Progress of the Pacific Economies : 1986

 

Paper for the Fifth Pacific Economic Cooperation Conference, Vancouver, Canada, November 17, 1986.

 

               Following the precedent established at the Seoul meeting last year, the Chairman of the Conference asked me to prepare a report on the progress of Pacific economies during the past year, suggesting the likely directions in which the regional economy will evolve in the near and intermediate future. My preparations in this regard have been greatly assisted by the excellent work of the various PECC task forces, upon whose reports I have drawn extensively. I will focus my report on the current economic performance of the Pacific economies, identifying and analyzing major challenges we are facing and then, based on this analysis, suggesting major cooperative approaches to meeting those challenges.

 
Current Performance of the Pacific Economies
 

First, let me briefly review the developments of the past two years. The pace of world economic recovery from the recession of the early 1980s slowed in 1985; world economic growth fell to 3.2 percent from 4.4 percent in the previous year. This slowdown resulted to a large extent from a major setback in the U.S. economy, which had previously led the global economic recovery. The U.S. economic growth in 1985 dropped sharply to 3.0 percent from 6.6 percent in 1984, while other advanced economies showed only moderate growth (see Table 1). At the same time, the growth rate of world trade also fell to 4 percent from 9 percent in 1984, due to intensified protectionism and economic sluggishness in the industrialized countries.

The slowdown in the growth of industrial economies and of world trade spread rapidly to the developing economies of the Pacific. Commodity-exporting developing countries were especially vulnerable; they suffered both from reduced export volume and from a substantial deterioration in their terms of trade. Manufacture-exporting developing countries, however, did not escape unscathed. For example, exports of the East Asian NICs-Korea, Taiwan, Hong Kong, and Singapore-also faltered, forcing them to curtail domestic investment expenditures and to experience lower economic growth (see Table 2).

The rather disappointing economic performance of the Pacific nations last year even raised serious doubts about whether the recent economic recovery could be sustained in the coming years. While the general economic conditions for the Pacific nations have not changed much since 1985, the recent decline in oil prices and realignment of exchange rates among major currencies deserves more attention in our assessment of the prospects of the Pacific economies. Although their full effects are not yet clear, these changes are likely to impact upon the regional economies significantly and asymmetrically.

The substantial decline in the price of oil should theoretically provide a positive stimulus to most of the Pacific economies, except in the cases of several oil-exporting countries. Nonetheless, the anticipated increase in consumption and investment expenditures resulting from the increase in real income has not yet materialized. The damage to the oil-exporting countries, on the other hand, has been much more direct and immediate.

The weakening dollar may alleviate to a certain extent the U.S. problem of growing trade deficits. Nevertheless, because of the so-called J-curve effect, those deficits will not decline quickly. Furthermore, exchange-rate realignment alone will not solve the trade imbalance problem unless it is accompanied by more fundamental remedies, such as a substantial reduction in fiscal deficits and improvements in productivity.

The realignment in the dollar/yen rate will have mixed effects on the Asian developing economies in the Pacific, depending upon each country's trade structure. The strengthened yen will in general help these developing nations gain price competitiveness in their manufactured exports. The Northeast Asian developing countries, almost 90 percent of whose exports are made up of manufactured goods, stand to benefit most; these nations are anticipating a substantial pickup in their exports this year. On the other hand, the enhanced price competitiveness will not be of much benefit to the ASEAN nations, more than three-quarters of whose exports consist of oil and primary products (see Table 3). Furthermore, since most of these Pacific developing countries are structurally dependent upon imports from Japan, their increased exports may be offset to a significant extent by the larger bill for those imports.

On the whole, the short-term prospects of the Pacific economies do not seem very favorable; the environment remains highly uncertain, with oil prices and exchange rates as major risk factors.

 
Major Challenges for the Pacific
 

Apart from these short-term uncertainties, there are also several structural problems that should be resolved if the Pacific economies are to sustain their dynamic growth into the coming years. Among these, I will focus mainly on the following four issues: macroeconomic imbalances, protectionism, unstable commodity prices, and foreign debt.

