities for APEC, to develop business projects and networks, and to conduct dialogues with government leaders.
As expected, the APEC leaders laid the path for next year's leadership by Canada by emphasizing the importance of sustainable development issues. Next year's agenda is likely to be dominated by the following: developing a methodology for comparing reform commitments among economies; encouraging the deepening and broadening of these commitments in an ever-evolving process; and introducing more fully-sustainable development issues into the APEC process. The monitoring and improving of the Manila Action Plan for APEC (MAPA) commitments will be key for establishing APEC's credibility as something more than a "talk shop" and "community-builder." There is some nervousness, however, about bringing sustainable development issues too strongly into the APEC process, not because anyone thinks that sustainable development is not important, but because some feel that this complicated subject may overload the APEC system and lessen pressure to continue the fundamental APEC challenge of achieving free and open trade in the region.
Let me step back just a bit from the details of this year's APEC activities. First, since APEC relies on non-reciprocal, unilateral reform, it is the ideal environment for accommodating diversity. By setting a common end-point of free and open trade and investment in the region, APEC allows a smoother transition for economies with high levels of protection to make major trade reforms, while economies with already open trade regimes will get credit for their good policies while promising to stand still and maintain market access.
Second, APEC is informal and non-binding. It is one of a number of influences (including WTO, bilateral talks, unilateral reforms) affecting trade and investment policy in the region. In my opinion, the key to APEC's success is how it influences the domestic political economies of its members, since this is the heart of concerted unilateralism. APEC is likely to be most influential in ASEAN and China, but also Chile, Australia and New Zealand, where pressures for domestic reforms and Pacific regional integration are greatest, and where APEC adds legitimacy and strength to domestic reform interests. And most importantly, APEC reinforces strong market pressures for reform, as we discussed above. Other pressures outside APEC will likely be more important for Japan, Korea, Taiwan, and the United States. Japan faces critical structural reform challenges that will require a major readjustment in how the Japanese government and firms operate in order to remain competitive relative to U.S. technology leadership and increasing competition from lower-cost Asian producers. Korea has promised a major economic reform package for its entry into the OECD. Taiwan, similarly, has promised a major economic reform package when it enters the WTO. And the U.S. focuses on the WTO. Interestingly, the APEC commitments in the IAPs will include examples of all of these efforts, which is its strength but also its weakness in terms of public credibility. APEC is comprehensive, ambitious, and far-reaching, and yet it is unlikely that any signed APEC agreement W-411 ever take place that directly and solely leads to a major change in trade policy. APEC, therefore, should be seen as one of several key elements of the broader Pacific economic dynamism based on economies committing to open regionalism and responding to market forces and to various economic diplomatic initiatives to open their economies to international competition and opportunities.
Let me speak briefly on the China and WTO question. I am sure you all are quite aware of the new, more accommodating statements by the U.S. on China's entry into the WTO, and the renewal of better relations overall between China and the United States. I think we are all a bit more hopeful, but there are still a number of underlying concerns. It is my understanding that there are still major disagreements in the Clinton Administration about how hard a line to take with China. The U.S. Trade Representative (USTR) wants to maintain a tougher stance, while the Department of State and others want to soften terms. The rise in the U.S. bilateral trade deficit with China does not help anything.
It is important to look more closely at the approach USTR is taking with Vietnam as well. USTR policy in Asia seems to be greatly influenced by what you might call the "Japan Syndrome." USTR, over the last several administrations, has been preoccupied with the perception that the U.S. made a major mistake by being soft on Japan during Japans developing years in the 1950s and 1960s, allowing a closed and idiosyncratic economic and trade regime to develop. They see all the real problems that U.S. negotiators have had over the last decade in trying to open the Japanese economy as being repeated in other "mercantilist-leaning" Asian economies unless a tough line is taken early. Thus, for both China and Vietnam, USTR's stance is to require that these countries agree to fully abide to WTO principles upon entry into the WTO (or the U.S.-Vietnam Trade Agreement), and then to negotiate the phase in schedule to achieve the mutually agreed end-points. This is, in many ways, more than a developed or developing country status issue; it is a fear that a protectionist regime will be established in China that will cause problems well into the future.
China, of course, is reluctant to sign on to a full endorsement of all WTO principles, noting that many other WTO economies, including some developed economies, do not fully abide by all WTO rules, and noting that they do not particularly trust how countries will monitor any phase in schedule. On the China side, though, the big problem is not nationalism or developed country status per se, the problem is more that economic planners in China are uncertain about the best path to industrialization, especially for higher technology sectors and various high value-added services. Many in China still want to use traditional, targeted, import-substitution industrial policies with a major role for state-owned enterprises. They see a strong WTO commitment as limiting those options, whereas they figure that APEC's objectives, with its 25-year horizon, can be handled. What needs to be done is for China to come to grips with the need to develop its technologically-advanced sectors in a global competitive environment, and for the U.S. to recognize better the full array of influences on China's policy that differ from the Japanese experience. In the end, the decision about China's entry to the WTO will probably be determined largely on a political basis, which raises additional complications. Even if the Clinton Administration decides to put China's entry into the WTO on a faster track, that entry faces considerable opposition by a significant and vocal, although I think a minority, group within Congress.
I want to conclude the talk with what I see as the three major concerns for Asia and the United States regarding economic growth prospects in the Pacific region. I am concerned not just because these are major problems -- there are other important problems as well - but because I do not necessarily see viable solutions for them.
First is the issue of accommodating the emergence of China as a major economic, political, and military world power. Wars have been fought throughout history by dominant countries trying to restrain the emergence of new rivals. It is vital that the United States in particular, as the dominant country in the world, but others as well, manages this inevitable process effectively, viewing this challenge as an opportunity rather than a threat. I personally am not convinced that the United States has worked out clearly how it should approach the emergence of China, nor am I confident that Chinese leadership sees a clear path toward responsible international leadership. There are strong nationalistic and isolationistic factions in both countries that could become destabilizing.
Second, I see the greatest possibility for a trade war over the next several decades to be rivalry between the "haves" and "have-nots" over the development of technology and, in particular, information technology. The United States currently has technological leadership in a wide range of sectors, which has been creating considerable wealth for the U.S. economy. East Asian economies, on the other hand, recognize that they must upgrade their technological and innovative capabilities to continue to support rapid growth in wages and real incomes. The threat arises because some policy makers and interest groups in East Asia, especially in China, still promote the use of targeted industrial policies that limit market access and subsidize "infant" industries in the advanced sectors. International agreements such as the WTO and APEC make it more difficult to implement these policies, but a major surge in such policies by East Asia would surely provoke a strong U.S. response.
Thirdly, every economy in the region has a major problem with managing the environmental consequences of rapid economic growth, especially the high population economies. The terrible environmental state of most cities in Asia highlights the difficulty of developing stronger environmental policies. This is not just a matter of political will; I think we as economists have not developed a viable paradigm for managing the macroeconomic consequences of economic growth.
Mr. Stephen Parker is the Chief Economist in The Asia Foundation. He is an expert on Asia-Pacific economies. He has previously worked as an economists in Jakarta, Indonesia for four years. His other work experiences include posts at the Harvard Institute for International Development, the U.S. Agency for International Development, the U.S. Congressional Budget Office, and the U.S. Department of Labor. He is currently writing a book on comparing Asian and Eastern European transition economies. The above is a slightly edited version of a talk he presented at the HKCER recently.