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Commentary: It's Not Pneumonia, but Asia's Deep Chill Could Last


Japan and Singapore are in recession. Just about every other major economy in Asia is contracting--and even go-go China is slowing. Jitters in Argentina and Turkey are prompting worries that another financial contagion is about to spread around the globe. If you believe the gloom meisters, what this means is a reprise of the 1997 Asian crisis--crashing stock markets, swooning currencies, bankruptcies on an epic scale, and bailouts from the International Monetary Fund.

In fact, Asia does face a crisis, but one of an entirely different--and more chilling--nature. The region has insulated itself against a 1997-style financial meltdown by stockpiling foreign currency reserves, running current account surpluses, and reducing its dependence on short-term, dollar-denominated debt to foreign banks. But in the past few years, much of Asia has become addicted to high-tech exports, and it's not likely to get another major fix for several years.

Since the crisis, Malaysia, South Korea, Taiwan, and Thailand have relied to a dangerous degree on supplying the seemingly insatiable U.S. appetite for PCs, mobile phones, and personal digital assistants (chart). Now, America is sated, and it's not likely to develop similar demand for some time--if ever. Economists have come to realize that the U.S. high-tech binge in 1999 and 2000 was an anomaly, driven by Y2K fears, euphoria over the possibilities of fiber optics, and a rapid buildout of the Internet. When tech spending in the U.S. recovers, it's unlikely to reach the same level of intensity witnessed during the bubble years.

UGLY NUMBERS. Trouble is, with this tech boom over, Asia doesn't have a leg to stand on: Domestic consumption is anemic everywhere but China. Banks wallow in bad loans. And many economic reforms are stuck in neutral, or have shifted into reverse.

The numbers are looking increasingly ugly. For the first five months of 2001, global trade grew just 4.3%, compared with 12.8% last year. In 2000, the U.S. imported $150 billion worth of Asian tech gadgets, and Europe and Japan together pulled in about as much, notes Morgan Stanley Dean Witter & Co. economist Andy Xie. Now, exports are tumbling regionwide. Take South Korea. Info-tech accounts for 12% of gross domestic product--but chip exports have dropped 25%. All told, that could cut growth in half this year, to 4%, figures Shin Dong Suk, an economist at Samsung Securities.

The downturn could also sink some Korean companies that failed to work down their debt during the flush times in 1999 and 2000. Chipmaking colossus Hynix Semiconductor Inc. is getting hammered by the collapse in memory-chip prices, and it still has debt of $8.7 billion. If the troubles spill into next year, says CEO Park Chong Sup, "the whole industry will collapse." The Bank of Korea reports that 38% of the nation's manufacturers failed to make enough money to cover their debt costs in the first quarter.

Capital investments that seemed like a sure bet just a year ago have turned disastrous. Singapore's ST Assembly Test Services, which tests and makes semiconductors for big customers such as Infineon Technologies and Alcatel, spent $280 million on new equipment and facilities last year. It is now using perhaps 30% of its capacity.

Surely Taiwan, the center of high- tech entrepreneurship in Asia, could escape this downturn. Sorry. Taiwan's exports in June were off 17% year-on-year, and big foundries such as United Microelectronics are laying off workers and expecting losses in the second and third quarters. Leading computer maker Acer Inc. is letting go 30% of its 2,300 workers in Malaysia and is expecting to post a loss for the first half.

INSIDIOUS. Nor can the region count on much help from Japan. While it sucks in 13% of Asian exports, the world's second-largest economy is embarking on a painful restructuring. "We can't expect high growth for the next three years," says Heizo

Takenaka, Japan's Minister of State for Economic & Fiscal Policy. True, Japanese companies are outsourcing more work to Asian high-tech suppliers. But if Japan grows at near-zero levels through 2004, it will be a net drag on regional growth.

This trade recession will be just as insidious in its effects as any market blowout. With the exception of China, the region won't be able to boost living standards. And if exports fail to regain their torrid pace of 1999 and 2000, Asia's economies will not generate sufficient wealth to bankroll tough workouts. Asia's policymakers could have used the late export boom to get their beleaguered banks in order, rekindle their domestic economies, and seek out new industries to develop. They didn't. They may not have that opportunity again for a long time. By Brian Brenmer

With bureau reports


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