Why America Can't Save Asia

by Brian P. Klein

Tokyo—The U.S. Congress has finally passed a much anticipated stimulus bill for $787 billion. While desperately needed, it is unlikely to lift America or Asia out of the rapidly deteriorating economic crisis anytime soon. Government efforts at this stage are still focused on stopping the hemorrhaging rather than reviving the patient.

Wishful thinking aside, the wild ride of export-led growth is over and Asian countries need to start taking serious action to shore up their own economic futures while the U.S. slogs through its domestic-induced crisis which is likely to take years to repair.

Despite the disappointment, a notable success was the speed with which the legislation was passed, flaws and all. Less than a month into office U.S. President Barack Obama carried out a major piece of legislative heavy lifting that is a critical first step in repairing the economy. Taking quick action is clearly a lessoned learned from previous crises.

The stimulus plan went through the typical partisan political washing cycle coming out the other end shrunk and wrinkled. Despite best intentions the core purpose of the bill was lost somewhere in all the zeros of hundreds of billions of dollars—namely to get people working again.

President Obama’s early call for bipartisanship went unheeded by the Republican minority, which despite their poor showing in 2008 elections remain a potent political force. The vote fell almost entirely down party lines. Tax cuts, approximately 38% of the entire package, featured prominently to win over the several Republican Senators and conservative Democrats vital to passing the bill.

More money in consumers’ pockets always sounds good. Who doesn’t want to pay less in taxes? But the highly indebted American consumer is far more likely to take the $400 per person and pay off immediate bills or save it as concerns over job losses mount. This does not bode well for Asian exporters of consumer goods.

With many people left wondering what, if any effect this would have on ending the economic crisis griping the country, U.S. markets continued their downward trajectory falling 4% in the last week alone (13% from the start of 2009).

Many economists are now estimating that a stimulus with teeth would need to be on the order of $2 trillion to $3 trillion over the course of several years. No one knows for sure and the need for another stimulus by year’s end is increasingly likely.

Generally speaking, last year wasn’t even the worst of the U.S. downturn. Real GDP growth slowed to 1% while imports actually rose 0.5% (versus 0.1% in 2007). U.S. economic growth has been decelerating since 2004. It has not, however hit zero or turned negative as it did during previous downturns in the mid 1970s, early ’80s, and early ’90s. The current crisis is far deeper, more widespread, and potentially destabilizing than any based on oil price shocks or standard business cycles.

Fourth quarter 2008 was the leading edge of the recession, not its bottom, signaling more tough times ahead. Predictions now turning into mere hopes coalesce around a 2010 turnaround. Early or late is anyone’s guess.

Since Asia’s economies are still disproportionately dependent on exports, some more than others, U.S. consumption is still a critical driving force for the region’s growth. The current stimulus is highly unlikely to get U.S. consumers buying again in the short term, especially with less than 25% of the stimulus focused on core spending, the biggest driver of actual job creation.

The effects of the current crisis on Asia are significantly different both in terms of size, speed, and composition than ones in the past.

Asia is far more dependent on trade than a decade ago. While the going was good export earnings and remittances from abroad set off a global chain reaction of growth. Unfortunately much of these gains were never reinvested in building strong domestic-driven economies.

Asia needs to start planning for its own future rather than hoping for a U.S. recovery to pull it out of the global downturn. This means serious investment of their stimulus packages on critical social infrastructure—education, health care, and a social safety net to stimulate consumption. To date Asia has yet to achieve even these modest successes.