Many would argue that export-oriented Asian economies are the paragon of economic success and an engine of global growth. Plenty of evidence supports this opinion: the economies of China and India grew by 10-11% and 6-7% annually for the greater part of the last ten years, and even when the global financial crisis induced a downturn, growth prospects in most export-oriented Asian economies stayed positive, albeit slightly less robust.
Falling consumer demand in the United States and Europe did exact a toll on export-oriented economies in Asia, and spurred the adoption of recovery programs. One of the most important features of these programs is their focus on stimulating domestic demand and supporting manufacturers supplying the domestic market. The International Monetary Fund notes that in the medium term, the global crisis has highlighted the importance for Asia of ensuring that private domestic demand becomes a more prominent engine of growth. Asian economies have plenty of tools for pumping up domestic demand. One of the important ones is the much stronger and direct role of the government in the economy. Another is the availability of huge foreign exchange reserves. Yet another is the size of the population. In China there are about 400 million persons with disposable incomes who can increase consumption and about 100 million who can afford to travel abroad.
Recovery plans implemented in the United States and Europe helped Asia by supporting demand for goods and services “made in Asia.” The Asian Development Bank expects GDP growth in Asia to top 7.5% in 2010 and stay at approximately the same level in 2011. China is forecast to continue being the main driver of growth, with GDP increasing by about 10% in 2010. All of these macroeconomic trends have been duly noted by governments, businesses, and analysts and are now part of what seems to constitute consensual thinking regarding Asia’s economic development prospects. However, some important aspects of these trends have received less attention. These collaterals include striking structural changes in many sectors, with maybe the most remarkable being in energy, investment, and wealth. Coupled with a policy oriented toward spurring growth by shoring up domestic demand, such structural changes have the potential to give new meaning to globalization and to boost the emergence of new regionalism in the global village.
Take, for example, energy. China, the second largest economy in the world, is also the second largest energy consumer. Some sources say that by 2009, it had already become the largest one, consuming 18% of total primary energy in the world, although China denies this. For the time being, almost three-quarters of this energy comes from coal, but imports of oil and natural gas have surged and continue to grow. To meet its own emission reduction targets, the Chinese government is sponsoring a variety of green energy projects, as well as efforts to increase the production and imports of natural gas, a fossil fuel that emits some 40% less CO2 and many times less pollutants in comparison to coal. Despite this effort, to meet energy demand, which is expected to grow at 6-7% per annum for decades to come, China’s dependence on foreign energy supplies will inevitably increase in almost all energy sectors. China became a net oil importer in the mid-1990s, net natural gas importer in 2008, and is now becoming a net coal importer, bringing supplies from as far away as Canada and South Africa. Chinese petroleum companies are aggressively expanding their upstream positions. With the help of loans from China, import infrastructure is being built on a grand scale: pipelines from Kazakhstan, Turkmenistan, and Russia, liquid natural gas terminals, and so on. Similar are the energy trends in India and other key Asian economies.
Or take investment. Overseas Chinese investment in non-financial sectors hit $43.3 billion in 2009, increasing in this difficult year by about 5.5%. In 2008, it grew by 63.6%, and is expected to grow by about 40% in 2010. “Acquiring foreign advanced technologies, distribution networks and energy and resources became the new focus of acquisition investment,” said the Commerce Ministry. Most of China’s overseas investments so far are in the form of mergers and acquisitions and the pattern is expected to hold in the future. Even the burst of the housing bubble is perceived as an opportunity, namely one to buy oil and gold reserves. Much of the investment was directed to unanticipated sectors, like automobiles. China is already the world’s leading car market with 12 million vehicles sold in 2009. It purchased brands such as Hummer (from General Motors) and Volvo (from Ford). In the financial sector, China has offered to buy billions of dollars worth of securities from debt-laden Greece, in addition to signing a 35-year lease with that country to expand the two main container terminals at the main port of Piraeus for a guaranteed premium of 3.4 billion euros.
One can also look at the middle class. It is in the structural change affecting what is loosely labeled as “middle class” in Asia that the greatest “unknown unknowns” lurk. If China is used as the example again, the impact of growth, investment, and rising consumption is far from being unequivocally positive or even well measured and understood. On one hand, just like in the developed world, the middle class in big cities in China is feeling unprecedented pressure, all but “forced to disappear” by the current trends in distribution of wealth. Japanese writer Kenichi Ohmae describes in his book Mishaped Society: The Crisis and Opportunity of the Disappearing Middle Class, how the poor in Japan are becoming poorer and the rich richer, all while 80% of people in the middle class slide down to a lower social class. It seems to be exactly the same in China. A bubble in housing prices does not help. Buy a house, and one discovers that it is unaffordable, but wait and it becomes even more so because the prices increasingly rise. A tense, fearful, and uneasy middle class would hardly be the pillar of society it is expected to be.
The greatest challenges to Asian export-oriented economies may thus be at home, not on foreign markets. Keeping the engine of growth revved up by boosting domestic demand has a number of unwanted and unexpected consequences, but slowing it down is risky, too. An unpalatable choice between higher unemployment and lower growth, or strong growth and rising inequality seems to have emerged. Navigating the troubled waters of today’s global economy by propping up the economy at home is not a risk-free strategy. But failure to find the path to both prosperity and stability in Asia will certainly have even riskier implications for the world at large.
Boyko Nitzov is Director of Programs for the Dinu Patriciu Eurasia Center at the Atlantic Council. Rustam Makhmudov is Deputy Director of the Center for Political Studies.*
*The Center for Political Studies (CPS) is an independent, nongovernmental, nonprofit organization promoting Uzbek social and political studies. Established in Tashkent in 2005 by Dr. Gulnara Karimova, CPS focuses under her leadership on present-day issues related to domestic and foreign policy of Uzbekistan, regional security, economic development, and international cooperation. Dr. Karimova is Ambassador Extraordinary and Plenipotentiary of Uzbekistan to Spain and Permanent Representative of Uzbekistan to the United Nations Office and other international organizations in Geneva, Switzerland.