Asia has lost its economic stride. China’s central bank has cut rates twice in quick succession, and Korea’s central bank surprised with a rate cut last week. Although falling inflation has given officials around the region room to maneuver, monetary policy may not be the most appropriate response to the current slump in growth.
What ails Asia is not the cost of capital, or its availability. Interest rates are already below their level before the global financial crisis, and bank lending is still brisk. Lowering rates further would not have the same punch as before.
More important, it may compound one of the region’s main ills: a tendency for cheap money to create asset bubbles. Nor is further fiscal stimulus a long-term growth solution, even if most economies – especially in Southeast Asia – would benefit from spending on improved public works.
Rather, the problem is the allocation of capital, which is hampered by regulatory restrictions. A pro-growth agenda would entail improvement in three areas.
First, trade liberalisation. Asia was built on exports, and there is a tendency to see benefits as accruing only when shipments to other destinations rise. But imports can also boost growth through lower costs for firms, greater purchasing power for households, and stronger competitive pressure to sustain gains in productivity.
Asian economies need to dismantle trade barriers further. Various initiatives remain stalled amid diplomatic wrangling or domestic wavering. Japan, for example, would hugely benefit from joining negotiations for the Trans-Pacific Partnership, a free-trade area that would include the United States as well as markets such as Singapore, Malaysia and Australia. China, Korea and Japan have also discussed ways to reduce barriers, but those talks have yet to bear fruit.
Trade liberalisation would have wide benefits by allowing regional trade to reach its full potential. Over the past 10 years, emerging Asia’s share of global output has risen to greater than 18 percent from around 10 percent, but the share of intra-Asian trade in world-wide exports has fallen to 59 percent from 63 percent.
Economies also need to increase further their openness to foreign investment. According to UN data, last year was another record high for foreign direct investment, or FDI, in Asia. However, flows have not kept pace with the region’s overall expansion. The contribution of FDI to total investment was a mere 7.4 percent, down from over 13 percent in 2000 and well below the 9.4 percent share in developed economies.
Significant ownership restrictions remain, and some industries continue to be entirely off-limits to outside investors. Efforts to open big-box retail stores in India to foreign capital remain stalled. In the Philippines, a whole range of professional services, including engineering, accounting and medicine, remain largely closed to foreign investors. In Indonesia, direct investment in mining is becoming more restricted.
This is another reform that would have wide ripple effects. Not only would greater FDI boost employment and growth in the near term, but it enhances longer-term growth, too. Foreign investment brings efficiency gains and also new, pro-growth technologies. China’s rise as a global trade power was in large part driven by foreign companies sharing their capital and know-how.
Finally, governments need to reduce state involvement in their economies and reduce barriers to internal competition. Privatisations of state-owned enterprises should be back on the agenda.
In Vietnam, growth took off with the so-called “equitisation” of state-owned companies in the early 1990s. But the process has stalled of late. Relaunching it would ultimately propel the economy back toward double digit rates of growth. Across the region, privatisation would spur near-term investment and thus demand, and raise productivity over time.
Tougher regulation of competition among private firms, with an eye to avoiding monopoly power and market distortions would be equally important. In particular, small- and medium-size enterprises require better access to capital, greater investment opportunities, and a more stable regulatory environment to flourish.
Such an ambitious reform agenda will not be easy, which is why it hasn’t been undertaken to date. But as policy makers, and the citizens they serve, become increasingly uneasy about the economic future, leaders have a unique opportunity to pitch structural reforms as a long-term solution to put Asia on a sustainable growth track. -By Frederic Neumann