Taking the lead; China, South Korea and Australia: the top three economies in Asia - Cover Story - Statistical Data Included

Business Asia, March, 2002

A DIVERSIFIED AND REFORMED South Korea, a stable and robust Australia, and the growing giant China, will be Asia's leading economies for 2002, economists predict.

China, South Korea and Australia are expected to power ahead and, unlike other Asian economies, are not solely reliant on an expected US-led recovery in the second half of the year.

Austrade chief economist Tim Harcourt says the three nations have the fundamentals for growth right. China, freshly accepted into the World Trade Organisation (WTO), is still a magnet for new investment and opportunities, Harcourt says, while Korea's hard work in reforming sectors of the economy after the Asian crisis was finally starting to pay off. Australia, he said, would continue to benefit from its strong export commodities base and relatively weak currency.

"China is still in an earlier phase of development than others in Asia, so you expect their growth and performance to be up," Harcourt said. "In fact, if you broke China up into its provinces, they would all make the top 20 fastest growing economies in the world for 2002.

"South Korea had a really strong focus on reform after the Asian crisis, which will help them through now. Plus they're not as reliant on IT exports like Singapore, Malaysia and the Philippines are.

"And as for Australia, given our stability and solid performance in productivity, you have to say we're in pretty good shape."

For South Korea, in many ways the wreck of 1997 and 1998's financial crisis seems a world away. Last year, Korea's economy grew an estimated 2.8 per cent, while others like Hong Kong, Singapore and Taiwan reached negative figures. Korea's growth is tipped to hit five per cent in the second half of 2002. And its stock market, which surged 37 per cent in 2001, remains one of the prides of Asia.

"Korea is simply better positioned than its competitors in Asia to handle the global slowdown," Eric Berthelemy, CEO of Societe Generale SA's operations in Seoul, said. "And it's not completely reliant on hi-tech exports either."

South Korea boasts a more diversified economy than its neighbours, who were devastated when demand for computers and semiconductors fell in a worldwide slump. Korea has many large, old economy industries such as automobiles and ships.

Its domestic economy is also in good shape, with US$9.8 billion ($18.7 billion) worth of Government spending and four interest rate cuts last year keeping it on sound footing. This year's soccer World Cup should also give the economy a temporary boost.

But while President Kim Dae Jung's Government has done much to stabilise the economy, some analysts say not enough is being done to reform the financial and corporate sectors. To investors, the country's failure to sell off such assets as Daewoo Motor, Hynix Semiconductor, and parts of Hyundai shows that the once supreme chaebol and militant unions are still a force to be reckoned with.

The Chinese Government will be striving hard to maintain its momentum of recent years, with growth expected to be about seven per cent in 2002. The economy grew 7.3 per cent in 2001.

China will be counting on internal spending and other measures to cushion the economy as WTO entry prompts many state-run companies to cut hundreds of thousands of jobs to face more competitive foreign rivals. Millions of coal miners, steelworkers and other state employees are expected to lose their jobs.

Chinese Premier Zhu Rongji has pledged more spending on welfare programs to cushion job losses. The Government will introduce unemployment benefits and medical insurance, as well as create new jobs and expand pension programs.

"China's accession to the WTO benefits its reform and economic development as a whole, but in the short-term less competitive industries and enterprises face significant challenges," Zhu told the National People's Congress recently. "We need to take effective measures to help their workers out of plight."

The state is also expected to keep pouring money into public works, especially in underdeveloped Western China. The country plans to spend about 150 billion yuan ($34.7 billion) on projects such as dams, roads and bridges.

Zhu Zhixin, head of China's National Bureau of Statistics, admits that 2002 will pose significant challenges for the Chinese economy.

"We may face a more grim world economic environment this year," Zhu said. "China needs to find a way to overcome the challenges WTO membership has bought."

China is still expected to attract the lion's share of foreign investment, however. China now attracts half of all foreign direct investment in East Asia outside of Japan, while South East Asia gets 20 per cent. Companies are flocking to China because of its lower operating costs and giant domestic market.

In Australia, the country's recent strong performances are expected to continue in 2002. Australia has been one of the stars in the slowing world economy, with its growth rate last year of around four per cent the highest in the developed world and about five times the G-7 average. Economists expect rising business investment and consumer spending to fuel growth this year. That will keep the domestic economy expanding, with growth of 3.4 per cent expected over the whole of 2002.