The financial crisis hasn’t spared Asia. According to the Asian Development Bank, aggregate gross domestic product (GDP) growth for Asia, excluding Japan, is forecast to fall to 5.8% in 2009, down from 6.9% in 2008 and 9% in 2007. To solve its slowdown, Asia’s economies need to start on a new track of domestic consumption and investment.
Take China, now the world’s third biggest economy. The economy grew at half its 2007 rate in the fourth quarter of 2008, at 6.8%. After stripping out seasonal adjustments, some economists estimate the Chinese economy barely grew at all from the third to fourth quarters of 2008—it could even have declined.
Consider Asia’s other hitherto dominant forces. South Korea, despite a weakened currency, saw exports fall by almost 12% in the last quarter of 2008. Singapore’s gross domestic product (GDP) is likely to contract by 5% in 2009. Japan, whose growth too is tied to exports, watched helplessly as December’s overseas shipments fell an astonishing 35% on the year. Japan’s economy, fresh from six years of growth, is now expected to shrink for two consecutive years. It is likely to sink back into deflation, having spent most of the 1990s trying to crawl out of that darkness.
India is no different. International Monetary Fund (IMF) has lowered India’s growth projections for 2009 from 6.3% in November 2008 to 5.1%. A two-part stimulus measure has failed to stimulate the economy. Credit availability remains sluggish. It’s exports in October declined year-on-year by 12.1%, Indonesia’s by 11.6% and in Vietnam exports have been on the slide since July.
Asia faces two recessions. The first is a slide in domestic consumption and investment that began in mid-2008, as Bear Stearns Companies Inc.—followed by Merrill Lynch and then Lehman Brothers Holdings Inc.—triggered a global domino effect. The second is a fall in exports as foreigners, especially Americans, buy less Asian goods. IMF says that foreign direct investment into Asia grew fourfold in the last decade, to $225 billion in 2008. Yet, domestic investment has stagnated, comprising only 9% of the region’s GDP.
Domestic consumption, too, doesn’t look good in Asia. World Bank economists Bert Hofman and Louis Kuss estimate that China’s gross savings reached a staggering 50.6% of GDP in 2006, up from 40.7% a decade earlier. But consumption as a percentage of GDP has been in a structural decline since then; it was an anorexic 38% of its GDP (one-third less than India’s) in 2007. In Singapore, consumption is only about 40% of GDP.
To give this some perspective, a decline in US consumption equal to 5% of its GDP would require an increase in Chinese consumption equal to 17% of China’s GDP. This would be nearly 40% growth in consumption: an impossible feat overnight. At an average of one-third of GDP, domestic consumption at this point is just not sufficient to sustain domestic momentum, let alone substitute for US demand.
Asia needs to rethink its growth model. Currently, Asia is as thoroughly hard-wired against consumption-led growth as the developed world is for it.
Asian production of goods and services are likely to be severely impacted in 2009: the economic pain will be high and potentially destabilizing. In Asia, government and corporate debt is low and household debt as a proportion of GDP ranges from around 3% to 70% (compared with the above 100% in the US), so there is plenty of scope for Asia to correct its imbalances by increasing consumption to offset dependence on exports. Tax incentives could be provided to promote borrowing and stimulate consumer spending. This would be a bitter pill for the region to swallow, as any change would be; but would be benign compared with the alternative—a prolonged world recession.
Lack of social security programmes has turned the Asian population into a surfeit of savers. They can be turned into avid consumers if government makes good promises on health care so people have less incentive to save for emergencies.
More than that, governments need to aim their stimulus packages carefully. The slew of packages announced all over Asia must aim not only to enhance government spending, but also to stimulate private sector and consumer spending.
There is a danger that this Keynesian spending may crowd out private investment, so governments must aim to stimulate those sectors of the economy otherwise untouched by private entrepreneurs.
Too much Keynesian spending also affects the credit markets. Large stimulus packages of the governments of the developed world are crowding out flow of credit to the Asian continent.
Asia must also develop wider credit swap lines than the tiny ones existing under the Chiang Mai initiative between Japan and other Asean (Association of Southeast Asian Nations) countries.
In the final run, Asia has to save itself. It can’t count on the West to do that. People in China and elsewhere in Asia have long lived beneath their means to enable people in the US and Europe to live beyond theirs. This crisis presents the perfect opportunity to correct this structural imbalance. Asia needs to now spend its way out of the downturn.
Sunil Kewalramani is CEO, Global Capital Advisors, a firm based in Mumbai. Comment at firstname.lastname@example.org