Devaluation overtakes textbook-bound views
Once again, an American think-tank has come up with the scenario of an export-based boom for those Asian countries that have let their currencies fall while Hong Kong and the mainland, which have kept their currencies stable, lose export competitiveness.
According to the Institute of International Finance, the current account surplus of the seven countries hardest hit by the downturn - Korea, Indonesia, Malaysia, the Philippines, Singapore, Taiwan and Thailand - will increase by US$100 billion to $150 billion as exports rise and imports fall.
Meanwhile, it says, Hong Kong and the mainland could lose up to $34 billion in trade as intra-regional trade declines and Western markets substitute products from Hong Kong and the mainland with those from cheaper regional economies.
And now to some facts.
As the first chart shows, export growth in the seven countries where the institute expects improvement is not doing so well. Latest figures show their combined exports were down 1.8 per cent from a year ago in US dollar terms.
The institute gives them two years to show improvement, but, if fallen currencies had given them such a price advantage in their goods, why were buyers not lining up outside their doors immediately? The answer is that fallen currencies have made matters worse, not better, for their exporters. Most of their costs are in US dollars, and devaluation has done little to help them here. Devaluation, however, has produced higher domestic interest rates and banks that are reluctant to lend to anyone, which has hurt them very badly.
Export growth in Hong Kong and the mainland is also down but not quite as seriously. These two don't have the same problems. Nor do they have to worry a great deal about a decline in regional trade. Much of the goods they ship to the region are component goods for final products that go to Western markets anyway.
Meanwhile, the current accounts of the seven countries the institute favours have probably reached its target already. In March, their combined merchandise trade surplus was $10.5 billion, or $125 billion at an annual rate, which is right in the middle of the target range. The combined current account surplus will have been a little less but not by much.
The problem here is that they are unlikely to keep it up. It has been the result of falling imports alone. Rising exports the seven have not had.
But most indications point to destocking as the reason for falling imports - which is all very well for a short period but cannot be sustained. These trade balances are likely to decline again soon as industry starts importing needed raw materials of which it is running short. This assumes, of course, that they have the rising export demand that requires the raw material imports.
The institute's scenario, one commonly held, is straight from the textbook. If the textbook had it straight, there would be no need to argue it. But perhaps the Asian crisis requires some rewriting of the textbook too.