Skip to: Content
Skip to: Site Navigation
Skip to: Search


Will Asia Woes Turn State's Golden Economy to Dross?

California, which does double the US rate of trade with Asia, may give clues to what the future holds for the US economy.

By Daniel B. WoodStaff writer of The Christian Science Monitor / September 3, 1998



LOS ANGELES

With world financial markets in crisis and investors trying to discern the lessons of this week's black Monday, eyes are turning to the mammoth economy of California as a possible harbinger of trends to come.

Skip to next paragraph

The Golden State's $1 trillion-plus output is the world's seventh-largest economy, having recovered in 1996 from its worst recession since the Great Depression by reinventing itself as an entrepreneurial high-tech economy of tomorrow.

Because the state has about twice as much trade with Asia, proportionately, as the US as a whole - about $70 billion a year - questions are being increasingly asked: Has the global currency crisis, centered in Asia but now spreading to Russia and beyond, put the brakes on California's economic comeback? What are the implications of a California slowdown for the US economy as a whole?

The answers, according to interviews with leading economists in the state, are that California is holding up well, for now, despite short-term blows to technology exports and tourism. Longer term, the outlook is still very strong. But certain sectors are especially vulnerable - notably Silicon Valley, which could be hurt drastically if the Asian-cum-global downturn is prolonged.

No need to worry - so far

But most observers suggest that because of the sheer economic depth and diversity of California and the US as a whole, fearful reactions over global deflation and depression are somewhat overblown.

"At this point, the evidence is just not showing the prospect of a prolonged California slowdown," says Ted Gibson, director of the state's Department of Finance in Sacramento. Allowing for the prospect of a lag effect - in which repercussions from the volatile stock market might not be felt for several months - Mr. Gibson counsels optimism based on how well the state has fared since the inception of Asian currency problems last August.

"Obviously we would be doing better if Asia had remained strong," Gibson says, noting than half the state's exports go to Asian countries, compared with 30 percent for the US as a whole. "But we have had such strong sales elsewhere, from Canada to Europe to Mexico, that we have been able to offset those losses." If global downturns affect buying power in those countries, the consequences could eventually hit California.

One consequence that has been traced to the cumulative effect of three problem economies - Thailand, Malaysia, and Indonesia - has been a drop in the robust gross state product from 5.2 percent growth to 3.2 percent by 1999. The effect of the drop has been minimal, because even though Asian countries have less ability to purchase California-made goods, Californians are paying less for imported goods - notably cars and electronics.

"So far, California has benefited from these two effects, which have offset each other," says Steve Levy, director of the Palo Alto-based Center for the Continuing Study of the California Economy (CCSCE).

Hotels, Silicon Valley feel pinch

The one area that has been hardest hit, economists agree, has been the computermakers of Silicon Valley in northern California. Two years ago, that region exported $30 billion worth of semiconductor equipment, computers, and telecommunications goods, half to Asian countries. Now, those countries can no longer afford to spend at such levels, especially with the comparative strength of the dollar raising the prices of US-made components.

"Silicon Valley executives ... are finally beginning to acknowledge that they are being hurt in ways they couldn't even have imagined six to nine months ago," says Ross DeVol, director of regional studies for the Santa Monica-based Milken Institute, which has been studying the effects of the Asian crisis on California companies. Electronic components, aerospace parts, software, legal services, and movie-licensing fees have all seen significant falloff, a Milken report shows.

Tourism is the second piece of bad news for California's $60-billion plus travel economy. Because prospective travelers from Korea to Japan are staying home, theme parks, tour operators, and hoteliers across the state have been socked.

"Korean tourism is down sharply, and Japanese visitors aren't spending as freely as they once did," says Jack Kyser, director of the Los Angeles Economic Development Corp. He estimates losses to Los Angeles alone at $600 million this year. "There are a lot of merchants from Little Tokyo to Rodeo Drive that are really feeling the pinch."

Farmers and loggers across California have been hard hit as well. Lumber sales to Japan have dropped 67 percent, and crop sales to Asia - which make up well over half of the state's agricultural exports - are down significantly.

But despite these pockets of vulnerability, California is in good shape, say most economists. Jobs in Los Angeles County alone, the nation's largest, will grow another 101,400 this year.

What may be important to watch, say other economists, is how hard the new global crisis hits other US regions. The Seattle region, which includes Boeing Co. and Microsoft Corp., is a very Asian-dependent region. Boston and New York have economies tilted to financial services, which could take a dive. Texas has heavy investments in new petrochemical plants across Asia, which are now in trouble.

"As long as the US economy as a whole is OK, California's additional exposure to Asia's troubles won't be a problem," says Robert Arnold, senior analyst at CCSCE.

"If the US as a whole gets into trouble, California will be pulled along with it."