Asia's quest for stable growth In the post-2008 world, the global economy is relying on Asia to provide both sustained growth and enduring stability

Highway

As the world turns to Asia to provide sustainable economic growth, are the policy fundamentals in place to support this quest for stable expansion?

“Asia’s economies are better known for their speed than their stability.” This phrase, which seems rather misleading today, was penned frequently during the dynamic, sometimes volatile years of the 1990s. The underlying premise was that while fast-paced economic expansion was being experienced, particularly in some South East Asian countries, uncertain monetary policy by governments and central banks and underdeveloped financial systems resulted in structural vulnerabilities.

This theory gained momentum around the Asian financial crisis in 1997. Between 1996 and 1998, growth in South East Asia’s five largest countries, Indonesia, Malaysia, the Philippines, Thailand and Vietnam, oscillated from 7.5 percent to -8.3 percent. In the early 2000s, doubledigit annual growth in China was accompanied by concerns about the viability of its big banks and, later, the scale of public sector debt. Meanwhile, Japan, for many years an Asian economic driving force, was facing protracted deflation.

Economic contexts change. In the post-2008 world, the global economy is relying on Asia to provide both sustained growth and enduring stability. In 2015, GDP growth in Asia Pacific will continue to outperform the rest of the world, remaining steady at 5.6 percent in 2015 and easing slightly to 5.5 percent in 2016, according to the International Monetary Fund (IMF). While Asia accounts for around 40 percent of global output, it contributes nearly twothirds of global growth.

Asian growth will be “driven by domestic demand, underpinned by healthy labor markets, low interest rates, and the recent fall in oil prices. The global recovery, while moderate and uneven, will continue to support Asia’s exports,” says the IMF’s Regional Economic Outlook for Asia and the Pacific. “Asia’s leading role in world growth is set to continue over the medium term despite slowing potential growth, which reflects weaker productivity gains, the effects of aging, and infrastructure bottlenecks,” the report adds.

The projected regional GDP growth rates for 2015 and 2016 show the pillar economies of China and India will continue their fast-paced expansions, although China’s growth has slowed noticeably. Just five years ago, it would have been inconceivable that Indian growth would outpace China, or that Myanmar’s rate of growth would be higher than both the region’s dominant players. Also in South East Asia, Cambodia and Lao PDR are targeting strong percentage growth, although – as with Myanmar – they are playing catch-up, and growing off considerably lower bases than their neighboring nations.

Vulnerabilities still exist across different parts of the region, although the trade-off between speed and stability is no longer considered apposite. Structural weakness in the global economy, the strength of the US dollar, reduced energy prices and varying levels of aggregate demand and competition in domestic markets all have different impacts across Asian markets.

Two views on the quest for sustainable growth

To discuss these key issues, we asked two Asia-based analysts for their views on the quest for sustainable growth across the region.

Manu Bhaskaran
Founding Director and CEO,
Centennial Asia Advisors

Manu Bhaskaran

Manu Bhaskaran is Founding Director and CEO of Centennial Asia Advisors, an independent research and advisory firm that works with governments, multilateral institutions, financial firms and leading multinational companies.

“Asia’s economies are better known for their speed than their stability.” Does that statement represent the Asian economic climate over the last 20-30 years?
It’s not really correct. Stability indicators such as inflation and current account deficits have improved since the 1997 Asian financial crisis. The volatility of growth has increased but this is more likely due to global shocks rather than domestic imbalances. There are some issues in specific countries in Asia, such as high household debt or high credit growth, but I wouldn’t generalize that across all, or even most, of Asia.

Governments across Asia are investing in infrastructure. Will capital investment continue to be a strong contributor to economic growth?
Yes. Firstly, the infrastructure investment will boost demand and promote short-term growth directly. Secondly, the visibility of public sector investments in infrastructure will help attract private investment, a pattern we have seen recently in many cases, including in Malaysia. Thirdly, in the longer term, better infrastructure will improve competitiveness and raise the volume of economic activity.

