People in the West have long had a fascination with the East, with many predicting an “Asian century” marked by economic and market dominance. I have disagreed with the consensus on China and other Asian Tigers, and others are beginning to agree. Many problems stand in the way of the “Asian century”.
Japan dazzled Westerners with the speed of its recovery from the ashes of World War II. Japanese purchases of US trophy properties such as the Pebble Beach golf resort in California and Rockefeller Center in Manhattan in the 1980s, on top of leaping property and equity prices in Japan, convinced many that Japan would soon take over the world.
Japan’s economic decline in the early 1990s did not curb the fascination with Asia. It simply shifted to the Asian Tigers. The original four, Hong Kong, Singapore, South Korea and Taiwan, were later augmented by the likes of Malaysia, Thailand, the Philippines and, of course, China and, more recently, Pakistan, Vietnam, Indonesia and Bangladesh.
The late-1990s Asian financial crisis only temporarily disrupted Western fascination with the East. The 2007-09 Great Recession ended rapid economic growth in Western countries and the robust demand for exports that were the mainstay of developing economies. Still, many believed emerging countries could independently continue to grow rapidly and, indeed, support economic activity in the sluggish US and Europe.
Chinese real economic annual growth rates nosedived from double digits to a recessionary 6.3% during the worldwide downturn, but then revived due to the 2009 stimulus programme. Easy credit fuelled a property boom and inflation, and excessive infrastructure spending replaced exports as the growth engine. Many thought Chinese growth was self-sustaining and unrelated to sluggish economic performance in North America and Europe.
There are five main reasons why it won’t get any easier for Asia:
1. Globalization is largely complete. There isn’t much manufacturing in North America and Europe left to be moved to lower-cost developing economies. At the same time, the West is saturated with Asian exports, and those countries are competing among themselves for limited total export demand. Also, exports are shifting among those countries as low-end production moves from China to Pakistan and Bangladesh, much as they shifted out of Japan earlier. As economies grow, a greater share of spending is on services and less on goods. This reality is a long-term drag on almost all the other Asian lands, except India, due to their goods-export orientation.
2. The shift from being export-led economies to ones driven by domestic spending, especially by consumers, has been slow. Chinese leaders want this transition, but it is moving at glacial speed. At 37%, Chinese consumer spending as a share of GDP is well below major developed countries such as the US at 68.1%, Japan at 58.6%, and even Russia at 51.9%.
3. Almost all developing Asian economies are tightly controlled by governments. Top-down regimes stoutly resist reform and often persist until they’re overthrown by revolutions. The current Mao dynasty in China, as I’ve dubbed it, seems worried about popular unrest due to the lack of promised economic growth and is reducing what little political liberty was allowed.
President Xi Jinping is the Big Brother with lots of little brothers insuring proper thoughts and actions. In Malaysia, Prime Minister Najib Razak is enmeshed in a multibillion-dollar investment scandal. In the Philippines, crime and drug trafficking are so rampant that President Rodrigo Duterte was elected on a platform of eliminating drug dealers, even by murderous vigilante squads. South Korea’s former president Park Geun-hye was thrown out over corruption.
4. Population problems endure. Despite the need for new workers in Japan, women are discouraged from entering the labour force, and Japan continues to be unwelcoming towards newcomers. There’s no immigration visa despite the fact that 83% of Japanese hiring managers have difficulty filling jobs. China also has a looming labour shortage and severe limits to economic growth due to its earlier one-child policy. Low fertility rates are also destined to reduce the populations of Hong Kong, Taiwan, Singapore and South Korea. At the other end of the spectrum are Asian countries like Indonesia and India, whose population is expected to exceed China’s by 2022.
5. Military threats are growing in Asia, and could severely disrupt stability and retard economic growth if they flare up. China is exercising its military muscles by challenging US military influence in the region by building military islands on reefs in the South China Sea. Japan is abandoning its post-World War pacifism and shifting from defensive to offensive capabilities. The Russians are also making military threats. The region contains five nuclear-armed countries: China, India and its rival Pakistan, Russia, and—most troubling—North Korea.
There may well be an “Asian century” in the future, but don’t hold your breath. It took about a millennium for the West to develop meaningful democracy, the rule of law, large middle classes that support domestic economies and all the institutions that are largely lacking in developing Asian lands. Bloomberg
A. Gary Shilling is president of A Gary Shilling & Co., a New Jersey consultancy.