/IPS DEVELOPMENT BULLETIN/ PACIFIC: Analysts Remain Bullish on Growth Prospects

By Jim Lobe Reprint | | Print |

Jim Lobe

WASHINGTON, Jun 7 1997 (IPS) - The economies around the Pacific Rim — from Chile and Canada in the Americas to China and Korea in Asia — should enjoy moderately higher growth rates over the next two years, according to a new report released here Tuesday by two pan- Pacific agencies.

The 84-page report, ‘The 1997-1998 Pacific Economic Outlook’, says the region’s economic performance over the past two years was characterised by “a combination of higher real output and sharply lower inflation” — in short, “the stuff of dreams for policymakers.”

While the overall forecast is quite positive, however, some cloud could darken the horizon — most notably, political uncertainties in a number of key countries and the possibility of a crisis in one or more of the region’s financial systems.

The Pacific Economic Outlook, which is put out each year by the Pacific Economic Cooperation Council (PECC) and the Asia Foundation, offers a forecast of the economies of 20 East Asian, North American, and Latin American countries.

Formed in 1980 as a joint initiative of Japan and Australia, the PECC is a non-governmental organisation consisting of representatives of business, research institutions, and governments from 20 countries in the region. It works alongside the more formal Asian-Pacific Economic Cooperation (APEC) forum which, since 1993, has held annual summits of the region’s leaders.

At last November’s summit at the former U.S. naval base at Subic Bay in the Philippines, the APEC leaders reiterated their goal of eliminating all trade barriers within the region by the year 2020.

According to the latest Pacific Economic Outlook survey, average economic growth for the region will reach 4.1 percent in 1997-98, just 0.1 percent higher than 1996. But if Russia, whose economy is expected to post negative growth both years, is omitted from the list, estimates for the region would increase to 4.3 percent.

Leading the pack wll be China (9.8 percent growth in 1997, 9.0 percent in 1998), Vietnam (9.6 percent and 9.2 percent, respectively), and Malaysia (8.2 percent and 8.6 percent, respectively). Canada, Peru, Japan, and the United States will bring up the rear with anticipated growth rates of around three percent or less.

Continued strong regional growth is due to several factors, according to the reporting team, which is led by University of California economist, Lawrence Krause. The most important is the continued rate of private investment, particularly in equipment to create new production capacity.

The United States is expected to retain its position as both the biggest source and recipient of foreign direct investment (FDI). China, the biggest recipient of FDI in the developing world by far, has probably seen its annual FDI inflow level off at about 40 billion dollars. Investment in Latin America and other East Asian countries, especially Malaysia, is expected to grow.

The Pacific Economic Outlook also expects a resumption in the growth of Pacific exports after a disappointing year in 1996 which some analysts believe reflected an end to the “Asian Miracle” of export-led growth. That was due primarily, according to the report, to a downturn in the business cycle for semi-conductors, which are produced by a large number of East Asian countries. This is unlikely to be repeated, the report says.

A third important factor is the rise in tourism in all of the region’s economies except China, Japan, and the United States, whose tourism industries have already reached a plateau.

While the region’s economies will continue their brisk growth, inflation is also expected to continue falling, albeit not at the pace of the last year, when the inflation rate fell from 8.6 percent to 4.1 percent, the lowest ever recorded by the Pacific Economic Outlook.

The rate should fall a further 0.2 percent this year and 0.4 percent in 1998, heralding “a new era of price stability,” according to the report, which cautions that Russia remains “a major concern” and that Mexico, which is credited with engineering “a significant turnaround in 1996,” must also be cautious.

The report’s estimates, which have traditionally been among the most accurate forecasts of the region’s performance, could still be undone by a number of political factors that cannot be so easily predicted.

China’s Jul. 1 takeover of Hong Kong looms very large in the region. “Very few peaceful regime changes ever take place, so it is hard to draw on experience for guidance,” according to the report, which stresses that the signs for a smooth transition are positive so far.

The lack of clear successors to the presidency in both South Korea, which holds elections at the end of this year, and Indonesia, where President Suharto is expected to win a seventh five-year term in 1998, also clouds the regional picture, according to the report. It notes that increasing unrest and political uncertainty in Jakarta “could become great enough to affect business confidence, even though few signs of this have yet appeared.”

In Mexico, political events and drug corruption could also shake investor confidence, the report states, adding that an opposition victory in the elections for mayor of Mexico City could raise new doubts.

Another worry is evidence of growing gaps between rich and poor that could create social tensions in some countries, notably Thailand, China, and Indonesia. “We don’t have an answer right now, other than to say that it’s an area we have to look at,” Krause says.

Other threats to the optimistic scenario include the possibility that a financial firm of some size could go bankrupt and cause an implosion of credit throughout a key economy.

That risk has existedin Japan since the financial bubble burst in the early 1990s, the report says. In Thailand, a slump in the property market has affected confidence in the financial system, while two recent bankruptcies of non-financial firms in Korea have also prompted investor jitters.

PECC members include Australia, Canada, Chile, China, Colombia, Hong Kong, Indonesia, Japan, South Korea, Malaysia, Mexico, New Zealand, Peru, the Philippines, Russia, Singapore, Taiwan, the United States, and Vietnam.