“The West messed up East Asia …” To this day, many economists and people from the political elite in that region believe that’s what the West (read the U.S.) did during the Asian financial crisis in late 1990s, without providing any proof or reason for such a colossal mischief.
Many years later, I had to deal with that accusation on my lecture tours in Southeast Asia. My explanation that a massive withdrawal of foreign private portfolio funds from the region had been a textbook case in damage limitation was routinely dismissed out of hand.
It seemed that blaming the foreigners was the only acceptable conclusion. The fact that some major economies in that region were grossly mismanaged, with current account deficits of up to 8% of GDP, usually fell on deaf ears -- even though most people seemed to understand that those deficits had to be covered by equivalent amounts of imported foreign savings.
They may have never heard of Cournot’s Law, but they were staring at a simple and obvious accounting identity: the sum of current and capital accounts must equal to zero, because the balance of payments has to balance.
Balanced trade and capital controls
But emotions were running high, with incredible moments, such as a question I got in one of the central banks of the region: “How do we get interest rates down?”
Telling them that they first had to reduce inflation and trade deficits with an appropriate monetary and fiscal tightening would just turn them off; they simply wanted a magic wand.
I was lucky to still have an audience, because some loudly pontificating American fund managers became (and apparently still are) personae non gratae in that part of the world.
Eventually, though, the hard lessons have been learned.
At the moment, major economies in Southeast Asia that were hard-hit by the financial crisis run balanced current accounts, or even substantial surpluses on goods and services trade with abroad. And, most importantly, they now properly supervise their financial services industry, while maintaining the necessary regulatory and prudential oversight of capital account transactions.
The ten countries in that region are part of the Association of South East Asian Nations (ASEAN), the world’s largest free-trade community of 667 million people, with very diverse members ranging from Marxist-Leninist governments to constitutional monarchies, parliamentary democracies and presidential political systems.
The group is pursuing a pragmatic intra-area trading regime, staying clear of EU-style trappings of a super state with economic, social and political constraints, a single market and a common currency.
About a quarter of the group’s estimated $3 trillion of foreign trade is conducted within the ten member countries. A greater volume of such internal trade is now expected because economic stimulus measures have been stepped up to accelerate recovery from a pandemic-induced growth recession.
As a result of that, government spending is widening budget deficits for this year toward 4% to 6% of GDP, which is still well below 16% of GDP in the U.S. and 8% in the EU.
With minor exceptions, inflation remains subdued and exchange rates are roughly stable.
Those indicators suggest that most ASEAN countries have enough room for a relatively safe monetary and fiscal support to economic activity over the near term.
Teaming up with China, Japan and Korea
Growth prospects are also significantly enhanced by increasingly closer economic ties with China, Japan and South Korea – a group of countries called ASEAN Plus Three. Those three countries account for one-third of ASEAN’s foreign trade, compared to only 19% for combined U.S. and EU trade flows.
With $800 billion in bilateral trade last year, ASEAN remained China’s largest trade partner. Based on results in the first seven months of this year, that trade volume will hit $1 trillion by the end of 2021.
Japan trails well behind China, with $200 billion in ASEAN trade during 2020. Trade numbers for the first five months of this year suggest a similar result for this year, too.
For South Korea, ASEAN is the second-largest trade partner (after China), with a bilateral trade business of $144 billion in 2020.
What we have here is an increasingly integrated and fast-growing East Asian trade area of 13 countries that account for one-third of the world economy.
Another important feature of this group is the scope it has for steady and sustained economic growth, without creating major macroeconomic disequilibria we are now seeing in the U.S. and the EU.
Those differences will become particularly important for portfolio choices when binding fiscal and monetary (i.e. inflation) constraints begin to create serious economic and political problems within the trans-Atlantic community.
East Asia’s revenge? No, not necessarily, although there are still people I know who never forgave the West for East Asia’s very difficult “tom yum” (a fiery spicy soup) years.