Can the Asian Economy Regain Its Mojo?

As the largest continent in the world, Asia certainly boasts the most diversity in terms of its economic development model, culture, and population. At the same time, most Asian economies share some major commonalities, for instance, high savings rates accompanied by high investment rates and lower consumption rates relative to most developed countries. Japan’s post-World War II rise, the East Asian Tigers’ rise in the 1980s (e.g. South Korea, Taiwan, Singapore, and Hong Kong) and China’s rise after joining the World Trade Organization all exemplify the typical Asian growth model whereby export-led growth resulted in fast economic development and wealth accumulation. On the other hand, we have south and southeast Asian countries like India, Malaysia, Indonesia, Thailand, Vietnam, and Philippines that are rich in natural resources, blessed with a demographic dividend, benefit from globalization—especially due to outsourcing from the developed world—and are in catch-up mode.

The memories from the Asian financial crisis are still fresh, and the hangover from the credit binge and dependence on foreign capital still make Asia vulnerable to a global slowdown. Will Asia be able to tag along with the recoveries in the developed world such as in the U.S. and Europe?

Asia benefitted from globalization and used to be the world’s “factory” given its cheap labor force, cheap capital, and relatively good infrastructure. China and India led the pack as the global growth engine. Lately, however, Asia has been going through a slowdown, as all major Asian countries are currently suffering from weak export growth, soft consumption growth, and slowing investment. Asia needs major reforms and growth model rebalancing. For the past couple of years, the economic recoveries in Asia have been lagging those from developed countries as shown in the Purchasing Managers Index (PMI) trend below (see Chart 1).

The current account surplus in most Asian countries has been decreasing over the past decade (see Chart 2).

For example, as China’s economy grows bigger, it cannot grow through exporting as easily as before. Furthermore, global export as a share of gross domestic product (GDP) has been stalling since 2012, and world trade growth reached a recent low, as shown in Chart 3. The export-led growth model has seemed to lose momentum due to the following reasons:

• Asian countries have been exporting more within the Asian region than to developed countries (see Chart 4).
• The deleveraging of households and the government in developed countries since Global Financial Crisis means less demand for Asian imports.
• Less capital expenditures in developed countries also means less imports like personal computers and laptops from Asia.
• Changes to demographics—especially the aging of its population—and increasing wealth have made Asia’s labor less “cheap.”

Asian countries have gradually lost their competitiveness. Increasing U.S. energy independence—led by the shale-gas revolution—the improving competitiveness of the U.S. labor force, and a less cost-effective Asian labor force has pushed many U.S. companies to re-shore their manufacturing and operations. Therefore, we believe that in order for these trends to reverse, Asian countries must reform their growth models and develop a fresh growth strategy.

Asia’s new growth model should include the necessary steps to: reform, innovate, improve productivity, and stimulate internal, demand-driven growth. Japan’s Abenomics, and India and China’s recent tough reform agendas all bode well for the next “new Asia.” Most of these countries have various subsidies on oil, gas, and other commodities usage; those subsidies burden governments’ fiscal status and artificially lower inflation pressure. The subsidies also enable a wealth transfer from the government to households. One major area of reform is to remove those subsidies gradually and deploy that government spending to build infrastructure—particularly in countries like India and Indonesia—to boost productivity. There are several tailwinds that should benefit Asia’s efforts to reboot its growth model and bolster economic expansion:

• As the European Central Bank (ECB) and Bank of Japan (BoJ) both profess to “do whatever it takes” to fight deflation, ultra-accommodative monetary policies from the developed world should buy Asia more time to reform and rejuvenate. Japan’s stimulus measures injected plenty of liquidity into the Asian economy. In addition, China also launched a series of stimulus packages to boost its growth to meet its target of 7%. The upcoming Federal Reserve rate renormalization may be gradually-paced and can be partially offset by stimulus from the ECB, BoJ, and People’s Bank of China.
• The rise of the importance of internet access and usage and smartphone application technology has enabled Asia to leapfrog over developed countries in terms of creating world class e-commerce. The rising Asian middle class has started to demand higher quality merchandise and services, and has therefore developed high-level consumerism. The rising importance of the consumer may transition Asia from the world’s factory to the world’s consumption powerhouse.
• The recently negotiated Trans-Pacific Partnership (TPP) deal—which covers approximately 40% of global GDP—should benefit Asian countries significantly by lowering trade barriers among member countries. In addition, TPP should also facilitate structural reform and revitalize growth by boosting competitiveness in those member Asian countries.
• China’s New Silk Road strategy should benefit Asia by better integrating the region as a whole and also with Europe. If implemented well, the multiplier effect could be significant in uplifting the region’s growth potential and trade development.
• China’s increasingly outward bound tourism creates a bonanza for its neighboring countries, driving consumption and boosting current-account surpluses for those destination economies like Taiwan, Hong Kong, Japan, Korea, Thailand, Singapore, and Vietnam.

However, the reform and revamping of Asian growth models is not an easy undertaking; we do see many obstacles ahead. Crony capitalism, deficiency in corporate governance, obsession with market share, and an insufficient focus on shareholder value has made Asian companies less competitive. Other major risks that could derail this transition process are the acceleration of China’s slowdown and the potential additional currency devaluation, which could be detrimental to the region’s financial market stability. China’s exclusion from TPP may push the country to devalue its currency to counteract the disadvantageous trade position. Last but not the least, the geopolitical risk in the South China Sea would be another tail risk.