 
1. Growing Policy Disharmony and Macroeconomic Imbalance
 

Since the world monetary system shifted to a flexible exchange rate regime in the early 1970s, disharmonious monetary and fiscal policies of the major industrialized nations have often produced excessive fluctuation and misalignment in interest and exchange rates. This instability has done great harm to the world economy by increasing uncertainty in the trade and investment environments.

Calls for policy coordination among the industrialized nations have been raised many times and have drawn much public support. Actual efforts at concerted action, however, have shown some success in only one case: the realignment of exchange rates following the G-5 agreement of September 1985. Instead, the continued policy disharmony has created growing macroeconomic imbalances in such areas as domestic savings and investment, inflation, unemployment, and balance of payments.

Among these, the growing regional trade imbalance seems most threatening to the future prosperity of the Pacific. The trade imbalance between the two economic giants, the United States and Japan, is the most visible example (see Table 4).

Whatever has caused the trade imbalances between the United States and Japan, they are certain to have many adverse effects on the Pacific economies, both directly and indirectly. The trade environment may be further worsened by the protectionist pressures generated by the enlarged U.S. trade deficits, pressures that not only will be directed against Japan but will also spill over to affect other countries in the region. In addition, the huge foreign capital demand of the United States to finance its deficits will continue to cause much uncertainty in international capital markets concerning credit availability, interest rates, and exchange rates. Finally, and more fundamentally, even an economic giant like the United States simply cannot support continual trade deficits of this magnitude.

 
2. Slow Industrial Adjustment and Widespread Protectionism
 

The importance of the Pacific countries in the world economy has grown especially rapidly in the trade arena (see Table 5). A closer look reveals that along with the rapid volume growth have come remarkable changes in trade patterns, which primarily reflect shifts in the comparative advantage structure of the Pacific nations. The newly industrializing countries (NICs) of East Asia have emerged as major exporters of manufactured goods by upgrading their exports into human capital- and technology-intensive products. At the same time, the ASEAN nations have also increased exports of labor-intensive products, in which the NICs formerly enjoyed a comparative advantage.

Such rapid industrial development and export expansion of the developing countries has doubtless intensified competition among the Pacific nations. It has also heightened the necessity for cooperative efforts to adjust the industrial structure of each nation so as to establish a more compatible industrial specialization and thus to achieve a more efficient division of labor among the Pacific nations.

Unfortunately, various rigidities in the industrialized economies have obstructed smooth industrial adjustment. Instead of structural adjustment, protectionism has proliferated since the 1970s, throwing the Pacific trading order into disarray. Protectionism has spread rapidly across countries and products and has taken various forms in recent years, including: outright quantitative restrictions; so-called gray-area measures outside the GATT system, such as voluntary export restraints (VER) and orderly marketing arrangements (OMA); and abuse of countervailing measures originally granted by the GATT for the purpose of promoting fair trade.

These protectionist measures have greatly weakened the foundations of the GATT system. Furthermore, GATT does not even have relevant provisions for many new issues raised in recent years, such as trade in services, trade-related foreign investment, and intellectual property rights. GATT in its present manifestation can thus no longer guarantee free world adherence to the principles of free trade.

 
3. Unstable Prices of Oil and Primary Commodities
 

The wide fluctuations in the prices of oil and primary commodities such as rubber, copper, coconut oil, and rice have caused serious instability in the economies of both commodity-exporting and -importing nations in the Pacific.

In the 1980s, it is the suppliers who have borne the worst of the fluctuations, because market forces have driven down the prices of oil and other primary goods. Demand for the primary commodities has fallen on the world market as industrial production activities are depressed and more substitutes are developed for raw materials, and supply has risen in most cases as debt-ridden exporters struggle to maintain foreign-exchange revenue levels amidst falling prices by increasing supply. The ASEAN economies, which depend heavily on commodity exports, have suffered most. The worsening of their terms of trade this year will increase their current account deficits to over 10 billion dollars, up sharply from 2.5 billion dollars in 1985. As a result, the ASEAN economies will only be inching ahead this year, showing average growth rates of less than 1 percent.

