This is an edited excerpt of a speech by Dr Tony Tan, deputy chairman and executive director of the Government of Singapore Investment Corporation, at the Swiss Re Forum yesterday. He is also chairman of Singapore Press Holdings.

 

ASIA has benefited tremendously from post-World War II globalisation and liberalisation trends. Strong growth in the developed world, trade liberalisation and a broadly stable geopolitical environment have enabled Asia's export-oriented development strategy to work.

The post-crisis environment challenges these basic trends which, till now, have been taken almost for granted.

Going forward, growth in the developed world will be modest at best. High unemployment increases the risk of protectionism and a reversal of globalisation. Shifting economic power could lead to conflicts among nations. Asia will increasingly face labour, natural resource and commodity constraints to its high growth strategy.

Can Asia and the West adapt to these challenges?

While we should not underestimate the difficulty of the challenges, I believe the answer broadly is 'yes' as it is in the interest of Asia and the West to work together for mutual benefit.

In the next stage of economic development, Asia's economic growth model is likely to change from depending largely on exports to a more balanced model in which private domestic demand is also a key source of growth. In some countries, especially the larger BRIC (Brazil, Russia, India, China) economies, an expanded middle class will consume more goods and services, such as TVs, computers and tourism. In many countries, extensive infrastructure investment will help meet the demands of massive urbanisation.

Asian countries and sub-regions like Asean are continuing to build strong WTO-consistent and inclusive regional trading and financial relationships and free trade areas. This will insulate them from economic shocks, further raise domestic living standards and contribute to balanced global growth.

As productivity in Asia rises relative to that in the developed countries, real wages will also rise. Asia's better growth prospects will also attract capital inflows. Both factors should, over time, lead to an appreciation of Asian countries' exchange rates.

In finance, Asia's increasing economic wealth and consumer sophistication will demand a wider variety of more sophisticated financial markets, products and institutions.

Financial systems in a number of Asian countries are still dominated by banks, with relatively undeveloped foreign exchange, bond and equity markets. Retirement savings and fund management are nascent. Banks are likely to continue to be the core of many systems, but other markets and institutions will develop.

This crisis gives financial institutions and markets in Asia tremendous opportunities to grow and develop. The globalised Western banking system, hampered by capital constraints and re-regulation, will likely not be able to intermediate the massive capital demand needed to finance Asian growth. This leaves the playing field unusually open for Asian financial institutions and markets, particularly for several years.

Fortunately, given the experience of the 1997 Asian crisis, Asian financial institutions generally came into this latest crisis much healthier than their global counterparts. Capital, liquidity and non-performing assets were at healthy levels while exposures to toxic assets were limited. Asian household, business and government sectors are also relatively un-leveraged. In order to take advantage of this opportunity, however, Asian banks and capital markets will need to quickly step into the breach.

The shift in economic power from the developed world to the emerging world could, however, raise geopolitical risks. However, I do not see Asia aggressively challenging the global order, which has benefited Asian countries for decades.

Asian countries, including China, generally share the view that a multilateral, rules-based international order is critical to their long-term growth and development. Asia's rise therefore is not inevitably a zero-sum geopolitical game where the United States and Europe must decline as Asian countries grow.

Asia will of course assert its views on global political and economic governance but will do so as a stakeholder wanting to strengthen international institutions and cooperation.

For instance, Asia's voice in global affairs will rise in tandem with its economic power. The governance and functioning of the international order - the Group of 20, World Bank, International Monetary Fund, World Trade Organisation and the United Nations - will also be reformed to take into account Asia's rise. But this is a rebalancing to take into account the growing importance of the emerging world and not a supplanting of the older order.

Asia continues to believe in the benefits of open economies and globalisation.

The region also benefits from regional integration, whether through Asean, Asean+3, or Asia-Pacific Economic Cooperation (Apec). For many in Asia, the Great Crisis of 2008-09 has reinforced the benefits of regional cooperation to promote trade, investment, markets, and provide avenues for conflict resolution.

To sum up, Asia is recovering well from the Great Financial Crisis of 2008-09. The crisis seems likely to accelerate the shift in economic power from the developed to the emerging world.

Asia is at the cusp of the next stage in its development. There will likely be bumps along the way, perhaps a few crises, but if we learn the right lessons from history, especially those of the recent Great Crisis, Asia will innovate and adapt.

