Pessimism Unwarranted
Philip Bowring International Herald Tribune
Friday, April 6, 2001
Tech Slump May Not Hurt Asia as Much as Is Feared
 
MANILA Exaggeration of the impact of the technology-led slowdown in the U.S. economy is giving an excessively negative picture of the outlook for East Asia.
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That is especially the case for the Philippines, where the modest optimism that was emerging after the crisis over the presidency is in danger of being overwhelmed by new fears about exports and the currency.
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The crude trade data tell us that information technology accounts for almost two-thirds of the Philippines' exports, half of Malaysia's and a quarter of Thailand's. What these figures do not say is that the local value-added portion in these exports is low - probably no more than 20 percent in the Philippines and Thailand and only slightly higher in Malaysia. That is because these countries import many of the semiconductors and other parts that go into assembly of electronics products.
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In contrast, local value added in more traditional and commodity exports such as palm and coconut oil, rice, shrimp and minerals is close to 100 percent, and even in textiles and garments can be as high as 50 percent. In the case of Malaysia, the impact on the overall economy of palm oil prices is at least as great as what is happening to electronics prices.
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For the Philippine economy, the pace of dollar remittances from overseas Filipinos is far more important than electronics. These remittances are influenced by perceptions about political stability and the immediate outlook for the peso. A speeding up in the sending of dollars has a more immediate effect on domestic demand than changes in industries such as electronics assembly.
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Price volatility for the components such as semiconductors that go into assembled goods also distorts the picture. At present, both exports and imports are flat or falling in most of the region. But much of this is simply a reflection of falling prices. Because these industries are almost entirely foreign-owned, price changes have little real impact on Southeast Asia's economies. What matters is the volume that generates employment and adds value to the local economy.
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Taiwan and South Korea, and to a lesser degree Singapore, are different from the poorer countries of Southeast Asia. Local value added is much higher, and industries in many cases are locally owned, so the impact on the economy is far greater.
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Taking East Asia, including China, as a whole, the degree of specialization of processing and the low cost of shipping parts around the region give an exaggerated picture of the industry's relative importance. One component may enter trade statistics four or even five times before reaching the country of the end user.
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Thus, price declines in electronics components are almost certainly overstating the regional slowdown as they suggest that import as well as export demand is weakening. But if misinterpreted, the data can become self-fulfilling as market sentiment leads - as in the past few weeks - to currency depreciation and a decline in confidence.
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Though the Philippines has cut its forecast of economic growth this year to 3.5 percent because of a global slowdown, the broader short-term outlook remains quite positive. Interest rates are down to reasonable levels like those before the regional economic crisis that began in 1997. The recent decline of the peso has been less than that of the Thai baht, the South Korean won or the Australian dollar. Lower oil prices will help consumer confidence. Agriculture has had a relatively trouble-free year.
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Stock market sentiment is poor because of the currency weakness, global price declines and unwillingness to commit funds in advance of congressional elections set for next month. The voting may determine the ability of President Gloria Arroyo to govern effectively. But sentiment could turn quickly, as there is plenty of capital waiting in the wings.
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For the long term, perennial problems persist. Abysmal tax collection has meant that taxes are now just 14 percent of gross domestic product and must service public debt equal to 70 percent of GDP, most of it dating to the era of the dictator Ferdinand Marcos. Billions of dollars in loans from the World Bank and the Asian Development Bank have gone undisbursed.
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There is a lack of equity capital and investment, especially in agriculture, and manufacturing is low. Overall, the Philippines' growth for the medium term looks unlikely to exceed its 30-year average of 3.5 percent.
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But whether or not one takes an optimistic view of the future under Mrs. Arroyo, it is important to recognize that here, as elsewhere in Southeast Asia, the state of the global technology industry is much less important to growth prospects than is commonly believed.

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