ECONOMIC AND MACROECONOMIC ISSUES IN ASIA

ECONOMIC AND MACROECONOMIC ISSUES IN ASIA

Collectively Asia embraces 44 very diverse economies. China, Japan and India are the dominant economies. In recent years China, India and South Korea and the countries of Southeast Asia and South Asia have all boasted consistently high growth rates. Indonesia is the biggest in Southeast Asia. Middle Eastern countries, flush with petrodollars, have a lot of money to invest and throw at their populations. China and Vietnam have rune up strong economic numbers combining market economies with authoritarian Communist governments. India and Thailand have posted equally impressive numbers with free and sometimes chaotic democracies.

William Pesek Jr. Bloomberg wrote: Asia “has what many Western countries don’t: rapid gross national domestic product growth, swelling populations, emerging middle class consumers, growing cities and evolving markets.” There is still a lot of poor people and problems but economic growth is helping to lift many of poverty and provide opportunities.

Growth statistics usually announced by the World Bank and Asian Development Bank are often for Asia’s developing economies such as China, Indonesia and Thailand. South Korea and Taiwan are sometimes included, sometimes not. Often Japan, Singapore and Hong Kong are left out because they are considered mature economies. Other times the statistics are just for East Asia (with or without Japan), Southeast Asia, South Asia (India, Pakistan, Bangladesh, Nepal, Sri Lanka) or the Asia-Pacific region.

Macroeconomics in Asia

Population growth in Asia is bringing economic growth there are shifting economic power to Asia. But there are concerns. In a speech in June 2011, Indonesia President Susilo Bambang Yudhoyono said: “Of the 7 billion people that now inhabit our plant, 60 percent live in Asia . As their economies grow, they will seek and compete for finite natural resources, a pattern that in previous centuries led to wars, conquest, exploitation and untold suffering.”

Companies around the world are becoming increasingly dependent on Asians to make their stuff and buy their products. East Asia accounts for 20 percent of global GDP. China is driving Asia’s growth. Growth and the general health of the economies of many Asian nations is closely tied to growth and the economic health of China.

Consumer spending accounts for more than half of all spending in Asia. It is also a strong indicator of confidence in the future.

The population is still largely rural but much of the GDP is concentrated in the cities, especially along the coasts. Many Asia countries are vulnerable to high oil and food prices. Surges in iol and food prices can bring economic growth to a grinding halt, and send inflation soaring, sending millions into poverty, bringing the masses into the streets and sometimes triggering violent rioting.

Dollars and Asia

Asian countries keep most of their reserves in dollars. As of 2004, they collectively had foreign exchange reserves valued at $2 trillion. Asian countries are paid in dollars for their exports and they buy up large amounts dollars because it keeps the value of the dollar high and the value of their currencies low, aiding their export-oriented economies.

Asian countries effectively finance the United States’s budget deficit by buying U.S. Treasury securities. There is such a demand for their securities, which are issued at a rate of $1.5 billion a day in early 2004, that the U.S. doesn’t need to raise interest rates to attract buyers.

There are dangers with this policy for the United States. If the Asians ever stopped buying up dollars it would cause interest rates to rise. Plus, the low interest rates encourage the United States to borrow more and allows the deficit to get bigger.

For Asian countries holding large dollars is a kind of insurance to prevent the Asian economic crisis of 1997 from occurring. If investors suddenly leave and the value of the local currency starts to tank the dollars can converted to local currency to prop it up. There are also worries that a sudden selling of dollars could cause an international economic crisis.

Export-Oriented Economies

Many of Asia’s best performing economies---first in Japan and later in South Korea and China--- have racked up their impressive growth numbers with policies that promote exports. One of the problems with the policy is that economic slumps in other countries can slow growth in the exporting country.

Export-oriented economies are heavily reliant on it's exports for growth. Export is the major component that provides the fuel for the nation's economy to expand. Consider the case of Japan. They have no natural resources to speak of, but since after World War II, their ability to absorb new technology and adapt, apply and innovate has led to products that is now in great demand worldwide, from cameras to VCRs to cars and a host of other product that has made them an economic power. Their ability to mass produce goods in high demand the world over has made their economy one of the most export driven in the world. Another example is the oil producing countries, whose economies depend mainly on oil for growth. The same hold true for other countries that export other resources and raw materials such as timber or minerals. [Source: Yahoo Answers]

In an export-driven economy export-earnings make up a a major share of the GDP. The higher the percentage contribution of exports to the country's Gross National product (GNP) , the more export dependent (or driven) that country is. Earnings are reinvested in export-oriented industries. Providing momentum to drive the economic forward. An export-driven economy is much more effected by world conditions than one that relies on domestic consumption.

