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Energy demand may be biggest challenge for East Asian economies

STANFORD -- If China papers its countryside with highways and cars, it could be bad news for East Asia's physical environment and strain energy supplies, but the region is positioned well to continue its economic growth into the next century, a panel of experts on that region said during the World Economic Forum's industry summit at Stanford on Monday, Sept. 19.

Positive economic factors in the region include relative political stability, increasing economic liberalization and a strong flow of foreign direct investment for infrastructure, Stanford political and economic analysts said.

Stanford political scientist Daniel Okimoto also predicted that trade tensions between the United States and Japan will continue to simmer but won't "boil over into a crisis or rupture of the relationship" because the countries are too interdependent.

"We have a situation of mutual hostage. Anything we do to punish Japan for its trade surplus will come back to haunt us," Okimoto said.

China's 10 percent growth rate has unleashed inflation above 20 percent, which is worrisome to some, because inflation was a factor in the Tiananmen Square uprising, said Stanford economist Qian Yingyi. The country continues to make progress, however, toward economic liberalization.

In January, China unified its unofficial and official exchange rates, a factor in the inflation, and began a three-year phase-in of a new tax system that replaces a hodgepodge of many different taxes and rates. Both reforms will encourage foreign investment, Qian said, which China needs to continue its rapid growth.

China is also trying to segregate its taxes into national, provincial and local administration, but that will take longer, he said, and there are more difficult reforms to undertake. "At the moment, 40 percent of China's state-owned enterprises are losing money. It's a big drain on the state budget" and must eventually be resolved with new forms of ownership and perhaps foreign joint ventures, he said.

In the longer term, Stanford economist Lawrence Lau said he is worried that China can create an energy and environmental problem for itself by "making a lifestyle choice" to become an automobile culture like that of Los Angeles rather than a public transport culture like that of New York or Paris. "There is talk now about building 20 auto plants," he said.

Lau, who is working on an energy consumption study of China for the World Bank, said the country's rate of energy consumption per unit of output growth is not high now, but that could change if autos wind up consuming as much as 25 percent of the country's energy by 2010. "Once the residential pattern is set, you can't change it."

Masahisa Naitoh, adviser to Japan's Ministry of International Trade and Industry, said he also is concerned about how the region will meet its ever-increasing energy demand in a way that does not degrade the environment.

"East Asia's energy demand is growing by 6 to 7 percent [annually]. How and where to procure the shortfall is a major issue for the region," Naitoh said, especially since 60 percent of the current supply is coming from coal, which causes air pollution.

Lau also stressed the importance of China joining the General Agreement on Tariffs and Trade soon, before government leaders face more pressure from its own growing private industrial sector to protect the country's huge domestic market from imports. Like Mexico, he said, China needs trade because "it puts pressure on domestic industry" to become more productive.

Chinese leaders seem to have "adopted the attitude that the more [economic reforms] they get done now, the more difficult it will be to unravel and unwind" later, Stanford economist Michael Boskin said in another session of the industry summit.

While growth in the Chinese economy is important to China and the region, Boskin told business leaders that China's growth is not as important to the rest of the world as U.S. economic growth. China eventually will have a huge domestic market, he said, but its per capita income and output is still a small portion of total world demand and output.

Recent trends in Japan include a new focus on development of the region's infrastructure and more industrial linkages with its East Asian neighbors, said Ken-Ichi Imai, director of research at the Stanford Japan Center in Kyoto. Increasingly, he said, Japanese manufacturers are exporting parts to other Asian countries for assembly into machinery for export.

There is also substantial private Japanese investment in information infrastructure in the region, he said.

The Japanese recession has forced Japanese companies to reduce domestic employment and increase jobs overseas, said Japan's Naitoh. Some manufacturers are reducing their traditionally high research and development budget as well, he said.

Japan's recent economic problems also have reduced U.S. fears of that economy, Okimoto said. In the Silicon Valley, semiconductor and computer manufacturers have more confidence that they can compete with Japan than two years ago, he said.

Donald Emmerson, a University of Wisconsin specialist on Southeast Asia who is a visiting scholar at Stanford's Asia/Pacific Research Center this year, said he foresees economic growth in Southeast Asia outstripping growth rates of Northeast Asia in the years ahead. This is because the Southeast Asian countries are now getting substantial flows of foreign investment from Japan, Korea and elsewhere. Their economies are starting from a lower base, so a smaller amount of new financial activity is needed to produce a higher growth rate than in Northeast Asia, he said.

Even in the Philippines, which has lagged, the government's economic liberalization policies are "beginning to pay off," Emmerson said, with a growth rate of 4.5 percent this year and probably 5 percent next year. Vietnam, he predicted, will maintain a growth rate next year of 8 percent.

Cambodia and Burma remain potential political trouble spots in the sub-region, he said, and there could be a problem with succession of political leadership in Indonesia in the years ahead.



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