AS the weather warms up in the Northern Hemisphere from a bitter winter, there is concern that the world is moving towards a synchronised global slowdown. This is a massive contrast to only a year ago, when the consensus was optimistic of a synchronised global recovery.
This slowdown is mostly man-made – the biggest dampener being the US-China trade tensions, which aggravated the cyclical Chinese slowdown last year on the back of reforms aimed at getting a grip on the debt overhang. As Brexit moved from tragedy to farce, Europe also slowed when populist unrests sparked off a huge internal debate on how to deal with the new unknowns.
Right-wing populists focus on European fears of being overwhelmed by the growing tide of migrants. Left-wing populists want more welfare spending that right wing conservatives reject.
Meanwhile, all emerging markets are all going through the throes of major elections or leadership changes, with major elections being called in India and Indonesia. Tensions in the Middle East and North Africa have worsened with civil wars erupting in Libya, Algeria and Yemen.
So far, East and South Asia are still the growth poles in global GDP league, enjoying GDP growth above 5% per annum, but there are signs of flagging growth. The WTO is forecasting that global trade growth in 2019 at 2.6% will be slower than global GDP growth of 3.3% as forecast by IMF – a signal that recession maybe on the horizon.
For some time, it has been apparent that the Asian Export Growth Model is already nearing the end of its shelf life. Indeed, with the arrival of robotics plus protectionism, Asia can no longer rely on a Cheap Labour+Export driven model. The US and European markets have reached maturity in terms of consumption power, whilst protectionism and automation mean that production is shifting back to home markets.
Consequently, Asian economies will have to look to their own domestic consumption to sustain growth. But for a number of reasons, most Asian governments are not ready to make that major policy shift.
The Peterson Institute of International Economics, together with the Asia and Pacific Department of the IMF, has produced a recent book on “Toward a New Long-term Growth Model for Asia (PIIE, 2018)”. In the face of secular stagnation in the advanced countries, what are the policy options and growth models in Asia?
First, the symptoms of secular stagnation in Europe and America are already evident in Japan and South Korea, which are both suffering from higher dependency ratios (more retirees to support by existing work force), as well shrinking work force. Declining interest rates, higher domestic debt burdens, and lack of domestic investments all point towards lower productivity levels, which then suggest lower future growth.
In the last 30 years, Asia has also begun to show symptoms of the free market financial disease of growing inequality. Since the 1970s, there was a swing from paying labour more to rewarding capital and short-term speculation. To illustrate, between 1973-2013, productivity in the US went up 74.4%, whereas hourly wages went up only 9.2%.
This meant that workers were paid peanuts, whereas corporate profits (and salaries of CEOs) rose disproportionately. Thomas Piketty and others show that historically concentrations in finance and landed property account for much of the inequality.
The political backlash against this inequality lie in the populist vote for change, blaming all ills on globalisation, immigrants and foreigners.
Asians, who have been exporting in the last 40 years not just their best products, as well as their top talent, to the United States, are now forced to re-think their own priorities. It is one thing to sell goods in exchange for dollars, but to be insulted and demeaned for causing America’s woes, begs a major policy shift.
These policy shifts are already showing up in subtle changes in Asian global supply chain. First, it is not just China diversifying through outward foreign investment, but many manufacturers currently based in China are already shifting to lower-wage production centres, such as Vietnam, Bangladesh, Indonesia and Philippines, to hedge their geographical risks.
Second, almost all are beginning to upgrade digitally, led by Asia’s own digital platforms, such as Alibaba, Tencent and Indonesia’s Go-Jek. The Asian global supply chain is becoming more services oriented and more regionally networked, as the main engine of growth diversifies from exports to the West to exports within Asia. Domestic consumption growth are clearly the major strategies of the population giants, China, India and Indonesia, but the 100 million class economies – Bangladesh, Philippines and Vietnam are also set to benefit from home market strengths. This leaves the smaller economies struggling to find their niche in the new multi-polar, diverse and politically divided world.
If there is one blind spot in this review, it is the lack of appreciation how climate change and the transition to a low-carbon economy will fundamentally change the consumption and production pattern in Asia as a whole. The irrefutable big picture is that as energy source move from fossil fuels to alternative energies, there will be a major redistribution of power from former oil producers to the most energy efficient economies. This is because the US emergence as a major energy producer will keep oil prices low, despite efforts of OPEC to limit production.
In short, as China and India move into middle-income consumption levels, there will be bigger strains on natural resources, particularly forests, marine reefs and food production. Those who move up the green path best will have the capacity to compete on the goods and services everyone needs to deal with the worst effects of climate change. The right path will be found through diverse competition and innovation, not any centrally planned solution. Diversity is Asia’s strength.
Higher Asian consumption is both an opportunity but also a threat, especially to our scarce natural resources. How each individual economy adapts to this new environment of worsening climate change, and the need to provide jobs and food for all, will be the major challenge for Asia.
Tan Sri Andrew Sheng writes on global economic matters from an Asian perspective.