Will Asia Drive Global Growth?
July 16, 2009
The news out of Asia was good this morning as China reported “its economy [had] accelerated in the second quarter, expanding by 7.9 percent, amid a surge in consumer spending and factory output on the back of massive government stimulus measures” [“Asia stocks rise as China growth buoys confidence,” by Jeremiah Marquez, Washington Post, 16 July 2009]. Marquez continues:
“Analysts said the quicker expansion, above most market forecasts, put the world’s third-largest economy within reach of the government’s 8 percent full-year growth target. It offered yet more assurances for global investors who, thrilled by China’s ability to keep its economy growing as other countries slump, have already driven Shanghai’s stock market up nearly 75 percent this year. ‘This should give people confidence that China’s economy is on strong footing and that there are a lot better days ahead,’ said Alan Landau, Hong Kong-based president of Marco Polo Pure Asset Management, which oversees about $120 million in mostly mainland Chinese equities.”
Back in March, a panel of Asian researchers claimed that “the global financial crisis has underlined the critical need for the region to grow less export-dependent and instead foster domestic demand” [“Experts Say Asia Needs to Rely Less on Exports,” by Yuri Kageyama, AP Business Writer]. They believed the recession would provide the catalyst needed to change.
“The representatives from the Asian Development Bank Institute, which brings together economic experts on the region, acknowledged such change will require time, perhaps as much as a decade. … The vulnerability of Asia economies caused by their extreme reliance on exports has been viewed as a major problem for decades. But the U.S. financial crisis, which threatens to bring more joblessness, poverty and social instability to Asia, is making the need for change more pressing than ever, researchers said.”
Even if Asian economies become more consumer-oriented, the experts believed that most of the demand would be for products from within the region. For western countries looking to increase exports to Asia in the near future, this prediction doesn’t offer much encouragement.
“‘Exports to developed economies will be less of an engine of growth for the region,’ said Masahiro Kawai, dean of Asian Development Bank Institute, and one of 19 researchers from Asian think tanks who signed the report. ‘East Asia will need policies to facilitate a shift toward inclusive, sustainable growth driven by regional demand,’ he said at the Foreign Correspondents’ Club of Japan in Tokyo.”
The Economist, however, notes that the rest of world hopes that a change in consumerism in Asia will have positive repercussions globally [“Shopaholics wanted,” 27 June 2009 print issue].
“Asia’s emerging economies are bouncing back much more strongly than any others. While America’s industrial production continued to slide in May, output in emerging Asia has regained its pre-crisis level. This is largely due to China; but although production in the region’s smaller economies is still well down on a year ago, it is rebounding in those countries too. … Meanwhile, export markets in developed economies are likely to remain weak. So the recovery in Asian economies will stumble unless domestic spending, notably consumption, perks up.”
Every country, of course, has unique challenges and spending patterns. The article observes that “consumers’ appetite to spend varies hugely across the region.” One reason is that about 50 million people who were on the verge of becoming part of the lower middle class have been plunged back into “absolute poverty” according to the World Bank [“Is Globalization Beating a Hasty Retreat,” `, 6 July 2009 print issue]. Nevertheless, The Economist indicates that in some regions consumer spending is growing impressively.
“In China, India and Indonesia spending has increased by annual rates of more than 5% during the global downturn. China’s retail sales have soared by 15% over the past year. This overstates the true growth rate because it includes government purchases, but official household surveys suggest that real spending is growing at a still-impressive rate of 9%. In the year to May, sales of household electronics were up by 12%, clothing by 22% and cars by a stunning 47%. Elsewhere in the region, spending has stumbled, squeezed by higher unemployment and lower wages. In Hong Kong, Singapore and South Korea real consumer spending was 4-5% lower in the first quarter than a year earlier, a much bigger drop than in America. But Frederic Neumann, an economist at HSBC, sees tentative signs that spending is picking up. Taiwan’s retail sales rose in May for the third consecutive month. Department-store sales in South Korea rose by 5% in the year to May.”
Although government stimulus packages are important to ensure that credit remains available, economic recovery rests in the perceptions, hopes, and activities of individual consumers. The article reports that much of developed world views Asia as a region where people save too much and spend too little. It claims that picture is not a fair one.
“During the past five years consumer spending in emerging Asia has grown by an annual average of 6.5%, much faster than in any other part of the world. It is true that consumption has fallen as a share of GDP, but that is because investment and exports have grown even faster, not because spending has been weak. Relative to American consumer spending, Asian consumption has soared. In most Asian economies, private consumption is 50-60% of GDP, which is not out of line with rates in countries at similar levels of income elsewhere.”
The article reports that there is one surprising exception — China.
“Private consumption there fell from 46% of GDP in 2000 to only 35% last year—half that in America. In dollar terms, spending is only one-sixth of that in America. (Singapore’s consumption is also low, at just under 40% of GDP.) This explains why China’s government has recently taken bolder action than others to boost consumption. Over the past six months the government in Beijing has introduced a host of incentives to encourage households to open their wallets. Rural residents get subsidies for buying vehicles and other goods such as televisions, refrigerators, computers and mobile phones; urban residents get a subsidy if they trade in cars and home appliances for new goods; tax rates on low-emission cars have also been cut. There is huge potential for higher consumption in the countryside as incomes rise: only 30% of rural households have a refrigerator, for example, compared with virtually all urban households.”