It is a major cause for concern that the poor performance of the ASEAN economies is not likely to improve in the near future given the slim chances of an early recovery in commodity prices.

 
4. Increased Foreign Debt
 

Foreign capital inflows have played an essential role in the rapid development of the Pacific economies by enabling those countries to develop beyond their abilities to mobilize domestic resources. Since the late 1970s, however, the Pacific developing countries have suffered a substantial deterioration in their borrowing conditions as the result of a sharp increase in interest rates and a tightening of lending terms. The increased burden of debt service became even heavier when these nations' export revenues fell as a result of the decline in international commodity prices and the slowdown of world trade (see Table 6).

In response to these adverse conditions, most of the Pacific developing nations have made strenuous efforts recently to cut down new borrowing, at the risk of reduced economic growth, and to reduce the proportion of short-term debt, which may jeopardize their liquidity positions. These efforts have greatly helped the Pacific developing countries avoid serious debt problems, and most of them remain healthy borrowers. The recent decline in international interest rates will also help by reducing the interest payment burden on these nations.

These recent improvements do not justify complacency, however. Many Pacific developing economies still remain highly vulnerable to a potential squeeze in international capital markets, and the long-term ability of these developing nations to service their debts depends critically upon an uninterrupted flow of export earnings, which in turn depends on the continued growth and openness of the advanced economies in the region.

 
Directions for Future Cooperation
 

The Pacific nations, most of which are highly outward oriented, stand to lose more than other nations if the external economic environment continues to deteriorate as a result of growing trade imbalances, spreading protectionism, unstable commodity prices, and foreign debt crises. It is therefore of utmost urgency for the Pacific economies to make cooperative efforts to improve the economic environment of the region.

First of all, there is a pressing need for macroeconomic policy coordination among the Pacific nations, aimed especially at reducing the excessive trade imbalances in the region. Countries with excessive surpluses or deficits should take prompt policy actions, either unilaterally or jointly. For example, they could implement measures aimed at further opening their own markets, reducing fiscal deficits, or accelerating industrial adjustment. In this sense, the cooperative stance that the United States and Japan have recently demonstrated-respectively, through their efforts to slash budget deficits and to open domestic markets-will greatly facilitate policy coordination in the future. Furthermore, it would be most useful if the Pacific countries that are not directly involved in the excessive trade imbalances also took their own policy measures to contribute to reducing regional imbalances. The recent efforts of certain Pacific nations to diversify their trading partners is a good example of cooperative policy efforts toward this end.

Second, the new GATT round of multilateral trade negotiations should receive the highest priority of the Pacific nations. If the Uruguay Round does not conclude with some success, the world trading environment, which has already deteriorated substantially, is likely to worsen. Under such circumstances, bilateral approaches to trade policy issues would proliferate, and the world economy might even become segmented into several autarkic trading blocks.

Thus, the Pacific nations should take a leading initiative in working for the success of the new GATT round. This could be done, for example, by actively participating in the talks and reaching a Pacific consensus on the trade issues on the agenda. In addition, these nations could support the global trade liberalization by carrying out their own unilateral and regional import liberalization.

Finally, the Pacific nations should strive to maintain smooth operation of primary commodity markets and international capital markets, which would not only facilitate the economic development of developing nations, but also help ensure stable growth of the world economy. One means toward this end, for example, would be to establish multilateral mechanisms for avoiding excessive variation in prices and supplies of primary commodities in a way that balances the interests of producing and consuming nations.

Once the policy measures discussed so far are implemented, the problem of foreign debt will be largely resolved, especially from a long-term solvency viewpoint. Nevertheless, it is also important to ensure that the debtor nations have access to sufficient short-term liquidity. This could be achieved through the joint efforts of the commercial banks of the industrialized countries, the international financial institutions-such as the IMF, the World Bank, and the ADB-and the debtor nations themselves, as advocated in the Baker Plan.

 
Conclusion
 

The past and current economic performance of the Pacific nations supports an optimistic view of their future prospects. The Pacific Basin will likely continue to grow more rapidly than other regions of the world, although at rates lower than those achieved in the 1960s and 1970s.
For this rather optimistic scenario to be realized, however, the Pacific nations should make their best efforts to address the policy needs discussed above. This could be more easily carried out through regional economic cooperation, which may supplement and even accelerate the global initiatives to build a more stable and prosperous world economy.

