Study Considers Worst Case If Asia
Collapses
By Clay Chandler
Washington Post Staff Writer
Saturday, August 1, 1998; Page C01
Call it the Asian Armageddon scenario:
Instead of getting better, Asia's economic crisis just gets
worse -- lots worse. Policy goofs in Tokyo trigger a run on
Japanese markets. Several big Japanese banks go bust.
The yen nose dives, China chops the value of its currency
and other currencies in Asia plunge anew. And as what
once was the most economically vibrant region in the world
lurches into depression, a cash-strapped International
Monetary Fund can do little more than watch.
If that nightmare were to become reality, how much would
the rest of the industrialized world suffer?
It would be painful, but not disastrously so, according to
experts at Standard & Poor's DRI, a respected economic
forecasting firm based in Lexington, Mass., that uses
complex computerized models of the economy to predict
the future.
In a newly released study DRI economists concluded that
even under a "worst-case scenario," in which Japan's
economy shrinks by 10 percent, China's economic growth
rate skids to 1 percent from 8 percent and Indonesia
lapses into default on its foreign debts, the United States
would experience only a "mild recession," while Western
Europe would escape recession and merely grow more
slowly.
Any economic forecast is fallible, of course, and
computerized models of the sort that DRI uses are
notoriously incapable of predicting changes in psychology
and confidence that can make the difference between
boom and bust.
Nevertheless, the DRI study highlights two basic features
of today's U.S. economy that sometimes are obscured by
the cavalcade of gloomy economic news from across the
Pacific:
Despite the increasing globalization of American firms and
recent efforts to strengthen economic ties to Asia, trade
with the Pacific Rim remains relatively limited. Exports to
Asia account for only 2.4 percent of the U.S. economy and
only a third of total U.S. exports.
The domestic economy, meanwhile, remains remarkably
strong and well-balanced. Unlike previous expansions, when
rapid growth has sent prices soaring, inflation is tame this
time around. As a result, the Federal Reserve "has the
leeway" to respond to a potential slump by "cutting
interest rates sharply," the study notes.
"The U.S. economy has tremendous momentum going into
the Asian crisis," said DRI's chief international economist
Nariman Behravesh, who directed the analysis. "If the crisis
were to hit at a different point in the U.S. business cycle,
things would be a lot worse."
The DRI study finds that a meltdown in Asia would clobber
key emerging markets, such as Russia and Brazil by
battering exports and boosting rates of inflation and
unemployment.
A further collapse in Asia also would inflict severe pain on
oil producing nations in the Middle East, which count the
Asian economies among their most important customers.
But for the rest of the world, the effects of a pronounced
slump in Asia would be only modestly negative. The U.S.
economy would contract by 0.5 percent in 1999, but
bounce back quickly, attaining a healthy annual growth
rate of 3 percent by 2001, DRI analysts predicted.
A "worst case" outcome in Asia would drive the U.S.
unemployment above 7 percent, or about one percentage
point above the level that DRI expects if the ongoing
economic expansion were to wind down without new shocks
from Asia. The stock market could drop as much as 25
percent.
By comparison, during the wrenching recession year of
1982, the U.S. economy contracted at a 2.1 percent rate,
and joblessness topped 10 percent. During a milder
recession in 1991 growth was negative 0.9 percent and
unemployment for the year averaged 7.5 percent.
In Western Europe, meanwhile, an Asian Armageddon
would cause growth to slip to 1.3 percent in 1999. But on
average, growth in European economies would bounce
back to a 2.5 percent pace by 2001. That's about a point
below where DRI analysts expect it to be if conditions as
they are now prevail.
In addition to tumbling growth rates in Japan and China,
DRI's nightmare scenario posits that the Japanese
currency, which ended New York trading yesterday at
about 144 yen to the dollar, weakens beyond 200 yen. It
assumes that Chinese authorities allow the yuan and Hong
Kong dollar to slump 40 percent, forcing the region's other
economies to devalue by similar magnitudes to ensure
that the price of their exports remain competitive.
DRI analysts estimate there is a 1 in 4 chance that the
conditions described in their "worst case" scenario actually
will occur. Ominously, though, they assert that there is at
least a 1 in 20 probability that even their "worst case"
scenario is too optimistic.
"There are altogether too many similarities between the
recent crisis in Asia and the Great Depression of the
1930s, including excess capacity, competitive
devaluations, collapses in property and equity markets,
banking c
