William Pesek: Time for Asia to kick its strong-dollar habit


By William Pesek
Bloomberg News Service
Monday, January 8, 2007


We all start January pledging to kick this or that bad habit. It is always a tough promise to keep, and how much more so when the bad habit is decades old, like the Asian addiction to raising economic growth by keeping currencies weak.

As the 10th anniversary of the Asian financial crisis approaches, it is high time for the world's fastest-growing economic region to get out of the trap of export dependence.

A recent International Monetary Fund report by two economists, Joshua Aizenman and Jaewoo Lee, refers to the Asian propensity for "competitive hoarding." It is an apt description for the unprecedented buildup of currency reserves since the crisis.

Worrisome, too. The Asian meltdown began in July 1997 after Thailand stopped defending the baht, setting in motion a series of devaluations around the region. Since then, central banks have amassed reserves to avoid a repeat. By the summer of 2006, nine years after Thai devaluation, reserves held by China, Japan and South Korea alone exceeded $2 trillion.

The strategy worked wonders to fuel growth, yet at a cost to Asian economic maturity. Excessive reserve accumulation is a questionable use of taxpayers' money that could be allocated to upgrading education, health care, roads, bridges, and water and power systems. Worse, weak currencies hold Asia back from reaching its potential.

On the most basic level, a strong currency is a sign of confidence. When Robert Rubin, a former U.S. Treasury secretary, spoke of how a strong dollar is in the best interest of the United States, it was code for "our economy is solid." Letting currencies rise would communicate that Asia is solid enough to withstand slower export growth. Sadly, Asia is addicted to a strong dollar.

There is little doubt Asia has come a long way since the dark days of the late 1990s. Banking systems have been strengthened, foreign-currency debt reduced, transparency improved, stocks are up in most markets and many governments are fighting corruption.

Yet the lack of focus on long-term issues is cause for concern. Policy makers now spend inordinate amounts of time managing exchange rates, and then additional time managing their dollar holdings. All that energy would be better used stimulating domestic demand and encouraging entrepreneurship.

Manufacturing jobs are vitally important to Asian economies, particularly those with high poverty rates like China, India, Indonesia and the Philippines. More attention should be on preparing for the so-called information economy, which holds more promise than making goods cheaply for export.

The future of Asia should be as much about ideas as factory floors. Working to see that technology and innovation become an increasing part of gross domestic product can go a long way toward spreading the benefits of Asian growth.

There are other advantages, too. At a time when investors are concerned that global goods and commodity prices will rise, firmer currencies would mean less imported inflation. Stronger currencies also tend to attract more foreign capital, increasing equity values and lowering bond yields.

More capital inflows and lower borrowing costs would be a big plus for companies aiming to issue debt. Rising exchange rates also would increase the purchasing power of the emerging Asian middle class.

When we talk about global imbalances, we often think of the huge American current-account and budget deficits, or of a Chinese currency almost everyone says is undervalued. More broadly, the failure of Asia to wean itself off exports is part of the problem that needs addressing. The inability of Asia to create growth organically leaves the region too vulnerable to global trends.

Breaking the addiction is a hard sell to politicians, of course. The export-your-way-to-prosperity formula has worked marvelously over the last decade. Even so, the idea is about moving up the economic food chain.

When developing nations enter the global system, they tend to start by offering cheap goods. Next, they offer cheap services and then innovative new products. The risk is that much of Asia sticks to the manufacturing phase of development.

Diversifying sources of growth also would help the region overcome what might be termed the cult of gross domestic product. Most of Asia has learned how to grow rapidly, though it has not done well in making sure the people most in need of growth feel it. Asia does not need to grow faster; it needs to grow better.

For too long, Asia has masked its challenges with top-down gross domestic product rates, and preferably very fast ones. They make headlines, excite investors and help paper over cracks in economies. A better way to measure success is to gauge whether the lives of the poorest members of an economy are benefiting from growth.

It would be better if Asia jump-started the enterprise on its own, as opposed to markets forcing it on the region. Currency traders are abuzz with talk of nations like Russia, Switzerland, Venezuela and the United Arab Emirates shifting reserves away from the dollar. If that were to happen on a massive scale, the dollar could plunge, driving Asian currencies up faster than the economies there may be able to withstand.

Either way, Asia needs to stop using cheap currencies in place of policies aimed at raising living standards. The year ahead offers a perfect opportunity to do just that.


William Pesek is a columnist for Bloomberg News Service.

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