1997 and 2015

The East Asia crisis of 1997 had many causes, including a strong dollar, fixed exchange rates and poorly regulated financial systems.  One additional factor was the rise of China, which had begun competing with other East Asian exporters.  At the time, China was still fairly low tech, and hence the 1997 crisis hit the lower income countries of Southeast Asia much harder than places like Singapore, Taiwan and Japan.  Those higher income places had a more complementary relationship to China, supplying needed capital goods.

But the China of 2015 is very different from the China of 1997.  It is now a much more advanced economy, and it is beginning to offer fierce competition to the more sophisticated economies of East Asia, such as Singapore:

The Ministry of Trade and Industry on Wednesday forecast economic growth in 2015 at “close to 2 percent” and between 1 and 3 percent in 2016. It previously forecast 2015 growth at between 2 and 2.5 percent.

Singapore, a city-state at the tip of peninsula Malaysia, is the wealthiest economy in Southeast Asia but has shifted to lower growth rates in the past decade as other countries including China eroded its traditional strengths in electronics and other manufacturing. It has encouraged investment in higher value industries such as pharmaceuticals and also tried to boost services by opening two casinos, encouraging tourism and becoming a center for private banking.

And Taiwan:

Last year Taiwan grew by 3.8%. Many analysts had expected about the same this year. Instead, it will do well to hit 1%, says Gordon Sun of the Taiwan Institute of Economic Research. . . .

Until a few years ago, the economic relationship between China and Taiwan was symbiotic. Taiwanese firms, among the world’s biggest makers of electronic components, needed China’s cheap labour; China craved Taiwan’s technical know-how. But this complementarity has given way to competition. Chinese producers of petrochemicals, steel, computers and digital displays have moved into terrain once occupied by Taiwan. Taiwanese firms with operations in China are themselves buying more materials and machinery from Chinese suppliers. Chinese firms are now trying to break into semiconductors, Taiwan’s last big industrial redoubt.

Sometimes size gives producers additional monopoly power.  Ironically the size and homogeneity of the Han Chinese population (both inside of China and overseas) depresses the prices of the things the Chinese have a comparative advantage in producing.  Perhaps this partly explains the disappointing performance of China’s stock market in recent years.  With each China advance, a new set of ever more sophisticated industries are flooded with output.  Meanwhile non-Chinese industries that sell to the Chinese (BMW, Louis Vuitton, etc.) benefit from the China boom.

BTW, lots of people like to cite the “Li Keqiang index” as an alternative to the official Chinese statistics.  I’ve argued that this index does not apply to an economy rapidly shifting from heavy industry to services.  It seems as though Li himself now agrees with me:

In short, despite moderation in growth, the Chinese economy is moving in the desired direction of stronger domestic demand and innovation. One by-product is a fall in the relevance of indicators such as power consumption, rail-cargo volume and new bank credit in gauging economic performance. Yet this transition from “bigger is better” to “less is more” is a good thing. I would otherwise be worried whether the reforms were working as intended.

And now I anticipate commenters who believed Li’s early statements telling me that you can’t believe anything a Chinese leader says.


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22 Responses to “1997 and 2015”

  1. Gravatar of E. Harding E. Harding
    29. November 2015 at 11:51

    1997 also witnessed a slowdown in Chinese energy use, didn’t it?

  2. Gravatar of Kevin Erdmann Kevin Erdmann
    29. November 2015 at 12:08

    The myth that cheap labor is a competitive advantage is so powerful. Notice in that paragraph you quote that they cite it as China’s main advantage, and without missing a beat move on to talking about how China is becoming more competitive, even though wages in China are rising rapidly. How many readers will notice this contradiction? The self editing of human perception is strong.

  3. Gravatar of E. Harding E. Harding
    29. November 2015 at 14:20

    @Kevin

    -How’s cheap labor not a competitive advantage?

    BTW, Scott, I’ve been apparently banned from commenting on Tyler Cowen’s blog, probably for using foul language. If you could please email him to attempt to convince him to reverse this decision, it would be greatly appreciated.

  4. Gravatar of Benjamin Cole Benjamin Cole
    29. November 2015 at 15:43

    I am always surprised that Scott Sumner takes off his monetary thinking cap, when reviewing events of the Far East.

    The Monetary Authority of Singapore (MAS) has been pegging the Singapore currency to a basket of other currencies. Like all central banks, the MAS also frets a lot about inflation.

    Singapore is presently in deflation. The poor performance of Singapore of late may reflect MAS central banking policies. A small nation on the rim of a very large nation that is rapidly growing should be prospering. Singapore has stalled.

  5. Gravatar of Major.Freedom Major.Freedom
    29. November 2015 at 17:22

    “The East Asia crisis of 1997 had many causes, including a strong dollar, fixed exchange rates and poorly regulated financial systems. ”

    Why do you always ignore the cause of socialist banking? The central bankers do not have the requisite information that only private property in money production could manifest.

