Asian Economies

Sisira JayasuriyaDepartment of Economics

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This subject aims to give you a general understanding of the following topics:

• A picture of the structure of Asian economies and historical experiences influencing policies

• The debates about the role of state and market, and process of economic policy reforms

• Nature of trade and investment links between Asian economies, and between Asia and the rest of the world

• Changing international trading and investment framework: issues facing Asian economies– Implications for Asian business environment

and business firms

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Globalisation: implications and issues

• Markets are opening: trade in goods and services increasing

• Larger role for markets• Foreign investment: inward-outward FDI,

portfolio• International economic and political context

– Political, legal, institutional and economic volatility

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Asian economies

• Regional identity and diversity: economic, political, historical, cultural

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Diversity

• Some of the largest countries and some very small countries

• Some of the richest and some of the poorest• Some natural resource-rich, some natural

resource-poor• In some population predominantly urban, in

manufacturing/services, some, still predominantly rural, in agriculture

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Historical background: links, similarities and differences

– historical links in Asia go back many centuries• Chinese and Indian cultural influences and links• Trade links

– direct western colonial rule: South Asia, Southeast Asia (except Thailand)

• British, Dutch, French, Portuguese, Spanish-American

– western domination : China, Thailand– Japanese colonialism

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Independence and post-independence

• nationalist movements: relatively peaceful vs revolutionary/violent

• communist movements in independence struggles

• regional conflicts

• political ideology and circumstances, and economic policy

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Convergence in economic policies: all countries are increasingly adopting similar

policies

• Since late 1970s, process of economic policy liberalization – market oriented policies

• Late 1980s-early 1990s, pace of liberalization accelerated

• 1997 crisis and aftermath• But history, culture, structure, politics

matter

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Asian economic integration?

• geographical proximity• some (limited) sense of common cultural

heritage (rice eaters???)• economic links have been growing:

– regional integration arrangements – ‘natural’ economic complementarities

• “Asian” economic crisis and ‘contagion’, “yen” zone…….

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Regional Integration Agreements (RIAs)

• ASEAN

• CER

• SAARC

• APEC

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Intra- and inter-regional trade sharesexports - 1999

Destination ____NA__ LA__WE AsiaOrigin N. America 39.6 15.6 19.4 21.1Latin America 61.6 16.0 12.9 6.0Western Europe 9.9 2.4 69.1 7.5Asia 26.3 2.5 18.1 46.6World 22.0 5.4 42.2 20.9

Source: WTO

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Asia in global economy

• Population: majority (>50%)• Production: Gross Domestic Product (GDP):

– by conventional $ measure, >20%– but by another measure (PPP), >30%

(with three of the world’s largest economies: China (2), Japan (3), India (4))

• International Trade: exports imports

Merchandise (‘goods’) 25 21 Services 19 25• Foreign Direct Investment (FDI): 20%

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Asia: the big 3

Population Area GNP per cap income(millions) (‘ooo km2) (bn$)

$ PPP $PPP$

------------------------------------------------------------Japan: 126 328 4,290 2,928 32,390 29,180

China: 1,239 9,597 929 3,984 750 3,220

India 980 3,228 421 1,661 430 1,700

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Asia’s International Trade: merchandise trade

• Asia (including Australia/NZ): 25.5% of world’s exports and 20.9% of world’s imports in 1999

• growth in volume value

1980-85 5 2

1985-90 13 14

1990-99 7 6

(note: 1997 crisis hit both exports and imports)

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Trade growth: selected Asian countries

average annual growth rate:1990-99exports imports

Japan 4 3China 14 13(excl HK)India 7 7Philippines 18 11Vietnam 19 17Australia 4 6

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Merchandise Trade by product group:1999(shares as % of total value)

exports imports

Agricultural products 7.1 10.6Mining products 6.3 14.5Manufactures 84.5 72.5

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Japan dominates trade, but China challenging

