Tony Makin

Director, APEC Study Centre, Griffith University, Australia

Prospects for the Asian Economy

Main Themes

Underlying Reasons for Asia’s Success

Near Term Prospects

International Factors

Longer Term Prospects

Asia’s Growth in Historical Perspective

according to economic historian Angus Maddison per capita income in the world rose 13-fold between 1000-2000

this compares to no increase in per capita income in the 1st millennium!

in 2nd millennium, most world growth occurred after 1820 the start of the industrial revolution

over just the past ½ century, Asia’s growth been the strongest the world has ever seen

Globalisation and Asia’s Rise

the world economy first experienced large scale globalisation during la belle époque from 1870s to 1914

improved transport and communications eg telegraph, railways, steamships) spurred international trade and capital flows

unlike the first globalisation era there now exists a well-established supranational institutional framework fostering international exchange

A fundamental question: Why have some emerging Asian countries grown faster than others?

?

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Globalisation and Asia’s Rise Distinct phases in development of modern

Asia:

Japan - 1960sAsian tigers - Singapore, Hong Kong,

Taiwan, South Korea - 1970s – 1980sChina, India, Indonesia - 1990sAsia’s phenomenal growth has occurred

during the second great globalisation phase - from 1990 onwards

- so international factors have played a key role

Economic Growth in Open Economies

it can be shown that: sources of growth = domestic + foreign

- trade liberalization and capital account liberalization further increase economic openness

can extend growth theory to examine how openness influences growth

Since 1990 emerging Asian economies have become more globalised

Domestic-international linkages

Rest of the World

Goods and Services Markets Asset Markets

Globalisation and Asia’s Rise

Key Developments in Asia since 1990

large expansion of trade and investment flows

exchange rate management and global imbalances

two major economic crises

– Asian Financial Crisis 1997-8

- Transatlantic Financial Crisis aka GFC 2008-9

The CIRIs?

Jim O'Neill, Goldman Sachs economist, proposed in 2001 that Brazil, Russia, India and China the BRICs could become among the four most dominant economies in the world by 2050

predicted a big rise in the size of the middle class in these nations

If we include Indonesia instead of Brazil

BRICs – B + I = CIRIs

CIRIs: Key Macroeconomic Facts

account for roughly 40% of the world's population and over 30% of the world's gross domestic product

the most important engines of the world economy in recent years

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Near Term Growth Prospects

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Near Term Growth Prospects

Asia to continue leading global growth but at a slower rate

Exports have slowed and domestic demand likely to play a more important role in the future

Slower growth in China likely to be offset by further strengthening of India’s growth

Structural reforms needed to lift productivity across the region

Income per head – China vs India

Reasons for High Growth: Micro

privatisation and reform of state-owned enterprises

enhanced labour mobility and better

educated workforce

emergence of entrepreneurial class

inflation kept under control

generally benefited from increased international trade and foreign direct investment

heavy spending on productive infrastructure

Reasons for High Growth: Macro

Infrastructure

over half world’s infrastructure now in emerging Asia

estimated to continue spending around 6% of combined GDP on roads, railways, electricity and telecommunications

this is twice the infrastructure ratio of developed nations

Growth and International Trade

numerous econometric studies have focused on the relationship between exports and growth

these studies show that high trade to GDP ratios tend to be associated with high economic growthhence openness matters!

Growth and International Trade

enhanced international trade also implies:

increased foreign demand for domestically produced goods and services → more exports and hence more overall production

increased imports raise competition for manufacturing sector

higher productivity higher growth

Exports as % of GDP- CIRIs

China India Russia Indonesia0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

16.1

7.1

18.2

25.3

29.6

21.5

30.0

24.6

1990 2010

Imports as % of GDP- CIRIs

China India Russian Federation Indonesia0.0

5.0

10.0

15.0

20.0

25.0

30.0

13.1

8.5

17.9

23.725.7 24.8

21.722.9

1990 2010

Foreign Capital’s Contribution to Growth

Standard growth accounting (Solow 1957) implies focus on key factor inputs to economy-wide production to identify the contributions made by factor inputs – capital , labour, technology

in open economies, yet another distinction is that between domestically funded and foreign funded capital

Foreign Capital’s Contribution to Growth

open economy macroeconomic production function of the form

where y is net output per worker, φ represents TFP, k(t) is domestically funded capital per worker and k*(t) is foreign funded capital per worker

Foreign Direct Investment (% of GDP) CIRIs1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

China IndiaRussian Federation Indonesia

GDP Growth

Road Transport

Lessons from China

China has outperformed other Asian emerging economies with its GDP exceeding the combined total of the other CIRIs

Now the world’s second largest economy, the world’s biggest manufacturer, and its biggest exporter

Foreign investment and exports crucial to China’s development strategy, but now rebalancing demand to consumption

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Longer Term Growth Prospects

great scope exists for further increasing international trade and investment as means of lifting the performance of emerging Asia

The World Bank expects China’s phenomenal growth to slow to less miraculous rates from here on, gradually tapering down to around five per cent by 2030

remains to be seen whether other emerging Asian economies, especially India, Indonesia, Vietnam and other ASEAN can accelerate as China’s growth normalises

Looking Ahead

Rise of Asia-Pacific region unforeseen in 1990s, so not easy to say:

Prediction is very difficult, especially if it’s about the future.

(Nils Bohr)