AgDM newsletter article, March 1998

The Pacific Rim and Iowa agriculture

Don HofstrandDon Hofstrand, retired extension value added agriculture specialist, agdm@iastate.edu

The Asian Tigers of the Pacific Rim have been models of economic growth.  Their rapidly expanding economies have been the envy of the rest of the world.  However, the tigers have stumbled.  Banks have gone bankrupt, stock markets have plunged, unemployment has risen, and the value of their currencies has fallen. 

On closer inspection, serious flaws exist in the structure of these economies.  To regain a path of strong economic growth requires that they be restructured.  Failure to do so will keep these countries in disarray.  In fact, the malaise could spread to Latin America and other parts of the world. 

Iowa's linkage to the Pacific Rim

The health of the Pacific Rim economies has a direct impact on Iowa agriculture.  As shown in Table 1, almost two-thirds of our corn exports and almost half of our soybean go to these countries. 

Table 1. Corn and soybean exports (1995/96 - 1996/97)

Percent of total

Destination

Corn

Soybeans

Japan

31%

16%

Taiwan

12

10

Korea

13

6

China

2

4

Malaysia

2

2

Indonesia

1

3

Philippines

1

1

Other

1

2

Total

63%

44%

In addition, 50 percent of our beef exports and 45 percent of our pork exports go to Japan.  Korea, a big importer of hides, accounts for another 12 percent of our beef exports.

However, due to the economic problems in the region, exports have declined so far this marketing year as shown in Table 2.  During the last six months corn and soybean exports have been down 6 percent to Japan and significantly more to other countries of the region. Pork exports are expected to be off about 25 percent.  Regaining lost exports and increasing future exports to this region depends on their ability to resolve their economic and financial problems.

Table 2.  Exports and outstanding sales (Feb. 5, 1998 vs. year ago)

Percent change

Destination

Corn

Soybeans

Japan

-6%

-6%

China

20

Taiwan

-38

-10

Korea

-60

-30

Other Asia & Oceania

-50

-18

Pacific Rim crisis

The crisis started with a single bank failure in Thailand.  Soon it spread to most of the developing nations in the region.  Explanations abound for the crisis.  But the problems are rooted in the following factors.

Legacy of the Cold War

The economic structures now in place through most of Asia are obsolete.  They were designed to consolidate domestic power and quickly raise living standards to resist the communist threat.  This lead to autocratic rule, strong links between the government and private sector, and preferential financial treatment for selected companies.  However, institutions now need to be built on democratic rule and free enterprise foundations.

Lending practices

Many of the banks have followed a philosophy of crony capitalism.  This involves lending money to friends and relatives without taking into account collateral positions and repayment capacity.  Debt-financed investments often resulted in speculation in golf resorts, high rise office towers, and luxury condos.  Money that did flow to manufacturing often just added to the global glut of these products.  Soon banks were reeling under the weight of bad loans.  It is estimated that bad loans account for 10 to 20 percent of the total loans in these countries – compared to 1 percent for the U.S. 

Much of this debt is owed to foreign banks.  Korea’s foreign debt is over $150 billion, followed by Indonesia over $130 billion.  Default on this debt will endanger the banking systems in other countries, increasing the chances of spreading the crisis.  For example, Japanese banks are major holders of this foreign debt at about $100 billion.  Japan, already suffering from its own problems, would be hard hit.

Stock Market decline

Many of the tiger economies are worth only a fraction of what they were a year ago.  During the last six months, the stock markets of Hong Kong, Korea, Indonesia, and Thailand have dropped by $200 billion.  Capital flight out of these countries has been a drag on sustaining economic viability.

Currency devaluation

During the last six months the value of many southeast Asian currencies has fallen by 50 percent.  The devaluation in specific countries is shown in Table 3.

Table 3. Devaluation of Asian currencies vs. U.S. dollar (Jan. 3, 1998 vs. 1997)

Percent
change

Japan

-9%

Korea

-50

Taiwan

-19

Thailand

-52

Indonesia

-78

Malaysia

-43

Philippines

-38

Hong Kong

0

Singapore

-19

China

0

Changes in exchange rates have a profound effect on our imports and exports.  For example, the Korean won has fallen by 50 percent relative to the U.S. dollar.  So it takes twice as many won to equal the value of one dollar. 

Assume that one dollar equals one won as shown in the simplified example below.  A corn price of three dollars translates into a Korean price of three wons.  Also, a Korean car price of 20,000 wons translates into a U.S. price of $20,000. 

Exchange rate example

Dollar

Won

Before devalued

(1 Dollar = 1 Won)

U.S. corn

3

3

Korean car

20,000

20,000

After devalued

(1 Dollar = 2 Wons)

U.S. corn

3

6

Korean car

10,000

20,000

If the won is devalued by 50 percent, the price of corn increases to six wons.  Conversely, the price of the Korean car drops to $10,000. 

So, the price of U.S. imports from Korea falls substantially.  This is the reason these countries devalued their currencies – so they could increase exports to bolster their economies.  However, the price of U.S. corn in Korea doubles in price, limiting our exports to Korea.

Growth potential

The destiny of Iowa agriculture is tied to the future of the Pacific Rim.  The population and per capita incomes of these countries are shown in Table 4.  The region contains seven times as many people as the U.S.  In addition, the population is expected to grow rapidly during the coming decades.

Table 4. Population and income of Pacific Rim countries                       

Per capita

Population

GNP/GDP*

income

(million)

(billion)

Japan

126

$5,151

$41,020

South Korea

46

377

8,483

China

1,210

2,979

2,500

Hong Kong

6

136

24,530

Taiwan

21

263

12,439

Thailand

59

355

5,970

Indonesia

207

619

3,090

Vietnam

76

23

311

Malaysia

20

80

4,027

Philippines

75

161

2,310

Singapore

3

57

19,940

Brunei

1

5

16,427

Total

1,848

$10,206

Average

$5,593

U.S.

265

$7,246

$22,788

* Measure of economy size. GNP = gross national product. GDP = gross domestic product

The region's per capita income has grown to one-forth that of the U.S.  If per capita income continues to increase, people will change from a grain diet to a meat diet.  This switch in diet not only increases the demand for meat but also increases the demand for grain because it takes several pounds of grain to produce a pound of meat. 

The large population, when combined with rapid income growth, has the potential to greatly increase the demand for agricultural products in coming decades.  So, the impact of the financial crisis on current exports is minor when compared to the loss of exports to this region over the coming decades if their economies don't continue to expand.

Will the region resolve its problems?

Although the region holds great potential for Iowa agricultural exports, they must first resolve their financial problems and restructure their economies.  The International Monetary Fund (IMF) is offering the financial investment needed to shore up these economies provided they restructure them.  So, will the financial problems be resolved? 

Although predicting the future is dangerous, most economists are optimistic that the Asian Tigers will get their economic house in order and get back on the track of economic expansion.  They have a skilled labor force with a strong work ethic.  In addition, a strong entrepreneurial spirit exists.   

However, just because their economies grow and the demand for agricultural products expands doesn't mean that we will be the supplier.  We will have to compete with other parts of the world for their business.

 

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