Source - The Starits Times (http://www.straitstimes.com/Review/Others/STIStory_557145.html)

No dramatic mass exodus of production to cheaper countries predicted by forecasting service Manufacturing will remain a major part of the Chinese economy for at least the next 100 years despite strikes and increased labor costs, according to a leading economics research body. Manufacturing currently makes up around 47 percent of China's gross domestic product (GDP), compared with 23 percent in the United States. Alexander van Kemenade, an analyst with the China Regional Forecasting Service for the Economist Intelligence Unit (EIU), said speculation of a mass exodus of manufacturers to cheaper locations such as Vietnam and Bangladesh was alarmist. "I would say it was very overblown. I would give it 100 years maybe before China has the same level of manufacturing as the United States," he said. There is little doubt that increasing labor costs in China will have some impact over time. The hourly labor rate for apparel manufacturing in China, according to EIU statistics, has increased by 14 percent since 2009 to $1.84. It now costs nearly four times as much to employ a Chinese worker in the garment sector than someone from Vietnam, where the hourly labor rate over the past year has increased by just 2 percent to 49 cents. China still has cheaper labor rates than India, which is keen to develop a bigger manufacturing sector to match its already thriving service industries. The hourly rate in its apparel industry is $2.99, up 17 percent over the last year. "I think the companies that will be looking to move to other countries such as Vietnam, India or Bangladesh are those in cost-sensitive industries including garment production," said van Kemenade. "It is feasible for them because they want to make 20-year decisions. Their concern about China is that if they move inland to other provinces they will face similar pressures as they currently do in the richer coastal provinces in just a few years. Labor rates and land prices will increase. They will then have to rethink their strategy again." No one can deny that increasing wage rates in China is not a significant issue. The average annual manufacturing wage in Guangdong, China's industrial heartland, increased by 144.2 percent from 1998 to 2008, according to EIU figures. The rises were even greater in the bordering autonomous region of Guangxi Zhuang, and Hunan and Guizhou provinces, all within the Pearl River Delta basin. Manufacturing wages in Hunan increased by 263.2 percent, while the rises in Guizhou at 258.8 percent and Guangxi at 244.2 percent were not far behind. The picture in the rest of the country is very little different. Wage rates have soared in the Yangtze River Delta too. The annual manufacturing wage in Shanghai in 2008 was the highest in the country at 42,311 yuan, increasing by 226.8 percent over the 10-year period. There was a similar story in the neighboring Yangtze provinces of Zhejiang and Jiangsu, where wages rates rose by 186.2 percent and 247.2 percent, respectively. Those companies hoping to get a cheaper deal on labor costs in the more western provinces such as Sichuan would also find it difficult. The average annual manufacturing labor rate there of 22,046 yuan is only slightly lower than in Guangdong itself. "The story of the 1990s was the east getting richer and the west more or less remaining stagnant. What we have been beginning to see since the beginning of the millennium has been the gradual disappearance of regional disparities. Income levels are growing more or less at the same level now," added van Kemenade. In the southwest major city Chongqing, a municipality governed in its own right separately from the Sichuan province and the world's fastest growing urban center, annual manufacturing labor rates have nearly trebled over the 10 years from 6,392 to 24,131 yuan. Even in remoter regions wages have soared, rising by a massive 335.9 percent in Inner Mongolia from 5,127 to 22,352 yuan. It is a similar story in Tibet with manufacturing pay increasing by 247.2 percent from 5,612 to 19,486 yuan. The obvious implications of this are that it is becoming more difficult for both foreign and Chinese companies to switch production to other parts of China to save significantly on labor costs. "A lot of people tend to think when you can just head further inland you start hitting upon these bottomless pools of surplus labor enabling you to hold costs down indefinitely. W really don't see that happening," said van Kemenade. The analyst added that the manufacturing emerging in the major inland cities such as Chongqing did not tend to be companies seeking ever cheaper labor but often those looking to set up advanced manufacturing facilities aimed at producing goods for the China market. "The major investment, much of it foreign, that you have seen in these inland cities has not been the type that typically follows the cheapest sources of labor. It has been fairly high value-added advanced manufacturing," he said. China manufacturing still largely only occurs, according to van Kemenade, east of a line from Kunming in Yunnan province in Southwest China, going up through Chengdu, the Sichuan capital, to Xi'an and then Beijing. "West of that is more or less no-go land. That line is very much the final frontier for investment unless it is resource-specific," he added. "I think you would have issues getting your typical expatriate staff out to Inner Mongolia or Tibet." Van Kemenade said there remained many major advantages for manufacturers to be located in the Pear River Delta, despite increasing wage rates. "You are close to ports, the transport links are very sophisticated, the logistics work well and there is a clustering effect in that you can source just about any component from the existing manufacturers there," he said. Van Kemenade said China still had a lot of strengths as a manufacturing heartland and any move away to other countries in Southeast Asia would happen only gradually. "It is a gradual trend and it will still be a gradual trend in 10 to 15 years. I think by then you could have a situation where you have a minimal number of garment factories in China but you can be pretty sure there will be a sizeable manufacturing sector. This sort of thing does not change overnight," he said.

