The good news is that Asia has learned many of the painful lessons of the wrenching 1997-98 financial crisis.  In general, the region has done a very good job of repairing its balance sheets and reorienting some of its most misguided policies.  Specifically, that means current account deficits have given way to surpluses.  Foreign exchange reserves have been rebuilt in an especially dramatic fashion.  Currency pegs -- with a few obvious exceptions -- have been replaced by more flexible foreign exchange mechanisms.  Moreover, reliance on the most fragile form of external funding -- the “hit money” of short-term capital inflows -- has been sharply reduced.  And for some countries, there has been meaningful progress on the corporate restructuring and labor market reform fronts.  All of these developments are unequivocally good news for what I believe is still the most dynamic region of the global economy.

The bad news is that the next crisis is never like the last one.  As a result, it follows that backward-looking fixes are no guarantee that new and different problems will be avoided in the future.  For Asia, that remains the biggest challenge of all.  Particularly worrisome in that regard is the region’s unbalanced growth model -- an externally led macro dynamic that is still lacking in meaningful support from internal private consumption.  What that means, of course, is that the region is highly vulnerable to a growth shortfall in foreign economies.  In a US-centric global economy, that spells one thing -- over-reliance on the over-extended American consumer.  Should the US consumer cave -- a distinct possibility in the event of a long overdue current account adjustment -- Asia would be toast.

A decomposition of the sources of Asian growth leaves little doubt as to the region’s lack of autonomous support from internal demand.  In Japan, real domestic demand growth has averaged a mere 0.9% over the past five years, with gains in private consumption averaging 0.8% over the same period.  By contrast, growth in Japanese exports averaged 7.4% over the 2000-04 period.  Our Japan forecast for 2004 sees this pattern worsening -- only a 0.4% increase in private consumption versus 0.7% growth expected for overall Japanese GDP.  For non-Japan Asia, there can be no mistaking the region’s reliance on exports as the main driver of growth:   Over the past five years, our calculations show, annual export growth in the region averaged 15.3%, more than triple the 4.9% pace of private consumption.  Our forecasts over the 2005-06 period call for more of the same -- 10.5% average export growth in non-Japan Asia versus 4.1% consumption growth.  Nor is China any different from the rest of the pack, with private household consumption falling to a record low of 42% of GDP in 2004.  Compare that with America’s 71% record at the other end of the spectrum.  China remains very much an export-driven growth machine, with the export share of GDP having soared from 20% in 1999 to 35% in 2004.  Moreover, China’s investment bubble -- with fixed investment likely to exceed 50% of GDP this year -- is also an outgrowth of outward-oriented industrialization and infrastructure. 

These findings are consistent with a recent study put out by the Asia Development Bank that uses a “growth accounting” framework to isolate the sources of growth in five Asian economies -- China, India, Korea, the Philippines, and Thailand (see Chapter 5 in the Asian Development Outlook 2005, “Export or domestic demand-led growth in developing Asia?”).  The ADB finds no compelling evidence of a post-crisis Asia that has shifted its growth dynamic from external to internal sources.  In the parlance of the ADB, the long-awaited hopes of such “growth switching” remain more hype than reality.

I spent a fair amount of time discussing this problem with some of the wise men of Seoul.  They, too, have been puzzled by the case of the missing Asian consumer.  In the aftermath of what Korea still calls the IMF crisis, Korean macro policy did its best to support private consumption.  Unfortunately, the stimulus backfired -- leading to credit and property bubbles that are now taking a serious toll on the nation’s consumer.  Our Asian team is looking for a mere 1.9% average growth in real consumption in Korea over the 2005-06 period -- literally half the average gains of 3.8% during the five-year 2000-04 interval.  In addition to post-bubble aftershocks, Korea’s experts pointed to several other key factors at work in constraining private consumption: a stagnant labor market with the unemployment rate holding around 3.5% since mid-2003 -- high by Korean standards; a growing profusion of temporary workers, which now make up about half of those on total business payrolls; and offshore job and income leakages that have arisen from Korea’s heavy foreign direct investment in China. 

Nor is Korea an isolated example.  Job and income insecurity is still a big deal throughout Asia.  That’s true in Japan, where the work force is still coping with a new social contract --- the demise of lifetime employment.  It’s also the case in China, with ongoing headcount reductions in state-owned enterprises of some 8-10 million per year.   In China, worker/consumer insecurities are exacerbated by the absence of a well-developed safety net, with little support from unemployment insurance, worker retraining programs, private pensions, and national social security.  That pretty much says it all:   Lacking in domestic consumption growth, Asia has had little choice but to go back to the well and do what it has long done best -- opt for another dose of externally led growth.

Little wonder Asians now have a new edge in their voices when they ask me about the fate of the American consumer.  Largely by default, it’s the region’s most important source of growth.  That’s especially the case in China, where fully one-third of the country’s exports now go to the US.  And it’s also the case elsewhere in Asia, which has become an important cog in the supply chain for China’s US-centric export dynamic.  That’s particularly true in Taiwan, Japan, and Korea, where the growth of exports to China has been most impressive over the past couple of years.

Needles to say, my message has not been received with open arms as I travel through this region.  Most Asians react with sheer disbelief when I even dare to mention the possible demise of the American consumer.  Never mind the juxtaposition between excess US consumption and subpar wage income generation:   Consumer outlays have surged to a record 71% of GDP since 2002 versus a 67% norm over the 1975 to 2000 period, while real private sector wage and salary disbursements are up only 5% in the first 39 months of this recovery versus a 15% average increase in the five previous cycles.  Nor do Asians want to hear about the excesses of the household debt cycle -- in terms of the record stock of indebtedness as a share of GDP as well as debt service payments that are near historical highs in an historically low interest rate climate.  Believe it or not, one client out here was so angry with me he actually tore my chart of the vanishing personal saving rate into tiny little pieces.  Asians want to believe that the income-short, saving-short, overly indebted, asset-dependent American consumer will never stop spending.

Yet in the end, there can be no mistaking the central role played by excess consumption in defining America’s current account problem:   With US imports fully 61% higher than exports (as of February 2005), the only conceivable way to correct the external deficit is by a reduction in consumption-driven imports.  For Asia, that spells serious trouble:   If you are a believer in the coming US current account adjustment, Asia’s most important growth prop is about to meet its demise.  Lacking in domestic consumption, Asia’s only hope may be nothing more than wishful thinking.