Japan’s share in 1990:

Exports of Asia 38.9%Imports of Asia 33.2%

But, share falling – others’ trade growing faster1999:Exports of Asia 30.1%Imports of Asia 25.9%

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Japan and rest of Asia

Direction of trade 1990 1999

exports to Asia (%) 34.2 39.7imports from Asia (%) 35.1 44.6

most important partners in Asia: China, Hong Kong, Taiwan, Korea

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Composition of exports: diversity reflects resource availability and stage of development

• Japan: passenger motor vehiclesintegrated circuitstelecommunication equipmentother electronic machinerycomputer parts

• China: clothingfootwear

toys games and sporting goodstelecommunications equipmentcomputers

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Indonesia natural gascrude petroleumplywood etcjewellerycoal

New Zealand milk and creammeatfruits and nutscheese

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Malaysia, Philippines, Singapore and Thailand: integrated circuits, telecommunications equipment, computers/parts

Korea: integrated circuits, passenger vehicles,ships/boats, telecommunications equipment

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India: has largest number of people who cannot read/write and very low per capita income but huge and fast growing exporter of computer software

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Many Asian economies’ exports depend heavily on global demand for:

electronics/computers/telecommunications

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Economic links in capital and labour markets

• FDI and portfolio capital flows– Changing attitudes to FDI

– Multinationals: first world and third world MNCs

– development of equity markets and relaxation of controls on cross-border capital movements

• Labour movements in Asia: labour migration from low wage countries to high wage countries

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FDI-inflows (1999)

Developed countries $ 636 billion

East and SE Asia $ 93 billion(mostly to China/Hong Kong - $ 63 billion)

South Asia: $ 3.2 billion, most to India

A significant part of investment in Asia is from within Asia: mainlyJapan, but also Taiwan and others – including China, India

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Development

• What is development? A Multi-dimensional concept– Basic economic needs –food, clothing,

adequately met– Access to health and education facilities– Political and broader ‘human rights’– Clean environment

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Measuring growth

• Per capita income – standard measure- US$:

GNP/population – adjust by exchange rate

• two major measurement problems:1. Measurement errors – underestimation

2. Prices of goods and services are different across countries – purchasing power of a dollar differs

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Purchasing Power Parity (PPP) measure

• Prices of ‘Traded’ and ‘non-traded’ goods (and services): different determinants of prices

• Determine international average relative prices of goods and services and use them to value domestic output/income

• PPP: ratio of domestic currency expenditures to international price value of output

• Two sets of national income figures

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Asia: the big 3

Population Area GNP per cap income(millions)(‘ooo km2) (bn$)

$ PPP $ PPP$

------------------------------------------------------------Japan: 126 328 4,290 2,928 32,390 29,180

China: 1,239 9,597 929 3,984 750 3,220

India 980 3,228 421 1,661 430 1,700

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Average per capita income - even when adjusted for price differences - does not give full picture of ‘welfare’

per capita share (%) of income share of income(PPP$) of bottom 40% top 20%

Sri Lanka 2,990 22 39Guatemala 3,350 8 63Brazil 5,370 7 65Costa Rica 5,520 13 50

How is income distributed?

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Measuring development

• Multi-dimensional, so any single measure has limitations– Food availability– Life expectancy– Education– Position of women, minorities, castes, ethnic

groups– environment

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High per capita income and higher human development indicators not always closely linked

Sri Lanka Upper middle income country average

per cap income (US$) 420 3240 life expectancy

female 73 70male 68 65

infant mortality(/1000) 21 42illiteracy

female 17 31all 13 24

Source: World Development Report, 1990 - figures for 1988

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Human Development Index (HDI)

• A composite index produced by the UN, published in Human Development Report

• Includes:– Literacy/education– Life expectancy– Per capita income

• Takes values between 0 and 1• Has limitations, but overcomes some limitations

of ‘per capita income’ measure