Source:China Daily http://en.ce.cn/Business/Macro-economic/201007/19/t20100719_21629466.shtml

By Srinivasa Madhur, For The Straits Times

 

 

EMERGING East Asia is virtually assured of a V-shaped recovery from last year's economic slump, though it is still too early to proclaim that the 'V' stands for 'victory'.

But with the recovery on track, it is now time to unwind the policy stimulus that has helped power the recovery. Ensuring the recovery is sustainable will depend heavily on the timing, policy mix and pace at which economic stimulus is withdrawn.

As governments begin to unwind policy stimulus, a 'Money First' strategy - in which policymakers normalise monetary policy first and consolidate fiscal policy subsequently - is appropriate for most of emerging East Asia.

Considering the need to rebalance the region's sources of growth, there is merit in normalising monetary conditions through a judicious mix of currency appreciation and interest rate adjustments rather than entirely through policy rate hikes.

The pace at which economies unwind stimulus should depend on the speed of recovery as well as evolving risks. Governments must be sure the private sector is strong enough to take over the slack created by the withdrawal of policy stimulus.

In China, the authorities are carefully pulling back by putting a cap on bank lending, increasing bank reserve requirements and giving the yuan a bit more flexibility. The aim is to contain inflationary pressures, avoid overheating and keep potential asset bubbles (real estate) in check while maintaining robust growth.

In South Korea, Malaysia, Singapore, Taiwan, China and Thailand, normalisation has already begun, and should continue at what appears to be an appropriate pace.

And in countries that have yet to begin, such as Indonesia, the Philippines and Vietnam, unwinding policy stimulus may need to start soon.

In every case, unwinding policy stimulus should be in step with the speed of the region's recovery, yet mindful of the risks facing the overall global economy.

With households, firms and even governments in advanced economies in North America and Europe deleveraging and restructuring their balance sheets, demand for the products 'Factory Asia' produces can no longer be counted on as a primary source of growth.

Without shunning globalisation or turning inward to a 'Fortress Asia', developing economies in the region will need to increase cooperation and deepen economic integration, using their huge savings to finance cross-border infrastructure, ease intraregional trade and investment, and develop more sophisticated financial markets.

The ultimate goal of this integration agenda should be to rebalance the sources of growth more towards domestic and regional demand while keeping the region firmly connected to the rest of the world.

The reason emerging East Asia has done so well in the face of global adversity is simple: It was not part of the problem; it had learnt its lessons well from its own 1997-1998 Asian financial crisis; its governments reacted quickly with monetary and fiscal stimulus; and both businesses and consumers retained confidence that the region would continue to prosper.

The Asian Development Bank (ADB) estimates the combined gross domestic product of the region will rise 8.1 per cent this year, much higher than last year's 5.2 per cent, and well above the 6.7 per cent growth the region posted in 2008.

That is quite credible considering the world is only gradually climbing out of its biggest financial meltdown and economic crisis since the Great Depression.

China, of course, has been at the epicentre of emerging East Asia's economic upsurge. Its policy stimulus package was by far the region's largest. First-quarter growth this year was a torrid 11.9 per cent. The second quarter was tamer at 10.3 per cent, with new investment last year accounting for nearly 90 per cent of growth. ADB predicts the trend will continue with economic growth this year at 9.6 per cent, and 9.1 per cent next year.

