As the West struggles to recover from the 2008 financial crisis, it is only natural that many have looked to Asia with envy. While Americans contend with a housing bust and joblessness, and Europeans suffer through their debt crisis, much of Asia (except Japan) seems to gain economic power, wealth and competitiveness year after year. The East looks like it is eating the West’s lunch.
We can see that in the current slowdown in the region. Despite Asia’s burgeoning wealth, its economies are still to a great degree dependent on the advanced economies of the West, and as the recovery there sags, so have Asian exports, manufacturing output and GDP growth.
South Korea notched its slowest growth rate in nearly three years in the second quarter.
Growth in India has fallen precipitously as well.
The IMF predicts the economies of developing Asia will expand by 7.1% in 2012 – not bad, of course, but a sharp drop from the 9.7% recorded in 2010. Clearly, there is a limit to how much Asia can defy the gravity of the global economy.
Most in Asia assume that this slowdown is a temporary, cyclical phenomenon, fixed by a bit of easy money and the eventual global recovery….
As Neumann and Mukherjee point out, Asia was able to accelerate growth through massive gains in productivity brought about by shifting cheap labor from farms to industry and adding in healthy doses of new technology provided by foreign investment.
The problem is that as this process increases wages and economies become more industrialized, new gains in productivity have to come from improvements in efficiency, advances in technology and better management, both at a corporate and a national level. That’s not easy. Not many developing countries have successfully jumped into the ranks of the truly advanced. Those that fail get stuck in what’s called the “middle-income trap,” in which they hit a ceiling in income levels before they reach the highest echelons of the global economy.
In their study, Neumann and Mukherjee uncovered a few worrying trends. First, they noted that growth has slowed down in Asian countries as they become richer. They charted income levels (on a purchasing power parity, or PPP, basis) versus average annual GDP growth over the past decade (PPP / GDP growth) and found that low-income nations grew about two percentage points faster than those with high incomes.
Malaysia, Thailand, Sri Lanka and the Philippines have not markedly improved their position with respect to the United States. China, India, Indonesia, and Vietnam, however, have graduated from low income to middle income status, while Korea, Taiwan, Singapore and Hong Kong have moved from the middle to the high income bracket.
The fact is that jumping from a poor country to a middle-income one is relatively easy. It just requires a generally stable policy framework that allows under-utilized resources (labor and capital) to get tossed into building an industrialized economy. Taking the next step from there requires a degree of reform that in certain respects is much more challenging:
- Companies have to transform themselves from simple manufacturers to innovators and designers.
- Education systems must churn out workers with creative thinking skills, not just basic skills.
- Policymakers have to forge an environment in which entrepreneurs and executives are willing to take risks by investing in R&D.
In other words, if Asia wants to keep its economic miracle alive, it needs to engage in some pretty serious reform.
The question is: Will Asia’s policymakers take those necessary measures? If they don’t, Asia could find itself mired in many of the same problems the West is facing today.