Why Asia Won’t Save The World

That's a dangerous illusion. Historically, policy dithering as inflationary spirals build has magnified the havoc they ultimately wreak. Unless tackled quickly, price spikes in commodities lead to demands for higher wages which push up the general price levels, particularly in fast-growing economies. Central banks can head off such a spiral by moving early to tighten money supply through higher interest rates. But real interest rates in Asia are still low or even negative, while bank lending is up sharply thus far in '08. Daniel Melser, a senior economist at Moody's economy.com in Sydney, says the focus of Asian central-bank policy is designed to "suit exporters."

Despite this effort, the export boom is slowing. While China's exports officially rose 21.4 percent in the first quarter of 2008 to $306 billion, the problem with that number is that China, like much of Asia, tallies its exports in fast-depreciating U.S. dollars. Measured in euros or yen (the coinage of Beijing's largest and third largest trading partners respectively), China's exports ticked up just 4 percent during the first quarter of 2008. Hardly a global economy-saving performance.

The real trade story is surging imports—much of it $130-per-barrel crude—into Asia. Last week Lehman Brothers said China's trade surplus peaked in the first quarter, and that, excluding China and Japan, the rest of Asia is already running a trade deficit, thanks to a "ballooning import bill" for food and fuel, much of it subsidized by government (at least for now). So far in 2008, Vietnam has already spent $38 billion on imports, more than it did in all of 2007, tripling its trade deficit.

When those subsidies are cut, as they undoubtedly will be, the rest of the world will begin to feel Asia's inflationary pain in the form of rising prices on consumer goods. The fast-growing economies that were supposed to help prop up the rest of the world would instead pull it down. Unless food and oil prices come down sharply, a number of Asian economies including Indonesia and the Philippines could see growth forecasts slashed by 4 to 5 percent, according to the ADB's James. "The answer," he says, "is for governments to accept slower growth in the short run and control inflation." That would hammer exporters, and slow job creation. Still, "inflation is more likely to cause riots than joblessness," says Felipe Medalla, former head of the National Economic and Development Authority in the Philippines. "People blame the government for higher prices, but when they get laid off they blame their bosses." If stagflation takes root in Asia, there will be plenty of blame to go around.

© 2008