How important is institutional reform to overcome issues that stifle growth and opportunity?
In countries such as India and Indonesia, regulations impede infrastructure development, as well as the growth of manufacturing and foreign investment. In addition, business environments are made difficult by red tape or corruption. These are the areas needing reform.

Across Asia, there are noticeable demographic differences. Will the “age issue” occupy more governmental policy planning in the coming years?
Aging is a challenge in Japan, South Korea, China, Taiwan, Hong Kong and Singapore. From around 2022 onwards, Thailand will see stronger demographic headwinds as well. But in India, Indonesia, Vietnam, the Philippines, Myanmar, Malaysia, this will not be an issue. So the aging challenge is country-specific, not generalized across Asia.

Mark S. Greenberg
Group Strategy Director,
Jardine Matheson

Mark Greenberg

Mark S. Greenberg is Group Strategy Director for Jardine Matheson, a diversified group focused principally on Asia which includes Jardine Pacific, Jardine Motors, Jardine Lloyd Thompson, Hongkong Land, Dairy Farm, Mandarin Oriental, Jardine Cycle & Carriage and Astra International.

“Asia’s economies are better known for their speed than their stability.” Does that statement represent the Asian economic climate over the last 20-30 years?
No, it’s impossible to generalize. Asia is a huge territory, in terms of national landmasses, natural resource bases and population structures – so countries progress in different ways, before the critical overlay of government management. However, it is evident that economies have grown at a significant rate over this period, and some have been able to achieve both growth and a degree of stability. That said, when you focus government policy almost exclusively on achieving economic growth it is almost impossible to grow at above trend rates without certain economic and societal imbalances being created.

Governments across Asia are investing in infrastructure. Will capital investment continue to be a strong contributor to economic growth?
Infrastructure investment is a critical enabler of economic development, and the multiplier effect is huge. China is a good example. It has delivered an incredible infrastructure programme in recent years, but infrastructure delivery has typically lagged the level of expectation elsewhere in Asia. The structure of political systems in South East Asia has held back infrastructure growth in a way that didn’t happen in China, with issues such as relative limitations on government financing and a limitation of the domestic savings base. So a number of countries need foreign capital to gear up their infrastructure programmes and give their economies the chance to grow at the capacity at which they ought to be able to grow. Aside from China, even other Asian countries that have achieved good rates of growth could have achieved more with better infrastructure spending.

Are slowing growth rates in leading Asian economies a result of a weak global economy, or are there intrinsic policy weaknesses?
Countries in East Asia and South East Asia are experiencing lower growth rates. We feel this in our own businesses in terms of dampened consumer demand. There is a combination of factors at work. Certainly, the weakness of western export markets has been a factor, but the cost of labor has risen dramatically, which caused a redistribution of business profitability. Another factor is the high level of domestic competition in some countries. Indonesia is an example. Ten years ago, competition in the automotive market was limited. In the interim, just about every major player in the world has realized the potential, and wants to build and sell cars in Indonesia. Despite the fact that it’s a large market, with a population of about a quarter of a billion people, it has become a very competitive market. There are plenty of examples across Asian economies as they have matured where the level of competition across any given sector has intensified. And that’s a good thing for the consumer.

Selected GDP growth predictions for 2015/16 (% growth)

Country
2015
2016
India
7.5
7.5
China
6.8
6.3
Japan
1.0
1.2
Korea
3.3
3.5
Cambodia
7.2
7.2
Indonesia
5.2
5.5
Lao PDR
7.3
7.8
Malaysia
4.8
4.9
Myanmar
8.3
8.5
Philippines
6.7
6.3
Singapore
3.0
3.0
Thailand
3.7
4.0
Vietnam
6.0
5.8

Source: IMF’s Regional Economic Outlook for Asia and the Pacific, May 2015