After being badly hit by the global economic crisis in the early part of last year, the newly industrialised economies of Hong Kong, South Korea, Singapore, Taiwan and China are forecast to turn in 6.2 per cent growth this year, moderating slightly next year. And economic prospects of the four middle-income Asean economies - Indonesia, Malaysia, the Philippines and Thailand - look good this year after last year saw their worst performance since the Asian financial crisis.

Leading indicators continue to improve, with strong industrial production growth and rising consumer confidence. This is also true of most other Asean economies. Together, ADB expects Asean to expand by 6.7 per cent this year.

Emerging East Asia's 'V for victory' may still be a way off, but for the moment it is forging the right path.

The writer is senior director of the Office of Regional Economic Integration at the Asian Development Bank. This week, the ADB launched its Asia Economic Monitor 2010 report, a semi-annual review of Asian growth and policy issues.

Source - The Starits Times (http://www.straitstimes.com/Review/Others/STIStory_556361.html)

By Linda Lim

 

AFTER recovering from the Asian financial crisis of 1997-98, East Asian economies began running consistently large current account surpluses.

The accumulated foreign exchange reserves served as a buffer against potential speculative attacks on their now-floating currencies, and allowed management of those currencies to reduce volatility and maintain the international competitiveness of their heavily export-oriented economies.

Because the United States was the largest final destination market for their exports and home of the world's reserve currency, a large proportion of these Asian reserves were invested in US dollar assets - especially US Treasuries but also corporate assets via Asia's sovereign wealth funds.

The resultant capital inflow into the US and global markets, together with the US Federal Reserve's easy money policy, kept US and world interest rates low, funding ever-increasing US and some European budget deficits and household debt.

Cheap money fuelled 'financial innovations' such as sub-prime mortgages and risky assets, which led to a crisis.

The capital flow from Asia (and other commodity-exporting economies) also propped up the US dollar and depressed Asian currencies, maintaining Asian export competitiveness, current account surpluses, and reserve accumulations, while expanding US current account deficits and national indebtedness.

US Fed chairman Ben Bernanke identified a 'global savings glut' as the cause of these global macroeconomic imbalances. With only a few exceptions, excess public sector savings in the form of persistent government budget surpluses are not the source of the high savings in East Asia, leading to the observed current account surpluses.

Japan notably runs large government budget deficits and has a huge national debt, but still exports more than it imports, due to high savings in the private sector. The basic question is: Why do East Asians save so much, particularly at low levels of income?

Demographic profile is a major reason. With the bulk of the population in the prime working-age years, and high rates of female labour force participation, dependency ratios have been relatively low, leading to high household savings and low shares of consumption in gross domestic product (GDP).

With few descendants to support them in retirement (and high life expectancy in many Asian countries), as well as weak or non-existent social safety nets, there is a high rate of precautionary savings not only for retirement, but also for health care and children's education.

Some economies - Singapore, Malaysia, Hong Kong - have forced-saving schemes or national 'provident funds' with high rates of mandatory contributions out of earned income.

Some researchers have also identified the high cost of residential property - as measured by ratios of housing prices to years of annual income that are much higher than international norms at given per capita income levels - as a contributing factor to high savings and low current consumption rates.

Underdeveloped and inefficient financial sectors in many Asian countries cause low returns for savers, requiring more savings to yield the income required for retirement.

Widening income inequality, with China, Hong Kong and Singapore now at the US levels of the Gini coefficient, also concentrates income among high-income earners who tend to be high savers.

Finally, high corporate savings are a major contributor to high aggregate national savings. In Asia, these result from a number of structural features of the corporate sector. Large, low-income China and small, high-income Singapore represent the two extreme cases, with the lowest shares of labour (wages) in national income, and consumption ratios at or below only 40 per cent of GDP, versus the Asian average of 55 per cent.

Moreover, in each case, these shares have steadily declined over the past two decades. Malaysia ranks a close third.

Both China and Singapore are characterised by high and rising shares in GDP of state-owned enterprises or government-linked corporations, and of multinational corporations - neither of which have built-in incentives to distribute corporate income where it is produced, preferring reinvestment for growth.