    The cause of the financial crisis of 1997 was central bank (mis) management.

  6. Gravatar of E. Harding E. Harding
    29. November 2015 at 17:46

    @Benjamin Cole

    -Maybe it’s because Singapore is too developed? Can it possibly get any richer?

  7. Gravatar of ssumner ssumner
    29. November 2015 at 19:40

    Kevin, Good observation.

    E. Harding, I don’t involve myself in editorial decisions of other blogs (not even Econlog, where I blog.)

    Ben, It may also be monetary, but I was just commenting on one issue here.

  8. Gravatar of Kevin Erdmann Kevin Erdmann
    29. November 2015 at 21:11

    E. Harding, wages are an effect, not a cause.

    Ceteris Paribas, low wage places produce relatively little and high wage places produce a lot. What causes confusion is that at the margin production moves to where productivity (and thus wages) are rising, and this happens most notably where there is catch up growth. So everyone acts as if production is attracted to low wages, even sadly almost all economists as far as I can tell. But production doesn’t move to where wages are low; it moves to where wages are rising.

  9. Gravatar of Ray Lopez Ray Lopez
    29. November 2015 at 21:14

    Let’s analyze Sumner’s opening paragraph for errors. Should be a LONG exercise.

    Sumner: “The East Asia crisis of 1997 had many causes, including a strong dollar, fixed exchange rates and poorly regulated financial systems.

    Given money is neutral, it really should not matter whether the dollar is “strong” or exchange rates “fixed”–things will adjust within a country (though individual companies are impacted of course). But what’s surprising is that a U of Chicago alum will now assert “poorly regulated” as a reason. Wow, maybe that anti-free market Indonesian or Malaysian minister who blasted ‘Western hot money’ back then was right? I doubt it, but Sumner thinks so. Sad.

    Sumner: “One additional factor was the rise of China, which had begun competing with other East Asian exporters. At the time, China was still fairly low tech, and hence the 1997 crisis hit the lower income countries of Southeast Asia much harder than places like Singapore, Taiwan and Japan. – wait, as Erdman would say, you contradict yourself. China was a competitor but did not get hit by the crisis?

    Sumner: “Those higher income places had a more complementary relationship to China, supplying needed capital goods. So complementary suppliers are not affected?

    Here’s a competing theory: the SE Asian countries all over-expanded, believing their own hype, and largely this expansion was driven not by exports as Sumner says but domestic demand. I recall the Bangkok sidewalk sandwich maker who was going to float his company on the Thai stock exchange. Nothing to do with tech. Then, due to factors like a region slowdown as E. Harding says, the contagion struck not just the low-income countries Sumner mentions but also South Korea (which is high tech, even at that time). Contagion, panic, irrational. And as evidence after some restructuring the SE Asian economies recovered. Ockham’s Razor…

    PS–LOL E. Harding (who can make good points) gets banned by TC for obscenities, yet I get banned from Econlog not for foul language, but for disagreeing with Your Majesty. That’s foul.

  10. Gravatar of ChrisA ChrisA
    29. November 2015 at 21:19

    Possibly the slower recent growth of Singapore and Taiwan might have more to do with the difficulty of measuring growth in more advanced economies. In developing economies, you can pretty much measure growth by counting things – amount of steel produced for instance. In a more developed economy it is more about quality of things. For instance the quality of the experience that you have at a hotel for instance could be drastically improved over time, all at the same costs. Without applying hendonic adjustments you will miss the effective growth. And almost no-one really adjusts for hendonic growth. As a frequent visitor to both Singapore and Taiwan over the last 20 years I would say this is exactly what is happening with their economies. Singapore is now a much more pleasant place than it was 20 years ago, same with Taiwan.

    I am not saying this isn’t happening in China as well – but they still have lots of basic growth going on as well.

  11. Gravatar of ChrisA ChrisA
    29. November 2015 at 22:28

    Sorry for the typo’s in my last post – still having my morning coffee. I of course meant hedonic adjustment.

  12. Gravatar of Ray Lopez Ray Lopez
    29. November 2015 at 22:45

    @ChrisA – the hedonic adjustment argument makes little sense for abrupt changes, like we had in 2008. More likely we simply have a demand shortfall after years of people living beyond their means in most Western countries. People don’t feel like spending, even when they can, see this blurb: “Fewer homeowners are “underwater” than they believe. Only 8.7% are actually underwater, but 27% believe they are. (MarketWatch).” When and if this passes–Rogoff et al in This Time is Different say financial panics take up to 20 years to work out–we’re half way through that now–then you’ll see a pickup in inflation as people rush to buy things. MM? Irrelevant.

