Frugal Is So Over

In the pie-chart world of macroeconomics, it is once again fashionable to bash Asia's "absent" consumers. Americans, we are told, tap easy credit to live beyond their means. Europeans, meanwhile, would rather cling to four-day workweeks than become more competitive, whereas "the Asian consumer has long been missing in action," as Morgan Stanley's chief global strategist Stephen Roach argued late last year in an essay entitled: "How to Fix the World." That familiar breakdown suggests a simple blueprint for rebalancing a global economy that has spun severely out of whack: Americans need to save more, Europeans must strive to become more efficient and Asians should shop till they drop.

For Asians, at least, the cure would seem relatively painless. Whereas Americans would need to cinch their belts after a 12-course meal and Europeans must rationalize key industries, goes the logic, Asia's contribution to global well-being would be to reject the old culture of toil, savings and sacrifice by going to the mall to spend, spend, spend. How hard could that be? Yet the question "Why aren't Asians spending?" continues to be asked, ever more urgently with each new signal that the U.S. recovery is blowing itself out.

Well, in fact, Asians are spending like never before--and saving much less. By the numbers, the notion of AWOL Asian consumers is more myth than reality. According to the OECD, Japanese households now bank less than half the share of disposable income of either their German or French counterparts. In 2004, they saved just 5.1 percent of what they earned, a rate that "will continue declining and become zero or negative by around 2007," as the country's population continues to age, forecasts Osaka University economist Charles Yuji Horioka. South Korean households saved a quarter of their incomes in 1988 but by 2003 banked just 6.1 percent. And since 1998, Thailand's personal savings rate has dropped from 14.8 to 6.0 percent, according to official figures.

Most other Asian governments don't release national household-savings rates, but there's no reason to suspect that the broader trend is much different. Nor does anyone track household spending regionwide. But with per capita incomes rising sharply, and savings rates falling, it is an accounting fact that personal spending has to be booming. Anecdotal signs abound in the proliferation of malls, boutiques and big-box stores in the region--as well as a fast-growing consumer-credit industry. Western-style consumption habits have taken root from Seoul to Shanghai to Mumbai.

One reason for the confusion is that governments typically track a broader saving indicator called gross national savings (GNS), or simply "national savings." This lumps together what wage earners, businesses and governments accrue each year as a percentage of income, and also factors in the national --trade balance. Twenty years ago household savings made up the bulk of GNS in Asia. Yet more recently, soaring corporate profits and ballooning trade surpluses have buoyed national savings rates at high levels--masking steep falls in household savings.

As a percentage of GNP, Asia's private consumption remains lower than either Europe's or America's. As Roach points out, since 2000 Japan's exports have grown roughly eight times faster than private consumption; in the rest of Asia exports grew three times faster. China, he notes, saw domestic consumption fall to just 42 percent of GDP in 2004, a record low. What underlies the imbalance is Asia's export-led growth model, which still targets the U.S. consumer with singular precision. But what observers based in Asia emphasize is how far nations like South Korea, Thailand, Malaysia and others have moved to embrace what the Asian Development Bank (ADB) calls "a more balanced growth strategy," and the fact that the most important missing "consumers" are not individuals, as the term implies, but businesses and governments.

The debate over Asian underconsumption has raged since the 1970s, when Japan emerged as a world-beating exporter but kept its own citizens walled off from the fruits of global commerce. Following Tokyo's lead, governments across the region implemented regulatory measures to boost savings rates (to fund strategic industries) and tamp down household spending. High property prices and hard-to-attain mortgages necessitated what economists call "forced savings" for those aspiring to homeownership. Credit cards were denied to preserve cash-based traditions, and steep duties rendered foreign luxury items too dear for all but the wealthiest households.

It took intensive pressure from the United States, Europe and global-trade bodies like the WTO to force open regional markets and rationalize exchange rates in the 1990s. Once that happened, Asians quickly embraced Western-style consumption. Yet after the 1997-98 financial crisis a new savings pattern emerged. Corporations stung by currency collapses began to pay down bank loans and amass large cash holdings once the recovery took hold, which meant investing less at home. "The area where there is a huge net-saving surplus is not the household sector, but in the corporate sector," says Goldman Sachs economist Adam Le Mesurier. "It's pretty obvious that consumer debt has been rising, and it's been rising because [people are] borrowing more to consume."

The quantum shift is most apparent today in South Korea, a nation once famed for its Confucian austerity. After opening its market to luxury imports, Seoul in 2000 unleashed a new spending weapon: credit cards. Runs on everything from imported fashion to overseas travel and IT gadgetry followed, causing a consumer-debt bubble nearly two thirds of Korea's annual GNP. Then the bubble popped. Still, "when the credit crunch eases later this year or next, the consumption pattern will return," forecasts Chang Jae Chul, an economist at the Samsung Economic Research Institute. "We already live in a world where consumption, not savings, is a virtue."

Even so, South Korea--despite its new spending habits--maintains one of the world's highest rates of national savings (32.6 percent in 2003). That's because Korea Inc. is tapping record export earnings to pay down debt (a form of corporate savings), while Seoul runs a large fiscal surplus (government savings) to float a new national pension scheme. In short, the mercantilist pattern in which the government suppressed household spending for decades to fund rapid industrial development has been turned on its head.

Much the same pattern has appeared across Asia. In Hong Kong, Singapore, Taiwan and Japan, corporations are today's big savers, whereas households spend all but a tiny portion of each dollar, yen, peso or rupiah they earn. Consumers, therefore, are in no position to redress the global trade imbalance by flashing more cash. Indeed, if that were all it took, a correction would already be underway.

Today China gets the most flak for its weak spending. Its national savings rate now stands at 47.6 percent, and in 2004 domestic consumption fell to just 42 percent of GDP. Private estimates set China's household savings rate at 18 to 24 percent (the government doesn't disclose the official tabulation). Like Japan in its heyday, China stands accused of grossly undervaluing its currency, dumping textiles on global markets and failing to open to imports--all to perpetuate its world-beating export juggernaut.

Yet even in China, much of today's savings takes the form of unspent export earnings. Investing more of it would lower national saving, to be sure. But invest where? The Chinese economy is already growing at nearly 10 percent a year, and fears of a meltdown were so strong in mid-2004 that Beijing halted some investments in new steel mills, urban real estate and even stadiums for the 2008 Olympics. If Beijing reinvested all its export earnings, says Masaaki Kanno, an economist at JPMorgan in Tokyo, "China's economy would grow by 20 percent a year." Until it exploded, that is.

Throughout Asia, development experts say, the long-term answer is to create a much more broadly based consumer society. And in some countries that process is underway. After winning office in 2001, Thai Prime Minister Thaksin Shinawatra implemented policies to boost domestic demand through village-level development. Thai growth is running faster than 6 percent, indicating stronger domestic demand. By implementing "a more balanced growth strategy," argues Daniel Lian, Southeast Asia economist for Morgan Stanley, Thaksin has "put the Thai economy back on the competitive global landscape."

Development experts like Ifzal Ali, chief economist at the ADB in Manila, say China and India have done less well at bringing "bypassed people" into the consuming mainstream. Instead, they have built dual economies in which the urban middle class is a privileged minority. Each has also enacted programs to accelerate rural development, but the process is painstaking, and the promise of huge new continental markets lies in the future. Alas, the trade imbalance with America could reach crisis proportions long before then. "If the U.S. consumer decides to take a holiday, it will have catastrophic implications in Asia," warns Ali. Still, if should that happen, don't blame the Asian consumer.

Frugal Is So Over | News