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Will Asian growth rebound?

By Suman Bery
February 13, 2014 14:07 IST
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There is no obvious reason for Asian growth prospects to be diminished, notes Suman Bery

IndiaFor much of the last decade, Asia’s growth was seen as inevitable and unstoppable.

This was reflected in the projections of all manner of global bodies, including the Organisation for Economic Co-operation and Development, the World Bank, the Asian Development Bank as well as professional forecasters in the private sector.

The resilience of many emerging markets, notably China and India, in the aftermath of the Lehman shock further strengthened this sense of manifest destiny.

In the space of less than a year, this widespread optimism has been replaced by equally pervasive caution.

The immediate source of this shift in mood has been the prospect of a return to more normal monetary policy in the United States (and so far only the US: the euro zone and Japan continue to battle deflation).

This has coincided with slowing growth in many large emerging markets both inside and outside Asia, and with political stress in several of them, including Turkey, Thailand and Brazil.

It would be natural and tempting to see these difficulties as largely short-term and cyclical, and that has been my own firm view.

But commentators in the financial press and in major banks are increasingly projecting a fundamental break in the growth prospects of poorer countries.

So far, this sentiment does not seem to have spread to the investment decisions of multinationals, or to forecasters in the official sector, but arguably these follow, rather than lead, shifts in sentiment.

So, are the financial sector pessimists right in asserting that we are at an important inflection point where Asian growth is concerned?

To examine this we first need to define what we mean by Asia, and then we need to define the time horizon for analysis.

I will take ‘Asia’ to include the arc of maritime Asia that starts with the Indian subcontinent in the west and extends east to the Korean peninsula, taking in the archipelagos of Japan, the Philippines and Indonesia.

This is an expanse that includes roughly half the world’s population.

In practical terms, our concern is with ‘developing Asia’, which would exclude Japan and Taiwan and the city states of Singapore and Hong Kong.

As always, the classification of Korea is problematic: it is now as affluent as some Northern European countries, but with economic and financial institutions still evolving.

As for time horizons, it is useful to distinguish between the near term (say, three years), where output is shaped primarily by demand (exports, investment and consumption), and the longer term, where output (strictly speaking, potential output) is driven by the performance of the supply side of the economy.

This includes the size and quality of the labour force, the size and growth of the capital stock, innovation, institutions and the like.

This framework is perfectly general, and in principle applies to the advanced countries as well.

But since developments on the supply side in those countries tend to be relatively smooth, it is demand management that dominates the discussion, although this has changed since the financial crash.

The optimism about emerging markets as a group over the long run, and certainly those in Asia, has originated on the supply side.

It has been driven by a belief in what economists call ‘convergence’.

This is the view that, in an integrated global economy, poor countries with abundant labour can raise the productivity of that labour relatively quickly by acquiring technology developed in the rich countries.

At the same time, the limits on demand that arise from relatively poor domestic consumers can be bypassed through exports to the rich countries.

This convergence doctrine emerged about 20 years ago.

The applicability of this theory (or “model”, as economists prefer to call it) in turn rests on several pillars.

The first is the availability of a workforce that possesses at least basic skills.

The second is the existence of conditions in the home economy that are friendly to the absorption of new technology.

In Japan and Korea, this was largely a matter of licensing; in the case of China (and before China, in Southern Europe Malaysia and Thailand), it was openness to foreign direct investment.

Finally, there is the importance of trade, both exports and imports.

As already noted, exports are important to get around the demand constraint, but a number of empirical studies have also demonstrated important intangible benefits in entrepreneurial development from exposure to trade.

Imports are important as a way of embodying modern technology, while the domestic trade regime (tariffs and quotas) plays an important role in ensuring that imports act as a disciplining device by providing competition to domestic production.

While macroeconomic management is largely associated with the demand side of the economy, through its effect on the real exchange rate it also matters for trade success.

It is this conceptual model that is now being questioned by a variety of critics, both within and outside the emerging economies.

There are those (such as Ruchir Sharma) who believe that convergence, if not a sham, was vastly oversold, and that there are important areas of the world (particularly Latin America) that in aggregate have not succeeded in riding the convergence escalator beyond the first floor.

The Latin American experience has led to the suggestion of a ‘middle-income trap’: the idea that many countries flounder after the initial growth burst, and that sustaining steady growth in per capita incomes, even with the inevitable cyclical ups and downs, is much harder (and rarer) than simple convergence theory would suggest.

A third critique comes from the altered state of the rich countries following the crisis.

With their own economic models under severe stress on both growth and distribution, politicians in the advanced countries are under considerable pressure to retreat from their commitment to open trade and finance, and to being willing markets for cheap goods produced by multinationals in poor countries.

Only time will tell whether this is a temporary or a long-lasting phenomenon.

Ultimately, though, the new scepticism seems to me at heart to be a comment on the domestic politics of the emerging markets and their willingness to stay the course.

The view seems to be that the emerging markets, India included among these, will find it hard to manage the politics of sustained rapid growth in the new global environment.

The sceptics may turn out to be right, but I see little to suggest that this outcome is preordained.

Suman Bery is chief economist, Shell International. Views are personal

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