  13. Gravatar of E. Harding E. Harding
    30. November 2015 at 10:15

    Kevin, maybe production could move, without productivity going anywhere?

  14. Gravatar of Doug M Doug M
    30. November 2015 at 10:45

    “At the time, China was still fairly low tech, and hence the 1997 crisis hit the lower income countries of Southeast Asia much harder than places like Singapore, Taiwan and Japan. Those higher income places had a more complementary relationship to China, supplying needed capital goods.”

    In what world is Singapore not “South-East Asia”?

    Korea and Hong Kong were slammed by the “Asian contagion.” Neither of them “lower income.”

    And Russia…

  15. Gravatar of Major.Freedom Major.Freedom
    30. November 2015 at 19:43

    Ray:

    “Given money is neutral”

    That is not a given. Your irrational, anti-scientific standard of “as far as I am personally concerned” does not turn a positive number to zero.

    Money is non-neutral according to the very study you keep referencing.

  16. Gravatar of Ray Lopez Ray Lopez
    30. November 2015 at 20:53

    @MF – do you enjoy beating a dead horse? Admit to me that 3.2% to 13.2% is a small fraction of 100%, and I’ll admit money is not completely neutral. Got it? No wonder Sumner ignores you, your head is harder than basalt.

  17. Gravatar of ChrisA ChrisA
    30. November 2015 at 21:10

    Ray – I don’t see the sudden fall off in Singapore data post 2008, the trend to lower GDP growth is over many years – see the data below from World Bank which is since the early 1960’s. Just to further confuse the story in 2010 they had their highest growth rate ever – 15%;

    https://www.google.com/publicdata/explore?ds=d5bncppjof8f9_&met_y=ny_gdp_mktp_kd_zg&idim=country:SGP:MYS:IDN&hl=en&dl=en

    What is interesting about this data set is the correlation of Singapore with Indonesian and Malaysian growth rates, probably starting off (in the 1960s) at similar levels of development. Singapore consistently has higher levels of growth but their growth is highly correlated with regional growth. I am sure that if you showed Jakarta or KL growth rates they would pretty much match Singapore’s. So could the excess growth of Singapore just be a result of the trend to Urbanization? Singapore is richer per head of course, while the other two cities have probably grown more by adding population, but that might be due more to Singapore’s immigration restrictions.

  18. Gravatar of Ray Lopez Ray Lopez
    30. November 2015 at 21:36

    @ChrisA – thanks, I stand corrected. You were referring to Singapore, a member of SE Asia (ASEAN member), while I was referring to the USA. However, if you believe in a recent article in The Economist, SE Asia will also have a “Great Recession” sometime soon, as their debt-to-GDP has grown unsustainable since 2007. Cheers.

  19. Gravatar of ssumner ssumner
    1. December 2015 at 06:41

    Ray, You said:

    “Wow, maybe that anti-free market Indonesian or Malaysian minister who blasted ‘Western hot money’ back then was right? I doubt it, but Sumner thinks so.”

    More idiocy. I never said that and don’t believe that. Again, do you actually know how to read?

    You said:

    “China was a competitor but did not get hit by the crisis?”

    It did get hit by the strong dollar, but I think you missed the point. Like asking after a truck runs over a bicyclist why the truck driver wasn’t also injured.

    ChrisA, Good point.

    Doug, You said:

    “In what world is Singapore not “South-East Asia”?”

    Of course it’s SE Asia, I never said it wasn’t. (I said it was not low income SE Asia—do you disagree?)

    As far as Hong Kong, that’s easy–they didn’t devalue. My post explicitly said that there were many factors involved, but on average there was a very strong correlation between level of development and severity of the SE Asian crisis. Even HK was hit far less than the poorer countries, despite a lack of devaluation.

    Next time read the post more carefully. All of your comments today reflect a simple misreading of what I wrote.

  20. Gravatar of Aaron J Aaron J
    1. December 2015 at 11:18

    Just because Li Keqiang index is of diminishing importance, does not mean it is irrelevant. And it’s not only the LK index that has Chinese growth below the government figures, basically (as you know) every composite has growth at least a point or two below the 6.9% rate.

    I agree with you generally that people are too pessimistic about China’s transition to services and especially about China’s ability to innovate. But growth is slowing and will continue to do so.

  21. Gravatar of TravisV TravisV
    2. December 2015 at 08:56

    (Sigh) Brad DeLong:

    http://equitablegrowth.org/must-read-greg-ip-the-false-promise-of-a-rules-based-fed

    http://equitablegrowth.org/at-what-time-scale-if-any-does-the-long-run-come

  22. Gravatar of ssumner ssumner
    2. December 2015 at 12:36

    Aaron, Yes, I’ve predicted 6% to 6.5% growth for next year, and I’ve acknowledged that growth may be a bit lower than the official figures.

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