Diversification is an important element of an export-oriented economy. If exports are poorly diversified (say, a country exports only one commodity or a few related commodities), the country is exposed to price shocks (a drop in the price of the single export can seriously hurt employment and national income). If, however, exports are well-diversified (and consist mostly of manufactures and services, rather than minerals and agricultural commodities), price shocks are not as important.

The computer and electronics sector made up about 40 percent of Asia’s export volume in 2007.

Japanese Trade Surplus and Export Model

One of the main contributors to Japan's phenomenal growth over the past half century or so has been its extraordinary trade surpluses, helped in part by high tariffs to keep foreign imports out and tax-free saving and other incentives to make sure the banks lent money to companies at low interest rates to fuel production. Japanese citizens did their part over the years by buying domestic products even though they often sold for outrageously high prices. Japanese companies made copies of all the goods that foreign companies might want sell in Japan. When Mars introduced M&Ms in 1973, 25 Japanese imitations were available in six months.

The traditional Japanese formula was to import raw material, produce manufactured good and export them at a higher price. Companies invested abroad but only to supply foreign markets and grew, in some cases, through dumping and ruthlessly seizing market shares. The government protected domestic industries such as farming, banking and small businesses for social and political reasons. In the 1980s, it was illegal for Japanese to import and sell rice.

One former Ministry of Finance bureaucrat old Time, "My duty was to prevent foreign companies from coming into the market." He said he achieved this goal by bogging down foreign companies with paper work and making "a very detailed examination so that it took ages."

Japan has a trade surplus with almost every developed nation in the world. Japan's share of world exports reached their peak in 1986. Since them, of the 1,618 international trade industries that Japan participates in, the export share of 1,250 of these companies declined while only 166 have risen.

Exports and trade surpluses remain essential to Japan’s growth. The period of growth from 2002 to the end of 2006, the longest in the postwar period, was largely driven by exports which rose as proportion of GDP from 10.4 percent to 15.6 percent. In recent years high fuel and material costs have trimmed Japan’s trade surplus. A decline in exports caused by global financial crisis in 2008 and 2009 turned a trade surplus into a trade deficit reached a record ¥952.6 billion in January 2009.

Asia Still Dependent on Exports

As Asia began recovering after the 2008-2009 global financial crisis, Takeshi Nagata wrote in the Yomiuri Shimbun, “The Asian economy appears to be back in business, pushed by a recovery in exports, but its overreliance on shipments to developed countries is risky. Economic growth in China and India, as well as a rapid recovery among Southeast Asian nations has boosted the growth rate of the entire Asian region. However, the pace could slow due to economic uncertainty in developed countries, the destination for many of Asia's exports. To prevent this, expanding domestic demand in Southeast Asian economies is seen as the key to maintaining steady growth in the region. [Source: Takeshi Nagata, Yomiuri Shimbun, October 16, 2010]

An increase in middle-income families in Indonesia has meant brisk sales of durable goods such as cars, motorcycles and electrical products in the nation. At Toyota Motor Corp.'s Jakarta outlet, sales of its minivans increased 1.5 times over the previous year, according to the outlet's director. New car sales in 2010 in the country are expected to exceed the record of 700,000 units. However, Indonesia is one of a handful countries showing "signs of an increase in domestic demand," as forecast by the Japan External Trade Organization's Jakarta office. Economic growth in other Asian countries is sustained by expanding exports, mainly to China.

Thailand's export value in the January-June period increased by about 37 percent compared to the same period last year. Exports have accounted for about 60 percent of the nation's GDP recently. The average export dependency ratio to GDP in Southeast Asian nations can be more than 70 percent. All this adds up to exports playing a very significant role in these nations' economies.

The United States--the destination for one-fourth of Asia's exports--is suffering from a prolonged decline in domestic home sales and a sluggish manufacturing sector. Europe and Japan also suffer from economic doldrums. Thailand's direct shipments to the United States account for only 10 percent of Bangkok's overall exports. But it sends electronic components to China, where they are integrated into completed products that are ultimately exported across the Pacific.

Faltering economic conditions among big consumers--mostly developed countries--will damage the exports vital to economic growth in Southeast Asia. Based on these considerations, the ADB has left next year's Asia-Pacific growth rate forecast unchanged at 7.3 percent. Analysts see a dependency on high exports as the Achilles' heel of the Asian economy. Linking growth to domestic demand likely will be key to the region's future.

