Why is Asia doing so badly?

Tyler Cowen asks, linking to Brad Setser’s More Bad news from Asia, why is Asia doing so badly?

He speculates

Another answer is that many Asian producers have chosen high fixed costs in a way that requires steady or rising revenue over time.  That is their version of being highly leveraged without taking on much explicit debt.

I do not believe that Asian producers have high fixed costs, infact most of Asian production is heavily dependent on cheap labour and a lot of labour is migrant labour, from Indonesia in Malaysia and internal migrants in China and India. These people are extremely easy to get rid of and this creates a drop in overall consumer demand.

None of the Asian countries have a robust unemployment insurance scheme and so consumer demand contracts

The Global Savings Glut pushed up the property and equity prices in Asia and even if wasn’t as egrerious as US, there were quite a few projects which would have never been financed in normal times. Also a lot of Asian countries are heavily dependent on commodities like Palm Oil in Malaysia, Coal and Timber in Indonesia and those are being hit hard.

The consumers are really scared and are cutting back on spending and the government is not as equipped to push out fiscal stimulas as effectively that it will stimulate consumer spending.

The key reason that Asia is doing badly is that consumers are saving too much and not a lot of that savings is being invested since the right institutions do not exist to channel the savings, except in property which is seeing a cyclical downfall right now.


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