Asian Economies Need To Invest More
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Written by: arkylmarzers
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Date: Tue, 25 Oct 2011 |
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ASIA'S current-account surpluses have been widely (if unfairly) blamed for causing the global financial crisis. Large inflows of foreign money helped inflate America's housing bubble, the argument runs. Many Western economists say that Asians should squirrel away less of their income and consume much more. But a more rigorous analysis suggests that in most Asian economies it is investment, not consumption, that is too low.
Even economists who believe that most of the blame for the crisis lies in Washington, DC, argue that Asian economies need to shift from exports and investment to consumption as their new engine of growth. In "The Next Asia", a recently published book, Stephen Roach, chairman of Morgan Stanley in Asia, calculates that consumption in emerging Asian economies fell from 65% of GDP in 1980 to 47% in 2008. American consumer spending, by contrast, accounts for more than 70% of GDP. "Until export-led growth gives way to increased support from private consumption," he argues, "the dream of an Asian century is likely to remain just that." His prescription certainly applies to China, where private consumption fell to only 35% of GDP in 2008. But what about the rest of Asia?
A country's current-account surplus is, by definition, equal to its domestic saving minus its domestic investment. So Asian economies can reduce their surpluses by saving less (ie, consuming more) or by investing more. Which route is appropriate depends in part on why their current-account surpluses widened during the past decade. In China the blame lies entirely with saving, which rose faster than its investment rate. (India's saving rate climbed just as steeply, but it was matched by an even bigger jump in investment, which kept its current account in deficit.)
In all the smaller emerging Asian economies, however, saving has either fallen or remained broadly unchanged as a share of GDP. The reason these countries have large current-account surpluses is because investment plunged after the 1997-98 Asian crisis and did not recover (see chart). Malaysia's investment rate, for example, fell from 44% of GDP in 1995 to an estimated 19% last year. Thailand's dropped from 41% to 21%.
The widespread belief that Asian households do not spend is also flawed. According to a study by Eswar Prasad of Cornell University, private consumption accounts, on average, for 58% of GDP in emerging Asia outside China. That is lower than in America, which has been overconsuming for years, but it is slightly higher than in Japan or the European Union. In the eight years to 2008, investment accounted for half of China's GDP growth and private consumption for less than one-third. But in most other Asian economies the relative shares were almost exactly the reverse, with consumption the dominant source of growth.
A report by the Asian economics team at Barclays Capital concludes that to reduce their excess saving, most Asian economies need to invest more rather than consume more. Higher investment, especially in infrastructure, they argue, would not only reduce current-account surpluses but also boost growth and living standards. Better roads and railways would help farmers get their produce to cities and enable manufacturers to export their goods abroad. Clean water and sanitation could raise the quality of human capital, thereby lifting labour productivity.
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Source: Asian Economies Need To Invest More
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