Much has been said about the "flying-geese" pattern of industrial development in the Pacific, which suggests that the developing nations will be able to follow the advanced nations along the path toward the horizon of ever-increasing prosperity. However, we must be wary of assuming this progression to be natural and inevitable. Without mutual cooperation and especially without strong initiatives by the leading geese, we may well see all the Pacific geese fly off course. Thus far, the efforts of the PECC and like-minded organizations have helped keep the flying geese aloft and on course. I am confident that we will continue to do so throughout their long but exhilarating flight.



Statistical Appendix



Table 1. Real GDP Growth Rates (%)
 
  Nominal GDP
($ Billion)
1965-1973 1973-1984 1984* 1985* 1986*
 U.S. 3,634.6  3.2  2.3  6.6  3.0  2.6 
 Japan 1,255.0  9.8  4.3  5.6  4.6  2.1 
 Canada 334.1  5.2  2.5  5.5  4.0  3.6 
 Australia 182.2  5.6  2.4  6.8  4.5  1.4 
 New Zealand 23.3  3.7  1.4  4.8  0.9  -1.4 
 Korea 83.2  10.0  7.2  8.6  5.2  9.2 
 Hong Kong 30.6  7.9  9.1  9.3  0.8  4.1 
 Taiwan 56.9  n.a.  n.a.  9.6  4.1  8.1 
 Singapore 18.2  13.0  8.2  8.3  -1.8  0.0 
 Malaysia 29.3  6.7  7.3  7.3  -1.0  0.9 
 Indonesia 80.6  8.1  6.8  5.3  1.1  0.6 
 Philippines 32.8  5.4  4.8  -4.5  -3.7  -0.5 
 Thailand 42.0  7.8  6.8  6.0  4.1  4.3 
 World Total       4.4  3.2  2.5 
Source: World Development Report 1986, World Bank, World Economic Outlook, Wharton Econometric
Forecasting Associates, October 1986. * : estimates


Table 2. Growth of Exports
 
(In millions of U.S. dollars, %)
 
  1970-80 1983 1984 1985
  Growth Rate Amount Growth Rate Amount Growth Rate Amount Growth Rate
 U.S.A. 17.7  200,538  -5.5  217,890  8.7  213,144  -2.2 
 Japan 21.1  146,965  5.4  169,700  15.5  177,164  4.4 
 Canada 15.0  76,461  7.3  90,208  18.0  90,781  0.6 
 Australia 16.5  20,635  -6.1  23,528  14.0  22,759  -3.3 
 New  zealand 16.1  5,414  -2.8  5,518  1.9  5,721  3.7 
 Korea 35.6  24,445  11.9  29,245  19.6  29,566  1.1 
 Hong Kong 22.9  21,954  4.6  28,317  29.0  30,184  6.6 
 Taiwan 30.0  25,135  13.7  30,522  21.4  30,688  0.5 
 Singapore 28.7  21,833  5.0  24,070  10.2  22,812  -5.2 
 Malaysia 22.6  14,104  17.2  16,484  16.9  15,442  -6.3 
 Indonesia 34.8  21,152  -5.1  21,902  3.5  18,590  -15.1 
 Philippines 18.4  4,890  -1.6  5,274  17.1  4,607  -12.6 
 Thailand 24.8  6,368  -8.3  7,413  16.4  7,121  -3.9 
Source : International Financial Statistics; IMF, Financial statistics; Central Bank of China, Taipei.


