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Friday, February 07, 2003

Asian Deflation Looming?

Another of the under-commented problems facing the global economy is the fact that Asian deflation is not simply a Japanese problem. Deflationary pressures are evident in S Korea, Taiwan, Hong Kong, and even China (where the massive restructuring of the former state owned industries has produced a tremendous downward pressure on Chinese wages). In Taiwan they are certainly worried, as this editorial from Taiwan News clearly demonstrates. Even if I do not subscribe one hundred percent to the thesis offered, I think the two points they highlight - falling technology prices and the entry of China (and of course India) as major global players in the supply markets - form an important part of the picture, and the argument does at least give us a welcome break from all those one-sidedly monetary explanations.

Taiwan and Asia have just completed a year of stable though slow economic growth. In the year to come, although likely to enjoy ongoing stability, we will be confronted with a major new challenge -- how to cope with an oncoming long-term era of global deflation. In Asia, a marked deflationary trend has become apparent not only in Japan, but in South Korea, Taiwan, Singapore, Hong Kong and China's urban sector. This circumstance demands action by all nations aimed at facing up to the problems occasioned by sustained deflation. Government officials and commentators, however, commonly appear to ignore the roots of chronic deflation. Japanese officialdom, for example, has to date interpreted it purely as a product of monetary policy, thus believing that if only they could make appropriate adjustments in monetary policy, they can turn the tide of deflation. It would appear that such, also, is the mainstream line of thought in other Asian countries.

The true sources of deflationary pressure, however, lie not in monetary policy but in worldwide political and economic developments. Harking back to the period of global deflation during the last quarter of the 19th century, its prime political contributory factor was the Pax Britannica -- a sustained period of world peace and stability under the sway of British power. Economically, it was the outcome of the rapid development and spread of new technologies. These two circumstances combined to cause the world economy to enter into an unprecedented period of economic growth, creating a productive capacity outstripping market demand, thus depressing prices globally for a full two decades. The deflation now overtaking the world economy is similar in origin. Despite the fact the United States is currently pursuing a worldwide war against terrorism, the reality remains that, for the foreseeable future, there appears to be very little likelihood of large-scale war; and that America's unchallenged superpower military might will most probably secure long-term peace for the world's three paramount industrialized regions of North America, Northeast Asia and Western Europe -- a peace which may reasonably be anticipated to last for at least the coming two decades. In combination with such a Pax Americana, the ongoing high-speed development and dissemination of new technologies, together with the injection of former communist-block nations' vast labor pools into the world market (most notably that of China, whose economic system has, in reality, long since ceased being communistic), have caused productive capacity to expand in leaps and bounds, resulting in a surplus of supply over demand which will not soon change. Given this circumstance, a protracted era of global deflation is only to be expected.
Source: Taiwan News

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