Asia Economies May Flag Some in 2011
Although Asia is doing just fine at least compared with the rest of the world, today's rosy numbers conceal the likelihood of a much less buoyant 2011, the Asian Development Bank suggests in its just-released update of the 2010 Asian Development Review, which was originally published in April.
While there is no danger of the "double dip" still viewed as a possibility in the west and Japan, for developing Asia a marked slowdown from this year's 8.2 percent bounce looks likely as both domestic stimulus and export momentum fall. The ADB is forecasting some slippage for 2011 but only back to 7.3 percent. That could prove optimistic. It relies heavily on India's growth rising from 8.5 percent to 8.7 percent and China only slipping back marginally from 9.6 percent to 9.1 percent.
Indeed, while year-on-year growth still looks impressive, data from the most recent research reports show export numbers for most of the developing world to have flattened out over the past two to three months. By the end of 2010, comparisons with year- ago levels will be looking puny.
For some countries at least, the export bounce appears to have been as much driven by commodity price rises as volume increases. Where the world is in the longer term commodity price cycle is unclear. The past year has seen a sharp rebound from the 2008-2009 slump and prices of many commodities have delivered huge gains to terms of trade of developing Asia over the past seven years. Take palm oil, rubber, copper and coffee, all important to Malaysia, Indonesia Vietnam etc. Although still down from their early 2008 peaks, they are still three to four times their level around 2002. Oil, gas, coal and cereal crop prices have risen by lesser amounts – but far faster than manufactured import prices.
The GDP data does not directly reflect these price gains but there is no doubt that commodity price strength has been important in pushing boosting consumer demand in countries such as Malaysia, Indonesia and Thailand, boosting foreign exchange reserves, making room for fiscal stimulus and creating the liquidity which has fuelled gains in asset prices. Some of this benefit is already beginning to wane which is one reason why the ADB forecasts growth in commodity dependent SE Asia will fall to 5.4. percent from 7.4 percent in 2011. Only Vietnam at 7 percent appears likely to show an improved performance.
The ADB may be a touch optimistic about the short term for the region as a whole but it has few illusions about the longer term needs if growth of per capita income is to be sustained. Most tellingly it zeroes in on total factor productivity (TFP) – an inelegant set of words which translates into achieving more with less. Deduct the growth of the workforce and the amount of capital applied to overall growth and that is TFP.
Two ingredients of improving TFP stand out: education levels and infrastructure quality as keys to sustaining growth without the need for ever increasing amounts of labor and capital. The data show that Southeast Asia has been for long a rather poor performer on TPF measurements. In the five years to 1997 it accounted for only 11 percent of output growth in these countries compared with 40 percent in the likes of Korea and other newly industrialized economies. The years since the 1997-1998Asian crisis have seen major improvement, probably because capital has been less abundant, workforce growth has fallen and previous excess capacity has been put to work.
.However in some countries educational advance is now needed to sustain improvement. Thailand and Malaysia are obvious examples if they are to follow the path of Korea and sustain TFP growth. Those two countries do however already have the advantage of relatively good quality infrastructure whereas Indonesia and the Philippines, as well as late starter Vietnam, languish near the bottom of the ADB infrastructure quality table.
Although TPF may have been picking up in the medium term, weak capital investment in much of the region is nothing to boast about. It has produced years of current account surpluses in Southeas Asia, even in the Philippines and Indonesia despite their glaring need for investment. The ADB expects these surpluses to continue which may be good for their currency strength and fiscal stability but also points to a lack of the investment that could continue to drive growth when global liquidity gets tight and/or export commodity prices fall.
Another issue to be addressed, says the ADB, is strengthening Asian trade links. The report notes that though 45 percent of Asian trade is within the region, most of that is in components. End use in Asia accounts for only 13 percent of exports. It notes the particular lack of cross-border trade South Asia despite India's improving links with East Asia. But the report does not wade into the politically awkward question of exchange rates, in particular the impact on Southeast Asia of the yuan staying closely linked to the dollar while their more open currencies appreciate.
Maybe some things are better left unsaid, particularly by the Japanese-led ADB at a time when China appears determined to make future regional trade and monetary cooperation more difficult by picking a fight with Japan over the Diaoyu/Senkaku islands, and irritating India and some southeast Asian countries with other border claims.