Table 3. Structure of Merchandise Exports
 
(Percentage Share of Total Merchandise)
 
  Fuel, Mineral & Metal Other Primary Products Textile and clothing Machinary & Transport Others
  1965  1983  1965  1983  1965  1983  1965  1983  1965  1983 
 U.S.A. 27  27  37  44  26  24 
 Japan 17  31  58  43  35 
 Canada 28  23  35  22  15  35  21  20 
 Australia 13  42  73  35  16 
 New  zealand 94  72  15 
 Korea 15  25  27  25  32  29  34 
 Hong  Kong 11  43  33  22  37  36 
 Taiwan 21  31  44  13  10  31  18  22 
 Singapore 50  15  19  26  28  44 
 Malaysia 35  35  59  43  14 
 Indonesia 43  80  53  12 
 Philippines 11  13  84  36  38 
 Thailand 11  84  62  11  15 
Sources: World Development Report 1986, The World Bank. Yearbook of International Trade Statistics,Taipei, 1966. Monthly Statistics of Exports and Imports, Taipei, 1983


Table 4. Trade Balance
 
(In billions of U.S. dollars)
 
  1980 1984 1985 1986*
 U.S.A. -25.50  -112.51  -148.5  -169.8 
 Japan 2.13  44.26  45.9  81.2 
 Canada 8.00  16.59  10.5  8.8 
 Australia 1.37  -0.82  -0.4  -1.0 
 New Zealand 0.48  -0.20  -0.2  0.3 
 Korea -4.38  -1.04  0.0  2.0 
 Hong Kong -13.41  -1.93  0.5  0.2 
 Taiwan 0.08  9.23  11.2  14.7 
 Singapore -4.20  -4.07  -3.5  -2.4 
 Malaysia 2.41  2.98  3.7  3.3 
 Indonesia 9.17  5.55  5.9  4.2 
 Philippines -1.94  -0.68  -0.5  -0.4 
 Thailand -1.90  -1.90  -1.3  -0.5 
Sources: International Financial Statistics, IMF. Financial Statistics, Central Bank of China, Taipei.
World Economic Outlook, Wharton Econometric Forecasting Association, October 1986. *: estimates


Table 5. Trade Flows of the Pacific Countries in 1970 and 1984
 
(In millions of U.S. dollars)
 
Imports (above) Exports (below) Developed Asian (1 Asian NICs ASEAN Countries Pacific Countries World Total
 Developed  Countries (2  
 1970 36,320  3,993  3,333  43,646  85,295 
 1984 230,947  38,047  28,381  297,375  507,257 
 Asian NICs (3  
 1970 2,731  265  359  3,355  4,779 
 1984 47,928  4,646  5,547  58,121  86,864  
 ASEAN (4  
 1970 2,714  366  1,239  4,319  6,193 
 1984 37,744  6,198  14,431  58,373  77,777 
 PacificCountries (5  
 1970 41,765  4,624  4,931  51,320  96,267 
 1984 316,619  48,891  48,359  413,869  671,898 
 World Total (6  
 1970 82,755  6,413  7,448  96,616  282,638 
 1984 588,804  81,318  74,068  744,190  1,776,600 
Source: Pacific Economic Community Statistics 1986, The Pacific Basin Economic Council.
Notes:
1. Upper level figures are for 1970 and lower level figures are for 1984.
2. U.S., Japan, Canada, Australia, and New Zealand.
3. Korea, Hong Kong, and Taiwan.
4. Singapore,Indonesia,Malaysia,Philippines, and Thailand.
5. Sum of the five developed countries, Asian NICs, ASEAN.
6. World total of exports.


Table 6. External Debt-Service Ratios of the Asian Developing Countries
 
(In billions of U.S. dollars)
 
  Long-Term Debt Short-Term Debt  Total Debt  Debt-Service/ Exports
  1974 1984 1974 1984 1974 1984 1974 1984
 Korea 5.06  27.72  0.56  15.14  5.62  42.86  0.14  0.19 
 Taiwan 1.99  5.01  0.81  3.02  2.80  8.03  0.04  0.05 
 Malaysia 1.11  11.74  0.42  2.26  1.54  13.99  0.04  0.09 
 Indonesia 7.42  27.99  0.99  3.80  8.41  31.79  0.09  0.16 
 Philippines 2.21  14.90  0.98  9.50  3.19  24.40  0.14  0.37 
 Thailand 0.91  11.87  0.43  2.49  1.34  14.35  0.11  0.26 
Source: World Economic Service, Wharton Econometric Forecasting Associates, 1986.