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Source: www.asiaecon.org |

THE NEED FOR A NEW ENGINE OF GROWTH IN ASIA


The era of export-oriented growth in Asia has come to an end. For decades, successful Asian economies have heavily depended on exporting goods and services and saving large amounts of foreign reserves to sustain their economic growth.


The era of export-oriented growth in Asia has come to an end. For decades, successful Asian economies have heavily depended on exporting goods and services and saving large amounts of foreign reserves to sustain their economic growth. These economies’ GDP’s have been growing at an annual rate of 7.5 percent in the past decade, two and a half times as fast as the rest of the world.

The current global economic crisis has exposed their excessive dependence on exports. In the fourth quarter of 2007, real GDP fell by an annualized rate of 21 percent in South Korea and 17 percent in Singapore, putting the latter in its deepest recession since independence in 1965. Even China, with a slower-than-usual growth of 6.8 percent in the year to the fourth quarter, sees signs that output stagnated during the least three months.

The two main destinations of Asian exports are the United States and Europe. Thus, it is not a surprise to see that Asia’s export-driven economies such as China, Singapore and South Korea have been hit hard. Plunging export figures are also accompanied by decreasing domestic spending. Domestic spending was negatively impacted in 2008 through the surge in food and energy prices in early 2008 and the increase of interest rates that were intended to fight inflation.

It is therefore argued that the new engine for growth for Asian economies must now focus on increasing domestic demand and consumption. In recent years, consumer spending has been declining. In fact, an analysis by CLSA, a broking firm, shows that the weight of exports in GDP currently exceeds that of private consumption in six of the eleven Asian countries it tracks.

The decrease in consumer spending can be blamed on several factors. One is higher saving rates of Asian households. Another reason is that the rate of job creation has slowed down because governments encouraged more capital-intensive industries.

Governments have been acting according to this renewed focus on their domestic economies. Governments in China, Singapore, South Korea and Taiwan all have introduced fiscal stimuli of at least 3% of their GDP in 2009. Other Asian governments have similar fiscal stimuli to encourage consumer spending.

In addition, most Asian governments have unveiled plans to boost infrastructure spending. In the short term, it helps increase GDP by increasing government expenditures and providing jobs. In the long term, the improved infrastructure is expected to boost productivity.

But helping increase consumer and government spending will not be enough. Government policies must also be enacted to increase the households’ share of national income and to provide easier access to credit.

By directing their economies to focus on domestic consumption instead of on exports, Asian countries can make themselves less vulnerable to economic and financial crises elsewhere.

Source: www.AsiaEcon.org
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Source: www.asiaecon.org |


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