Asia's growth model relies extensively on exports. We all know that that places us at the mercy of our consumers. Is there a better way? How can we lessen the reliance on exports? Is it OK to do nothing? If we do change, are the changes for the betterment of Asian economies? Roubini's RGE has a good article weighing the matters at hand:
- Asia is dependent on the export model (using an undervalued exchange rate and sourcing inputs from other Asian countries) to drive its growth. A large share of its extensive reserves have been invested in the G-3 markets. Asia's export to GDP ratio rose from 36% in 1998 to 46.7% in 2007 with the ratio exceeding 100% for Singapore and Hong Kong, and over 60% for Malaysia, Taiwan and Thailand.
- Problems with the model: Large FX reserves and current account surpluses have contributed to the global imbalances which are unsustainable. Consumption has been subdued especially in China, Singapore and South Korea, followed by Hong Kong, Taiwan, Thailand and Malaysia. Consumption to GDP ratio for emerging Asia actually declined from above 50% in 1998 to around 47% in 2007
- Governments put off other areas of the economy, such as liberalizing domestic sectors and encouraging domestic demand and ignored social services and good governance
- Rising wage and other costs in Asia along with upward pressure on exchange rates, high oil and shipping prices reduced cost-savings for Western producers from importing from Asia.
- Since exports started weakening in mid-2008, many Asian countries returned to favoring an undervalued currency or at least stopped allowing appreciation
- Stimulus related investment policies to raise consumption indirectly by boosting production will temporarily boost growth, but they cannot result in a sufficiently large increase in domestic net consumption to replace American buying. Also some of these policies (es: China increasing loan growth which will only raise NPLs) will sharply constrain future domestic consumption just when it is needed most
- Benefits of continuing with the model: Trade helped several Asian economies attain higher per capita incomes, stronger economic growth while reducing poverty significantly. Letting their currencies appreciate will result in losses on their U.S. holdings
- It might be politically easier to continue with the present policies to boost manufacturing jobs and rural migration than to initiate economically/politically difficult and longer-term structural changes in the economy
- Changing the model would entail diffusing rather than concentrating wealth and political power
- The adjustment will largely depend on China's stance on its currency and export policies (as ASEAN takes cues from China to maintain their relative export competitiveness), and the political will of Asian leaders to re-balance their economies
- Reforms/Structural changes needed to change growth model/boost domestic demand: Increasing domestic demand will boost imports and help reduce current account surpluses and global imbalances
- Need to increase social safety net for workers (pensions, public services), reform Social Security systems, increase returns of pension schemes and improve health care access. Move from low-end to high-end and labor-intensive manufacturing and also services to increase job creation and also incomes. Need to attract private investors and banks, increase government spending on innovation, development of human capital, raise crop yields
- Will need to improve credit access to reduce the need to save, move away from devalued currency which will lead to cheaper imports for consumers (and lower commodity prices), government investment in infrastructure. Higher public spending on health, education and welfare support could encourage households to save less and spend more. Financial intermediation of savings to investment to reduce dependence on external capital, speeding up financial liberalization to lift the cost of capital for firms (reducing the need to borrow from abroad)
- It may already be too late for developing ASEAN countries to attract the kind of foreign investments that will help them benefit from technology transfer and MNCs. They have few homegrown MNCs. Private investments are constrained by capital limitations and a general lack of entrepreneurial spirit. As a percentage of GDP, domestic credit from the banking sector in ASEAN, apart from Vietnam and Cambodia, is lower than 1995 levels. Domestic capital markets, an alternative funding source, are shallow: stock and bond markets are small
p/s photos: Intan Ayu