Cheap Labor in Asia

Reliance on labor-intensive industry is sort like a stage that developing economies go through. In the 1980s, South Korea was leading manufacture of sports shoes and cheap textiles. These products are now made in China, Thailand and Indonesia while South Korea is a leading manufacturer of semiconductors and other high tech products. China is making more and more high tech products all the time.

Cheap labor can be viewed as an impediment to development rather than a boon. When the United States was growing there were labor shortages and this encouraged innovators to come of with labor saving device like the cotton gin and assembly line that increased productivity and efficiency. There is little incentive in China to be innovative because labor is so cheap and there supply sometimes seems unlimited.

Impact of Cheap Asian Labor on the Global Economy

Martin Wolf wrote in the Financial Times: “The world is indeed suffering a huge supply shock, just as it did prior to the first world war. Then the shock was an increase in the effective supply of land, as the railway and steamship brought the “new world” into the global economy. This time, it is an expansion in the effective labour supply, which has tripled over the past two decades, according to Richard Freeman of Harvard University. In an integrated world economy, suggests Helmut Reisen of the Organisation for Economic Co-operation and Development, equilibrium real wages in high-income countries should fall by about 15 per cent. [Source: Martin Wolf, Financial Times, March 14, 2006]

“We do not live in such a world. This is obviously true for labour, where tight controls on migration fragment the global market: thus, a study for the US bureau of labour statistics concludes that average labour costs per hour in Chinese manufacturing were just $0.60 in 2002, against $24 in Germany (see charts). Yet Germany is still the world’s largest exporter of manufactures. [Ibid]

“What is the impact of Asia’s entry into a world with such highly segmented pools of labour? One point is evident: the reason for the Asians to export is to increase their consumption, at least in the long run. If the Chinese, for example, could produce everything more cheaply at home, their exporters would find that the euros they earned would be worthless. True, the Chinese government could buy the unwanted currency. But what would be the point of accumulating ever vaster currency reserves if there were nothing worth buying with them? [Ibid]

“A slightly more sophisticated view would be that the Chinese do want to earn foreign currency, but to buy oil and other natural resources. But why should they expect Saudis to accept euros in payment? The answer is that oil producers continue to buy things from rich countries that cannot be supplied more cheaply by the Chinese. The view that the Asians will simply end up more competitive in everything is absurd. What, then, is the true impact of the labour supply shock? The short answer is that it generates a fall in the world relative prices of labour-intensive goods and services against those more intensive in now scarcer resources of capital (both human and physical) and land. [Ibid]

This has two consequences: shifts in the terms of trade, namely, changes in the relative prices of imports and exports of Asia’s partner countries; and changes in the distribution of income within the latter, as prices of labour, capital and land adjust. [Ibid]

“China’s terms of trade have deteriorated markedly since it opened up. Estimates suggest that prices of its exports have fallen by about 25 per cent relative to those of its imports. In this way, China’s exports make the rest of the world better off. That China has made the rest of the world better off, as a whole, does not mean it has made every single country better off. The more similar is a country’s comparative advantage to China’s the more likely it is to be a loser (and vice versa). In practice, the winners are likely to be producers of industrial raw materials, particularly fuel. For the high-income countries, Asia’s impact is mixed: it lowers the price of the goods and services they import from developing countries (which makes them better off), but raises the price of imported commodities (which makes them worse off). In recent years, the latter effect has outweighed the former for the US and Germany. The UK has gained, however, largely because it is self-sufficient in energy. [Ibid]

East Asian Economic Integration

Joshua Kurlantzick wrote in the Washington Post: “In the mid-1990s, East Asia began to reorient its compass inward. Regional economies expanded, producing a class of younger businesspeople. These new cosmopolites grew up forging ties among East Asian corporations, building firms such as Thai agro-industrial giant Charoen Pokphand, which quietly became the largest foreign investor in China. More sophisticated Asian companies also began developing the high-tech industries that would keep Asian talent from migrating to Silicon Valley. [Source: Joshua Kurlantzick, Washington Post, December 10, 2006]

Just as Asia's economies were integrating, the financial crisis of the late 1990s struck. Washington, so long the guarantor of Asian stability, reacted slowly. "The lesson to a lot of Asian leaders was we had to depend on ourselves," says Federico Macaranas, a former official with the Asia Pacific Economic Cooperation. As Asia's economies recovered, local companies began focusing more on the region: Intra-regional trade now comprises about 60 percent of all East Asian trade, up from 30 percent 15 years ago.

