Asia Agrees on Need to Cut Exports, Boost Consumption
Cutting Asia’s reliance on exports for growth has taken on new urgency as the global economic crisis sends trade into a tailspin. But many economies in the region are unprepared for such a profound shift.
As some 3,000 officials wrapped up the Asian Development Bank’s annual meeting Tuesday held in Bali, Indonesia, there was no shortage of exhortations for Asia to boost domestic consumption — or risk remaining captive to the economic fortunes of the U.S. and Europe.
Declaring the era of rich Western countries having unlimited appetite for exports “has passed,” ADB president Haruhiko Kuroda urged Asia’s governments to reduce dependence on trade. Japan’s Finance Minister Kaoru Yosano said the region must lift consumer spending to “avoid economic meltdown.”
Such calls aren’t new. “Rebalancing” and charting a new “growth paradigm” have been much-discussed at Asia’s economic talkfests for years. Yet the backdrop of the global slump and the possibility of years of feeble growth in the U.S., one of Asia’s biggest markets, may add some substance to the rhetoric.
“Now that Asia has experienced the drag from slow overseas demand, countries may be more inclined to rebalance,” said David Cohen, head of Asian forecasting at Action Economics in Singapore. “There is no guarantee that the U.S. is going to get back on track anytime soon.”
The head of the U.S. delegation to the ADB, Karen Mathiasen, said the shift would be a “profound adjustment” that won’t be easily realized but is essential to sustaining a global recovery.
Japan, Asia’s biggest economy, has already outlined yet another program to move its focus from exports to domestic sectors like “green” technologies, medical services and pop culture, though details remain vague.
Prime Minister Taro Aso said last month the long-term plan aims to increase domestic demand by at least 40 trillion yen ($400 billion) within three years and add between 1.4 million and 2 million new jobs.
Japan first began trying to boost domestic demand in the late 1980s, but it remains heavily reliant on exports as households continued to be subordinated to corporate priorities.
China is also trying to turn the tide. Its $586 billion stimulus package aims to boost consumer spending by pumping money into the economy through higher spending on highways and other public works. But there too consumer welfare is sacrificed for big, politically powerful corporate interests.
Efforts to prop up recession-hit economies with massive spending won’t make much difference if they’re not combined with a fundamental change in direction, experts say.
“It would take some years before we see any significant shift” toward domestic consumption, said Cohen.
As a strategy for powering growth and lifting tens of millions out of extreme poverty, exporting has proved remarkably successful for Asia. Exports account for about 50 percent of developing Asia’s GDP, up from nearly 30 percent in 1990, according to the International Monetary Fund.
But it has come at a cost. Exporting created jobs but competition in international markets gave an advantage to the nations with the cheapest labor costs, keeping wages in poor nations low and stunting the growth of domestic service industries.
Meanwhile, China has for years plowed its ballooning reserves into low yielding assets like U.S. Treasury bills at the expense of bigger investments in schools, hospitals, roads and other infrastructure that would boost growth in the longer term.
“In small economies, it’s always easier to export to the global market” than develop their domestic market, said ADB’s chief economist Jong-Wha Lee. “But for a big country, like China, you cannot assume that you can export your way to growth continuously,” he said.
To maintain or enlarge its share of export markets, a developing country faces pressure to keep lowering prices, often through keeping its currency weak, Lee said.
“That’s not in China’s interests or global interests,” he said. “It suppresses consumption” by keeping wages low, and holds back domestic industries.
Analysts say stock and bond markets in Asia’s emerging nations aren’t yet developed enough to efficiently channel money from savers to the entrepreneurs thirsty for capital to start businesses serving their local markets.
A lack of state pension systems and affordable health insurance also keeps domestic spending in check. Knowing there’s no safety net, Asia’s workers save more than they otherwise would while also using part of their incomes to support their parents.
Saving rates in Asia are high because “people are worried about their future” said Lee, the ADB economist.
Change will be nearly impossible for some countries. The populations of Hong Kong and Singapore, both rich from exports, are deemed too small to support big industries focused on their domestic markets.
The overhaul will take time, the ADB’s president says.
“It’s not a matter of months. It’s a matter of a few years but not decades,” Kuroda said. “The U.S. economy is making such a huge adjustment, so why not the Asian side?”
5/5/2009 7:34 AM STEPHEN WRIGHT AP Business Writer BALI, Indonesia