Asia’s moderate boom

Many developing Asian countries have experienced rapid and yet relatively stable economic growth over a number of years. In other words, this has not been a short-term unsustainable boom associated with the expansionary phase of the business cycle – with aggregate demand expanding more rapidly than aggregate supply. Rather it is the result of a rapid growth in aggregate supply.

Over the period from 2000 to 2011, several Asian countries experienced average annual growth rates of over 4% and some, such as China and India, much more than that, as the following table shows. The table also shows forecasts for the period from 2012 to 2017. The high forecast growth rates are based on a continuing rapid growth in aggregate supply as the countries invest in infrastructure and adopt technologies, many of which have already been developed elsewhere.

Average annual economic growth rates

Source: World Economic Outlook Database IMF (October 2012)

But for aggregate supply to continue growing rapidly there must also be a stable growth in aggregate demand. With the recession in the developed world, some of the more open economies of Asia, such as South Korea, Taiwan, Malaysia and Singapore themselves suffered a slowdown or recession as demand for their exports fell. The Malaysian economy, for example, contracted by 1.5% in 2009.

Given the continuing macroeconomic problems in the developed world, many Asian countries are seeing the need to rebalance their economies away from a heavy reliance on exports. China, for example, is putting more emphasis on domestic-led demand growth. Others, such as Indonesia, have already embarked on this route. As The Economist article states:

Household consumption contributed half of the growth of just over 6% Indonesia enjoyed in the year to the third quarter (its eighth consecutive quarter of growth at that pace). Exports have fallen from about 35% of GDP ten years ago to less than a quarter in 2011. Developing Asia’s combined current-account surplus, which reflects its dependence on foreign demand, more than halved from 2008 to 2011 and is expected to fall further this year.

The continuing success story of many developing Asian economies thus lies in a balance of supply-side policies that foster continuing rapid investment and demand-side policies that create a stable monetary and fiscal environment. A crucial question here is whether they can emulate the ‘Great Moderation’ experienced by the Western economies from the mid-1990s to 2007, without creating the conditions for a crash in a few years time – a crash caused by excessive credit and an excessively deregulated financial system that was building up greater and greater systemic risk.

Articles
Asia’s great moderation The Economist (10/11/12)
Asia Seen Nearing End of Slowdown on China Recovery: Economy Bloomberg, Karl Lester M. Yap and Michael J. Munoz (15/11/12)
An Insider’s China M&A Notes: What Economic Slowdown? CFO Innovation, Peter Hall and Yuan Peng, The Valence Group (31/10/12)
Building a stronger Asia The Star (Malaysia), Cecilia Kok (24/11/12)

Data and reports
World Economic Outlook Database IMF (October 2012)
OECD: south-east Asian economic outlook to return to pre-crisis levels Guardian datablog, Nick Mead (18/11/12)
Southeast Asian Economic Outlook 2013, Executive Summary OECD (18/11/12)
Asia Economic Outlook BBVA Research (Q3 2012)

Questions