ADB Lowers Sights on Asia
It is no surprise that the Asian Development Bank in its latest forecasts for 2012 and 2013 has had to lower growth expectations almost everywhere in the region. But the widely touted suggestions that this is mainly due to weakness in the US, EU and Japan is not confirmed by the detailed figures.
The problem for many lie closer to home, or to global factors which go well beyond the problems of the major OECD economies. Thus the mid-term review of the annual Asian Development Outlook suggests that for India domestic shock factors account for no less than 74 percent of the decline in growth while the US/EU problems account for just under 8 percent and the rest of the world for 17 percent. For China the domestic contribution is much smaller but is still 44 percent compared with the EU/US at 14 percent and the rest of the world at 41 percent.
Of course the broader world is also responding to the impact of the advanced countries via factors such a commodity prices. But nonetheless the ADB clearly shows that blaming outside forces for weak performance is only partly justified. Nor does it suggest that Asia by and large needs more official stimulus, suggesting that there is actually little slack in most of the economies and more stimulus would likely reignite inflation, which anyway will edge up in 2013, it suggests.
If lack of slack in domestic demand appears counter-intuitive, the reason may be found in the document’s detailed look at the services sectors in the region. This sector is far too diverse to be amenable to generalization but in many countries the failure of service sector productivity to improve sufficiently is an apparent cause of slowed growth.
In general, the services sector can be expected to grow faster than others as low income agriculture declines and manufacturing does not take up quite all the slack. Overall the services sector now account of 50 percent of Asian GDP compared with 45 percent in 1990. However, while some countries, including China, have seen a steady rise in services as well as manufacturing productivity, others have not. For instance, although India and the Philippines have niche, high-value IT service sectors, most services are still very low productivity ones such as small scale retail and domestic help. The informal sector is vast in both countries.
Meanwhile at the other end of the Asian development scale, Korea too has a services problem. Its manufacturing productivity stands at 118 percent of the OECD average but its services at just 48 percent. Others such as Thailand have both very low-productivity, old service sectors side by side with higher, modern ones such as banking and insurance.
Weakness in these sectors provides an opportunity to find new growth engines at a time when export demand for manufactures and commodities looks set to remain quite weak. Consumption growth has sustained demand in many countries but investment has been weak in the wake of both poor exports and excess capacity in some industries. Weakness may be more prolonged than the Development Outlook now forecasts. It sees modest recovery almost everywhere – China from 7.7 percent to 8.1 percent, India from 5.6 percent to 6.7 percent, Korea from 2.7 percent to 3.4 percent, Vietnam from 5.1 percent to 5.7 percent and Malaysia from 4.6 percent to 4.8 percent. Three exceptions are Bangladesh, which at 6.3 percent this year is outperforming expectations so will ease to 6.0 percent, Thailand whose high growth this year mainly represents recovery from the 2011 floods, and the Philippines which is expected to ease from 5.5 percent to 5.0 percent as government spending and investment stimulus ease slightly.
The Development Outlook may be particularly optimistic about prospects for current account performances at least in commodity exporting nations. For example it sees Indonesia’s current account deficit at just 2.1 percent of GDP this year, a number which is no cause for concern, and falling to 1.4 percent in 2013. Given the state of the coal market in particular, and the strength of domestic consumption, this forecast looks vulnerable.
Lower commodity prices would reduce Malaysia’s large current surplus and rein in consumption at a time when government deficit spending is already playing too large a role for comfort. But lower commodities should help trade balances in northeast Asia and stimulate consumption and keep a lid on inflation.
Large current surpluses in Malaysia and a continuing one in the Philippines both reflect weak investment as well as high commodity prices in the Malaysia case and a continuing surge in remittances and BPO income in the Philippines. Although this surplus and improved governance have helped raise the nation’s rating, the surplus at 2.6 percent of GDP also reflects the still far from adequate investment and the slow progress of the public-private partnerships in infrastructure development. Nevertheless the data implies that the Philippines is less vulnerable to more external shocks than most in the region.