There has been much talk about Asia’s rising middle class and the development of a new model based on domestic consumption. So far that is all it has been: talk. The plain fact is the dazzling retail emporia of Asia’s up-and-coming cities aside the region has become more, not less, dependent on foreign demand.
A decade ago, when Asia was in the midst of its home-grown crisis, exports accounted for 37 percent of regional output.
Partly in reaction to that shock, which exposed an over-reliance on flows of foreign capital, economies ramped up their production of manufactured goods. A decade later, overseas shipments accounted for 47 percent of output.
Asia’s heightened reliance on external demand has been masked. In many countries, particularly China, consumption has conspicuously risen; people have been trading in their bicycles for scooters, and their scooters for cars. But consumption has lagged behind overall economic expansion. While they were buying at home, their governments were even more furiously spending swelling trade surpluses on what Paul Krugman, the Nobel economist, calls “sterile claims” on the US Treasury. China’s household consumption, for example, has fallen to a lowly 35 percent of gross domestic product, against 50 percent in the 1980s.
Inter-regional trade has also risen sharply, creating a false impression that Asia has somehow broken free of dependence on western consumers. But as much as 60 percent of inter-regional trade is in components, part of a sophisticated regional supply chain whose final demand has nevertheless remained primarily American and European.
As a forthcoming article by Brian Klein and Kenneth Cukier in the journal Foreign Affairs points out, Asia’s export-dependent economies with the important exception of China have fared even worse than the western economies where the lightning of the financial crisis struck. Taiwan’s exports shrank in the last quarter of 2008 by 42%, while production dropped at a faster rate than the US experienced during the Great Depression. Similarly sharp contractions have happened all over Asia. For economies supposedly more resilient to falls in external demand, these have been savage declines indeed.
As Klein and Cukier write of the sputtering export-led model: “What brought the region so far in the 20th century may not take it much further in the 21st.”
As long ago as 1985, when Washington and Tokyo were at loggerheads over what were, even then, considered Japan’s unsustainable trade surpluses, Japan commissioned the Maekawa report to come up with ideas for breaking export dependence. Nearly 25 years later, the job remains undone.
As Clyde Prestowitz, a trade negotiator in Ronald Reagan’s administration, says: “I was in the room in 1984 when Japanese prime minister [Yasuhiro] Nakasone promised that Japan would become an importing superpower. It hasn’t happened.” His explanation is that economic structures are resistant to change. “Export-led economies are organised to export. All the incentives are to save, invest, produce and export. All the politics are organised around that system.”
China, an economy in an earlier stage of development, has a better shot at transformation. But in China, too, national policies are more stuck in their ways than meets the eye.
It is now nearly universally accepted, for example, that one way to get Chinese to spend more is to improve the social safety net to encourage people to run down precautionary savings. Doubtless there is some truth in this. Yet, even if it could be achieved quickly, effects on spending would not be dramatic. The truth is Chinese household savings are not particularly high lower, say, than in India. The big Chinese savers are the state and state-led corporations.
“It’s not clear to me that Chinese consumers have lots of idle cash lying around,” says Yasheng Huang, a professor at the Massachusetts Institute of Technology.
Huang argues that the real cause of China’s low consumption is stagnating incomes, particularly among the 700m rural inhabitants. He blames China’s political-economic structure which, he says, since the 1990s has stifled lending to rural enterprises and prioritised spending on the cities. Poor Chinese and that means most of them simply have not shared fully in economic growth. Interestingly, the same has happened in Japan, where flexible labour practices have exerted a downward pressure on wages. “It’s an income problem and an income-distribution problem,” says Huang.
Such structural difficulties do not mean China and others cannot establish new growth models less dependent on debt-fuelled American consumers. If Huang is right, much could be achieved in China simply by incentivising lending to the countryside or legalising underground rural banks.
Some of the adjustment will happen automatically. As exports fall, domestic consumption becomes a higher proportion of GDP whether you like it or not. Stimulus packages are already having an effect. The Japanese are buying fuel-efficient cars; the Chinese household electronics. But the trick will be to make domestic consumption whether of goods or services a permanent engine of growth. -By David Pilling