Charging ahead: America's biggest new export—credit cards—could bring down the world economy

Washington Monthly, May, 2003 by Joshua Kurlantzick

This crucial deregulation has allowed banks and card companies to pursue a wider range of clients, many of whom have minimal savings and no credit history. In South Korea, for example, it has become so easy for lenders to issue credit cards that the local media reported last year that banks had mistakenly given household pets--which could hardly have a credit rating--their own credit cards. In golf-mad Thailand, card issuers have offered free links lessons. And credit-card issuers have pursued similar tactics across Latin America and Eastern Europe.

Foreign governments and global lenders have both tried to encourage developing world consumers to open their wallets and global consumers have happily obliged. Until recently, credit cards were unheard of in China. Today, however, Chinese use plastic for more than $200 billion worth of transactions annually. India and Indonesia reported major increases in mortgage applications, consumer loans, and credit card purchases in 2002. Across Asia, Visa International increased the number of cards issued by 25 percent last year alone, and cash withdrawals using Visas rose by 44 percent. According to The Economist, households now account for nearly 40 percent of East Asian banks' total lending, up from 27 percent in 1997.

Thailand and South Korea have become even more obvious examples of American-style spending. Visa says that total spending on its cards in Thailand is rising by more than 40 percent annually. In South Korea the story is the same. As one South Korean told The New York Times in December, the average Korean worker now carries four credit cards (more than 10 million South Koreans carry four or more, while the average bank worker carries between 10 and 15). Meanwhile, consumers in Eastern Europe, Latin America, and even Africa have actively followed suit. Schroder Salomon Smith Barney, an investment bank, estimates that between 1997 and 2001, household lending in Hungary, Poland, and the Czech Republic rose by more than 25 percent. As The New York Times recently reported, Russians also are beginning to utilize debt to pay for mortgages and large appliances. Household spending in South Africa, the biggest economy in Africa, has soared since 2000. And while Latin America has been hit by a series of financial crises from which, unlike Asia, it has not completely recovered, consumer spending--especially spending on credit--is rising there as well, in the region's more developed economies.

Extra Credit

As in the United States, the expansion of household spending in the developing world has had many positive impacts. It has not only helped buoy domestic economies hit hard by the economic shocks of the late 1990s but also provided new markets for foreign companies. Chinese acceptance of credit and auto financing, for instance, has helped Volkswagen make China its largest market; other automakers plan to follow suit. "The Chinese are becoming more used to financing. Once we establish the type of comprehensive GM financing systems we have in the US, we expect to see a huge jump in purchases," General Motors China head Philip Murtaugh told me last fall in Shanghai. Leading automakers are also developing plans to expand their product lines in Mexico, Brazil, South Africa, and Chile, in part because of the explosion of borrowing on credit--a development which mirrors the pattern in America during the early 20th century. Rising consumer spending has also filled many countries' tax coffers, since in most developing countries sales taxes are much easier to collect than income taxes--income-tax avoidance is very high.