Asean, China and India together have a population of over three billion, about 45% of the world's population and their share of international trade accounts for about 20% of global trade. With this sheer size, their growth is important to the global community.
The growth of both advanced and emerging economies has declined and remained stagnant since the global economic crisis due to cyclical and structural factors. Cyclically, a number of countries are still dealing with the aftermath of the crisis, with high debt overhangs, high unemployment, and weak financial sectors. Excess supply and capacity in countries such as China take time to wear off to make room for new investments. Structurally, several traditional manufacturing sectors lag behind rapid technological changes and have difficulties making the necessary adjustments in their production and products. These factors are not conducive to investment.
In addition, the service sector, which tends to be more labour intensive, has become increasingly larger and tends to bring about smaller investments. Lower investment and productivity improvements have resulted in a decline in potential growth all over the world, which will unfortunately persist in the near future. However, one sees a few potentially powerful growth engines for the medium term from the following contexts of Asean, China and India:
Tarisa Watanagase was governor of the Bank of Thailand (BOT) from 2006-2010. This article appeared in the May, 2016, bulletin of the Official Monetary and Financial Institutions Forum.
These countries are well integrated with the region and the world. Integration is expected to further increase with the expansion of Asean and other FTAs, both multilateral and bilateral. Discussions have been under way to expand Asean to Asean plus 6 to include China, Japan, Korea, Australia, India and New Zealand to agree on a framework for Regional Comprehensive Economic Partnership (RCEP). Other FTAs that are in the pipeline include the Asean-Hong Kong FTA and Thailand-Pakistan FTA. Four Asean countries, ie, Brunei, Malaysia, Singapore and Vietnam have joined the Trans-Pacific Partnership (TPP) and more from the region are expected to join. Hence, there is no reason not to expect further trade expansion along with increased integration.
They are large markets with very sizeable populations. Urbanisation has also been remarkable. In fact, as of 2014, China's urbanisation, with 54.4% of its population residing in urban areas, already exceeded the world average of 53.6%. Asean and India, especially the latter, have significant room for further urbanisation. Over the years, these countries have also seen declining poverty, resulting in a consistently increasing share of middle class populations.
There is substantial room for an increase in consumption. Compared to advanced economies, Asean, China and India all have lower private and government consumption as a percentage of GDP. Large populations, continued urbanisation and the expansion of the middle class, discussed above, represent good opportunities for consumption to catch up with that of advanced economies.
Infrastructure in these countries is grossly inadequate. For example, 2012-2013 logistic costs per GDP in Indonesia and China at about 24% and 18%, respectively, were significantly higher than in the US, at about 9% and Japan, at about 11%. There is, therefore, substantial room for infrastructure improvement in areas such as electricity, transportation, telecommunications, water and sanitation. The ADB has put the need for infrastructure investment of East, Southeast and South Asia between 2010-2020 at close to US$8 trillion (281.7 trillion baht).
Three engines for the future growth of Asean, China and India can be identified. They are exports, consumption and infrastructure investment. Exports must be technology and innovation driven to keep up with the fast changing consumer preferences as a consequence of technological changes. Consumption must be based on higher income, not debt creation, for it to be sustainable. Infrastructure investment must cover both traditional and technological infrastructure.
As much as there are opportunities for growth, there are significant challenges to ensure that these engines for growth work properly:
First, given limited resources on the supply side, growth must be generated by productivity increases. Infrastructure investment will make an important contribution towards this end. It is equally important to build capacity and capability in technology, innovation and human resources with the right skills, which in turn, require educational reforms and efforts to increase R&D, reduce the digital gap both domestically and internationally, and move up the value chain. These are all long-term efforts that need patience, resources and policy continuity, all of which could be easily disrupted.
Second, countries have different risks and challenges with regards to consumption growth depending on the average age of their populations. Rapidly ageing populations in China and Thailand, for example, may have fewer incentives to consume if they believe they have not built up sufficient wealth for retirement. Substantial fiscal spending for social welfare and safety nets may be needed to care for the elderly and at the same time entice people to consume more if they perceive that lower savings are needed for retirement, with a social safety net becoming available.
Maintaining fiscal sustainability will be a challenge, given other developmental needs as well in an emerging economy. On the other hand, the young populations in Cambodia, Laos, Myanmar and Vietnam (CLMV) and Brunei may have higher consumption needs in relation to their incomes in the early life cycles. The challenge here is to ensure the seeds of financial instability are not sowed along the growth path from an excessive buildup of consumer debt as a consequence of lax monetary and fiscal policy and financial institutions' imprudent lending practices.
Third, getting sufficient funding for infrastructure investment will be a challenge. The ADB alone will not be able to support the large funding needed. With the launch of the AIIB, it is important that these international institutions work closely together to better support these countries' financing needs.
Last but not least, while making long-term efforts to ensure the proper functioning of future growth engines, countries must be mindful of the significant financial instability risks from spillovers that they face currently and the need to maintain resilience. Substantial capital inflows result in excessive liquidity, a potential source of financial imbalances if not dealt with effectively. Currencies may also appreciate beyond the country's economic fundamentals, weakening export competitiveness. Abrupt and drastic outflows can be an even bigger problem, resulting in substantial losses of international reserves and investor confidence.
Since the time of the Asian financial crisis in 1997, Asian countries have become much more resilient, attributable to both real and financial sector reforms and, learning from the crisis, heightened risk awareness and risk management, both of the private and public sectors. International reserves are also much higher as a means of self-insurance. So the risk of a major crisis in the region is currently low. In addition, regional safety nets have been put in place. Asean plus 3 has been working on the strengthening of CMIM (Chiang Mai Initiative Multilateralisation) with more resources and flexibility in financing for member countries in times of emergencies, although the facilities have not been tested. Amro (Asean plus 3 Macroeconomic Research Office) is now an international organisation with full independence for its research, member surveillance and development of regional bond and capital markets.
Notwithstanding the lower systemic risk, one cannot be complacent since the global economy is still weak, markets are highly volatile and investor confidence is fragile. The current policy uncertainties and more vigorous policy normalisation going forward will continue to have spillovers to emerging economies.
It's important for countries to continue building economic resilience with an appropriate mix of monetary and fiscal policies, and if necessary, macro-prudential measures. Areas that are susceptible to financial imbalances, such as the property market, stock market, household and corporate debt must be monitored and the buildup of financial imbalances dampened. Supervision must be adequate to ensure a strong and well-functioning financial sector. Without financial stability both in the near and medium term, future growth will only be jeopardised.