Widespread social change followed and reinforced economic integration in the 1990s and beyond. For the first time, nations such as Malaysia and South Korea created sizable middle classes, which clustered in megacities such as Kuala Lumpur and Seoul. From Thailand to Tokyo, 20-somethings adopted similar lifestyles -- working longer hours at office jobs, living in their own apartments rather than with their parents, following the same Asian pop stars and enjoying the weekend leisure time that comes with higher incomes. Communications technology further cemented links among East Asia's urban middle classes. The region's biggest countries began to develop sophisticated film and television industries capable of packaging products for new pan-Asian Internet sites and satellite networks.

Meanwhile, rising incomes and open borders sparked intra-Asian tourism. From almost no outbound travelers in 1979, China will have about 100 million residents traveling abroad by 2020. In Thai cities such as Pattaya, Chinese tourists already dominate the town, following megaphone-wielding guides past bars and transvestite revues where Chinese visitors pay to ogle the scantily-clad dancers. Perhaps most important, Beijing has begun to rethink its ties with its neighbors and has become an enthusiastic proponent of Asian integration. Shortly after last year's inaugural East Asia Summit, former Philippine president Fidel Ramos even suggested that East Asia could become more like the European Union, which has a common currency, common market, and common institutions to facilitate trade and other policies.

APEC

Asia-Pacific Economic Cooperative Forum (APEC) is 21 nation organization made up of countries around the Pacific in Asia and the Americas. It deals primarily with economic and trade issues but also deals with political, environmental and terrorism issues. It serves as a formal link between the United States and the countries of Asia and has grown in stature and importance in recent years. One of the more notable features of the meetings is how silly the country leaders look dressed in the traditional clothes of the nation that hosts the APEC meeting.

APEC was launched in Australia in 1989 with 12 members including Japan. Australia, South Korea and the United States and its leaders have met annually since 1993. Its members account for 53 percent of the world’s gross national product, 44 percent of global trade and 40 percent of the world’s population. The 21 members are: Australia, Brunei, Canada, Chile. China, Hong Kong, Japan, Indonesia, Malaysia, Mexico, New Zeland, Papua New Guinea, Peru, the Philippines, Russia, Singapore, South Korea, Taiwan, Thailand, the United States and Vietnam. The members are called “economies” because of the presence of Taiwan and Hong Kong.

The forum operates on the basis of nonbiding commitments and decisions reached by consensus. In 1994 the group declared the Bogor goals for open trade and free investment by 2010 for developed countries and 2020 for developing countries. In 1997 it failed to map out ways to deal with the Asian financial crisis. In 2001, after the September 11th terrorist attacks, it took up secuirty matters, issuing ant anti-terrorism statement at the Shanghai meeting.

APEC meeting are often attended by world leaders and often serves as an opportunity for these leaders to exchange messages and hold informal talks on the sidelines. Among the issues that addressed in the main meetings are how to deal with current economic problems, trade, tariffs, protectionism, bird flu, food prices and shortages and North Korea’s nuclear program. One of the goals of the organization is to create a Free Trade Area of Asia-Pacific (FTAAP) agreement which would liberalize trade and investment in the region. In 2009 global warming

Asian Development Bank

The Asian Development Bank is headquartered in Manila and has 2,200 employees. It has an annual lending budget of $6 billion and operates under similar mandate as the World Bank: namely to fund development projects that are seen as advantageous to developing countries and their people. It has traditionally provided funding for infrastructure projects in a region where the poor live. Japan is the largest shareholder in the Asian Development Bank.

Asian Development Bank was founded in 1966. It is largely seen as a “second fiddle” to the World Bank in Asia. In recent years it has suffered from morale problems and is badly in need of an overhaul and has been associated with failed development projects.. In some cases business interests have been the primary beneficiaries of loans that were supposed to help the poor and programs classified as poverty reductio projects. One example is a $300 million, 964-kilometer railway between Xian and Hefei in China, whose primary beneficiaries are coal companies and city dwellers. The people in the poverty-stricken area the train run through who the train was supposed to help were relatively unaffected by it.

The president of Asian Development Bank appointed in 1999 aimed to restore poverty-fighting mandate of the organization but defined poverty intervention in such a way that it allowed a number of project that didn’t really fight poverty to be classified as such. At the same time there was a drive to give out more Gameen-bank style loans, which some at the bank complain were time consuming to process and argued helping government to lower inflation was a more efficient way to use the bank’s money, resources and expertise.

Asian Development Bank In Need of Overhaul?

