Asia’s worrisome downturn underscores the region’s failure to wean itself from Western capital. This week’s discouraging trade data from Japan and South Korea was followed by the World Bank’s estimate that GDP growth in the developing Asia-Pacific would slow to 7.1 per cent in 2011. Then, China’s “flash PMI”, a much-followed barometer for economic growth, produced its lowest reading since March 2009.
Debt troubles roiling Europe and the United States are dealing Asia a double-whammy. The first blow comes from declining exports that, despite rising intra-regional trade, remain vital to regional growth. Export growth has eased from nearly 30 per cent in 2010 to below 20 per cent.
The second blow comes from receding funds, as global investors facing financial turmoil in Europe and the United States turn tail from markets everywhere. Their retreat is pulling down currencies like India’s rupee, which has tumbled more than 15 per cent since July, driving up import costs and the cost of borrowing for companies.
Asia has high savings rates and vast foreign reserves. But, it has clung to a development model that depends on abundant export demand. The proceeds have funded development and financed more export industries and infrastructure. That has created vested interests which still dominate Asian economies, crowding out services and more innovative enterprises that don’t depend on demand from faraway markets.
It’s a similar story with investment capital. Stunted capital markets reinforce the status quo by limiting how public savings can invest in local enterprise. As a result, Asia’s fast-growing bond market accounted for just seven per cent of total global issuances last year.
As long as exports and investment were booming and incomes were growing, it was easier to go slow on reform. Now, slower growth is exacerbating income disparities, raising pressure on policymakers for relief. Since reforms work through slowly, politicians are more likely to reach for traditional nostrums and try to kick-start exports. This will only tighten their dependence on the West and make them more vulnerable to the next downturn.
Asia squandered its chance to make the transition in the boom years. Doing so now will be doubly painful.
