Deflation prompts rethink

Business Asia, August 17, 1998 by Richard Hubbard

Government policy makers across Asia are changing direction and are set to revitalise infrastructure projects as a new threat emerges to their already embattled economies -- the prospect serious deflation.

Since mid-year the authorities have been loosening the tight monetary policy screws in place since the peak of the Asian crisis, and making plans to boost government spending to try to head it off.

In taking this new direction, analysts say, governments have been given a green light by the International Monetary Fund.

"Deflation is the watch-word in Asia at this point," said Mr Tim Condon, regional economist at Morgan Stanley in Hong Kong.

No less a figure than Chinese Premier Zhu Rongji has openly admitted the existence of deflation in China's economy.

"In view of the current situation in which there is deflation, the central government has decided to take more active fiscal policies to raise more capital and strengthen infrastructure investment," Mr Zhu said.

Economists define deflation as a sustained reduction in the general level of prices. It is often, though not always, accompanied by declines in output and employment.

This is certainly happening across Asia now and governments appear to have decided that, since exports are not going to provide the needed stimulus to avoid deflation, they have to step in.

A new report on East Asia says China is defying Asia's downturn and becoming an even more attractive location for infrastructure investment.

The report claims that the overall need for infrastructure investment in Asia remains essentially undiminished, despite delays to a number of large current and proposed projects because of the region's financial crisis.

Titled "Infrastructure Development in East Asia: Opportunities for Hong Kong", the report identifies market trends for power and land-transport infrastructure provision.

According to the Hong Kong Trade Development Council study, one of Hong Kong's strongest competitive advantages is its links with mainland China.

While most regional economies affected by Asia's economic crisis had adopted austerity measures to weather the storm, some are rethinking this strategy and are planning to resurrect postponed infrastructure programs to stimulate their weak economies.

Some governments are also trying to attract badly needed foreign capital by overhauling investment conditions.

The report suggests infrastructure development in China may actually accelerate this year.

One-fifth of China's incremental power-generating capacity between 1996 and 2000 will be contracted through the private sector, the report says.

This represents an enormous opportunity (about US$84 billion of work) for investors, developers, equipment manufacturers and service providers.

--Reuters, Business Asia

PRIVATE INVESTMENT IN INFRASTRUCTURE

Private-sector participation in
infrastructure projects is common

1 = STRONGLY DISAGREE
7 = STRONGLY AGREE

Rank     Country

1        Hongkong           6.42
2        Philippines        6.00
3        Thailand           5.92
4        Malaysia           5.85
5        Indonesia          5.76
6        Australia          5.75
7        United States      5.69
8        Argentina          5.68
9        Chile              5.64
10       Ukraine            5.46
11       New Zealand        5.39
12       United Kingdom     5.38
13       France             5.29
14       Mexico             5.23
15       Japan              5.22
16       Canada             5.18
17       Turkey             5.10
18       Slovakia           5.09
19       Singapore          5.06
20       Colombia           5.00


Others
23       South Korea        4.93
24       Vietnam            4.72

Source: World Economic Forum, 1997