Pana Janviroj wrote in The Nation in March 2004: “Morale among the 2,200-strong staff at the ADB’s headquarters in Manila is said to be woefully low. Leaks from frustrated donor and shareholder nations critical of the bank’s management have been publicised. Reform is said to be underway, though progress is slow and painful. Private management organisations have been brought in to re-engineer the bank’s so-called expert staff. [Source: Pana Janviroj, The Nation (Thailand), March 2, 2004]

Armed with an annual lending budget of about US$6 billion, the ADB continues to play second fiddle to the World Bank in Asia despite its being located in the region. While the management of the World Bank has taken the bull by the horns in reorganising and reinventing itself, the ADB appears stuck in the time warp of “factions and rivalries”, according to the Financial Times. The ADB has failed to ride Asia’s economic successes. In Thailand, for instance, during the economic boom time, the bank was said to be unable to match the services of private commercial banks. Conversely, during the tough times, the bank’s interest rates were said to be too high. Moreover, the ADB has picked up where the World Bank left off in its battle against environmentalists by getting caught up in a triangular conspiracy relating to the failed, corrupt Klong Dan waste water treatment project.

The ADB opened a sub-regional office in Bangkok in the mid 2000s. “The office’s mission is not so much to manage development loans and other financial services to Thailand, but to hasten the development of the Mekong area, as the bank is the prime sponsor of both strategies and funding for the area. The priority areas are road construction and other infrastructure projects that will increase economic activity in the sub-region.The ADB’s Bangkok office will have a small staff, giving it the potential to act with unity and speed, safely removed from the internal politics of the Manila headquarters. “We should have done this a long time ago. It is a dream come true to have a presence in Bangkok,” said one ADB staff member. If given a clear mission and mandate, the ADB’s Bangkok office will have the opportunity to display the kind of versatility and professionalism that the headquarters lacks. The ADB can use this opportunity to cut red tape and be more responsive to local needs.

China and the Asian Economy

China is replacing the United States as the economic engine in Asia. It buys up huge amounts of raw materials, goods and parts and pour in large amounts of foreign investment. into its Asian neighbors. China aid funds roads and hospitals across Asia which helps to funnel commerce in these countries towards China. Chinese traders pour across the borders with huge bags full or cheap goods, seeking out even small villages, for buyers, and barge full of Chinese products unload their supplies at Mekong River ports after large deals have been made.

China is also proving to be a large buyer of goods produced by Asian countries and a source of foreign investment. China ran a trade deficit with Asia in 2003. It imported steel from South Korea and Japan used in construction and car making, imported basic commodities from Malaysia and Indonesia such as palm oil and oil and imported chips from Taiwan used to make products for export such as laptop computers and calculators. Chinese tourist are popping up all over Asia.

In 2002, China proposed setting up an Asian free-trade zone. The China-ASEAN Fair Trade Agreement wet into affect in January 2010. The pact is expected to boost bilateral trade by $106 billion by lifting tariffs on about 7,000 items, or about 90 percent of all traded commodities.

China as a Threat to Asian Economies

According to United Nations Development Program report issued in 2006: “China’s stunning economic growth, in so many was an inspiration to its Asian-Pacific neighbors isn’t delivering reciprocal benefits to its regional trading partners and in some cases is causing difficulties for them.” The report find that Asians least-developed countries are experiencing a “severe trade imbalance” with China. Cambodia for example imported $452 million worth of goods from China in 2004 but exported just $30 million. Bangladesh imported $1.9 billion worth of goods from China but exported just $57 million the same year.

China has become a manufacturing threat to many Asian countries, not only in low tech areas but also in high tech fields and in industries like automobile manufacturing. China has taken away foreign investment from the other Asian countries and takes business away with its unlimited supply of cheap labor. China-bashing books fill bookstore shelves in Asia.

China has been able to undercut is neighbors in key export markets. Many of the sectors that China’s is doing well in---light industry, electronics, chip making---are sectors that other Asian countries had hoped to do well in but aren’t do as well in as they hoped because of China. In the 1990s, China’s exports to the United States tripled while those of Japan fell by half and those of the four tigers---South Korea, Taiwan, Hong Kong and Singapore---shrank by a third.

Thailand and Malaysia took 10 years building the expensive, production base and infrastructure for a precision metalworks that could sell components to Swiss watchmakers. The Chinese took over the business in only a year.

Image Sources: Wikimedia Commons

Text Sources: New York Times, Washington Post, Los Angeles Times, Times of London, The Guardian, National Geographic, Smithsonian magazine, The New Yorker, Time, Newsweek, Reuters, AP, AFP, Wall Street Journal, The Atlantic Monthly, The Economist, Global Viewpoint (Christian Science Monitor), Foreign Policy, Wikipedia, BBC, CNN, NBC News, Fox News and various books and other publications.

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© 2008 Jeffrey Hays

Last updated November 2012

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