China is also trying to shore up its social security system to ease its citizens long-term concerns and, hopefully, spend a little more of their hard-earned money. Increased consumerism would certainly help turn the global economy around, but that consumerism can’t be based on credit given to people living beyond their means. So far, that has not been the case in Asia. The article concludes:
“A bigger test of Asian governments’ resolve to shift the balance of growth from exports towards domestic spending is whether they will allow their exchange rates to rise. A revaluation would lift consumers’ real purchasing power and give firms reason to shift resources towards producing for the domestic market. But so far, policymakers have been reluctant to let currencies rise too fast. Asian spending is already an important engine of global growth. Even before the crisis, emerging Asia’s consumer spending contributed slightly more (in absolute dollar terms) to the growth in global demand than did America’s. But it could be even bigger if Asians enjoyed the full fruits of their hard labour, rather than subsidising Western consumers through undervalued currencies. It is time for an even greater shift in spending power from the West to the East.”
In the BusinessWeek article cited above, it was reported that “global trade is set to fall this year, for the first time in more than two decades, while capital flows to emerging markets are projected to decline by more than half from 2008; commodity prices, with the exception of oil, are in the dumps. That’s all taking an especially hard toll on developing nations.” What all this indicates that the U.S. is unlikely to emerge from this crisis with the same amount of economic influence that it possessed going in. Even the world’s poorest countries believe they should have a greater say in the economic system because they are often victims of crises not of their making [“Poor countries want greater role in world economy,” by Michael Astor, Washington Post, 25 June 2009]. Astor reports:
“At … a three-day U.N. financial summit, country after country laid blame for the crisis on financial liberalization and deregulation in the United States and other rich nations and said it was time to reform the world financial system under the auspices of the United Nations. ‘The reforms based on the belief in the efficiency of the market and the diminution of government did not work,’ said Bangladesh’s Foreign Minister Dipu Moni, speaking on behalf of the world’s poorest nations. ‘Reforms are needed to enhance productivity and capacity to cope with risks.’ Nobel Economics Laureate Joseph Stiglitz, who headed a Commission of Experts on Financial and Monetary Reform that developed recommendations for the conference, said that ‘as globalization has proceeded we haven’t created global financial institutions.’ He called for the creation of a Global Economic Coordination Council to deal with the fallout wrought by the crisis that began in 2008. … The draft [report presented at the conference] calls for the International Monetary Fund, the World Bank and other lending institutions to be flexible in imposing conditions on developing countries so they can take action to deal with the economic crisis, including adopting stimulus packages. The draft also calls for measures to avoid a new debt crisis and new approaches to restructuring debt.”
Bangladesh’s Foreign Minister was correct in his assessment that the world’s poorest nation’s need to “enhance productivity and capacity to cope with risks.” Part of that increased capacity must include the diversification of national economies. As the BusinessWeek article noted, “commodity prices, with the exception of oil, are in the dumps” and nations dependent on high commodity prices are suffering. Zambia is a good example of a bad situation [“Zambia’s Copperbelt Reels From Global Crisis,” by Karin Brulliard, Washington Post, 25 March 2009]. She reports:
“The global economic meltdown swept into this company town [Luanshya] and took down the copper mine in January. It left in its wake a crisis measured in unsold tomatoes at the market, empty stomachs and desperate people. … Mines here in Zambia’s Copperbelt region drive this poor nation’s economy, but a plunge in global trade has slashed demand for the copper used to construct electronics and houses in the United States and Asia. That is prompting mines here to slow and shut, limiting tens of thousands of Zambians’ access to schooling, health care and regular meals.”
Brulliard notes that Zambia is not alone:
“Africa’s resource-fueled economies have grown steadily in recent years, improving the lives of millions of people. Now, as prices drop for Botswana’s diamonds, Chad’s oil and Tanzania’s cotton, a crisis that began in the rich world is threatening to drive millions more into poverty, according to the World Bank, and raising the specter of unrest.”
Both economic diversification and increased regional trade can help mitigate the effects of fluctuating commodity prices. That is a message I continually communicate as I discuss Enterra Solutions’ Development-in-a-Box™ with government and business leaders in emerging market companies. Brulliard also discusses a number of other subjects that I’ve been talking about for years — including the need for increased foreign direct investment in developing countries.
“The problem is not just a collapse in commodities prices. Foreign investment is receding in countries such as South Africa and Kenya. Remittances are dropping in Liberia. Aid flows from economically stressed donor countries might retreat. Much will depend on how quickly advanced economies recover, according to experts and African leaders, who warn that a prolonged downturn could stir turmoil.”
If The Economist is right, African countries shouldn’t be looking to “advanced economies” as much as emerging market economies for the quickest recovery from the current recession. Like Asian nations, African nations need to become less dependent on exports (in their case, commodity exports) and they need to encourage more local consumerism. This can’t happen without a good strategy for economic diversification. Even with a good strategy, most African countries are decades away from achieving sustainable economies. Asia, however, is much more likely to diversify and as a result will drive global economic growth over the next few years.