Multinationals are often beneficiaries of host country tax breaks or other investment incentives that reduce local income distribution, and are obligated to remit income overseas to their predominantly home-country shareholders.

Elsewhere, the private sector is dominated by closely held public companies or family-owned conglomerates, both of which have little shareholder pressure or motivation to distribute rather than accumulate and reinvest corporate income for growth and expanded market share.

Most of the causes of high Asian household and corporate savings are structural rather than policy-driven, and cannot be easily or quickly unwound by government policy.

Demographics obviously take a long time to change but have an impact when they do. As a population ages and large cohorts retire, they dissave.

Financial sector reform should help rebalancing by increasing the efficiency and diversity of financial instruments, so that less savings are required to earn a target return for the investor.

After the Asian financial crisis, this did occur in some countries, most notably South Korea. Elsewhere, banks remained dominant, becoming more conservative in their lending practices after the Asian financial crisis. Furthermore, the experience of the crisis made China reluctant to pursue capital account liberalisation.

Still, demographics and financial sector reform are probably responsible for the increased share of private consumption in GDP between 1990 and 2008 in the largely domestic private sector economies of Japan (rising from 53.2 per cent to 57.8 per cent), Taiwan (54.6 per cent to 61.4 per cent), South Korea (50.9 per cent to 54.5 per cent) and Hong Kong (57.1 per cent to 60.5 per cent).

Consumption also increased (41.6 per cent to 45.2 per cent) but remained low in Malaysia over this period.

The difference between Hong Kong and Singapore is striking, with private consumption in the latter declining from 46.3 per cent of GDP in 1990 to 38.6 per cent in 2007. This is surpassed only by the decline in China from 50.6 per cent to 36.4 per cent.

Besides the practice of running surplus government budgets in Singapore compared with Hong Kong, the decline in the wage and consumption share is probably due to the rising share of foreign labour - which, like multinationals, has an expected higher propensity to save its income for repatriation rather than domestic consumption.

The lack of a social safety net might partly explain high savings in relatively low-income China, but cannot explain continued high savings in high-income Singapore and Japan, where safety nets are adequate and financial markets relatively well-developed.

What about currency appreciation? In theory, this should reduce the relative share of export to domestic market production, while increasing the share of imports for consumption, thus shrinking current account surpluses and foreign exchange reserve accumulation.

However, this has not happened despite the near-continuous appreciation of Asian currencies against the US dollar over the last three decades, particularly in Japan and Singapore.

The last two decades in East Asia have seen savings' high share of GDP decline in the 'more democratic' economies of Japan, South Korea and Taiwan, but also in non-democratic Hong Kong. This is probably mostly due to demographic reasons largely beyond the control of government policy, with the exception of Singapore's migrant labour policy.

But the inevitable acceleration of ageing and retirement will eventually lead to lower savings and thus to macroeconomic rebalancing away from export production and towards domestic consumption.

Financial sector liberalisation has helped rebalancing, but is still incomplete and likely to continue being retarded by a combination of post-Asian financial crisis and post-global crisis risk aversion and ideological scepticism, nationalist objections, and resistance by domestic financial institutions to increased competition.

Witness, for example, Japan's backtracking from the proposed privatisation of its postal savings institution, South Korea's legal attacks on foreign transactions in its financial sector, and the continued dominance and even expansion of China's state-owned banks.

There is no evidence from East Asia to date that expanding social safety nets will significantly reduce savings, given that they have not done so in Japan and Singapore. There may also be governmental hesitation to do so, given ageing populations and the recent negative demonstration effect of fiscally unsustainable safety nets in Europe.

Corporate restructuring necessary to reduce high corporate savings rates is likely to prove most politically intractable, requiring governments to relinquish state control of economic resources and activity.

On the other hand, the experience of the global crisis and international pressure to rebalance to prevent further crises provide a political stimulus and awareness of the need for multilateral collective action as well as national rebalancing.

The writer, a Singaporean, is professor of strategy at the University of Michigan's Ross School of Business. This is an edited excerpt of an article that appeared in Rebalancing The Global Economy: A Primer For Policymaking, edited by Stijn Claessens, Simon Evenett and Bernard Hoekman.

Source - The Straits Times (http://www.straitstimes.com/Review/Others/STIStory_555488.html)