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Wednesday 23 Aug 2017 | 12:38 | SYDNEY
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Asia's recovery: Not under its own steam?

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COMMENTS

13 May 2009 17:24

Last week, the IMF released its Regional Economic Outlook: Asia and Pacific. Following on from the World Bank’s April East Asia and Pacific Update and the Asian Development Bank (ADB)’s Asian Development Outlook the month before, this completes a trifecta of official forecasts for the region. 

One theme common to all three is the assumption that a sustained recovery in Asia is conditional on growth resuming in the developed world. The Fund report is perhaps the most blunt about this (p.13):

Historical experience shows that Asia will need improved demand from advanced economies to escape the crisis...the monetary easing and large fiscal transfers already approved will help limit the damage to the economies...However, they will not be enough to generate sustained growth in the region. 

Similarly, the Bank notes (p.42) that '...scope for faster recovery in the region will be helped by China, but will ultimately depend on the pace of recovery in the advanced economies’. Finally, the ADB says, after having canvassed the monetary and fiscal policy measures already taken (pp.45-46):

It is uncertain, however, that these conventional monetary policies and discretionary fiscal policies can continue to support demand until external demand recovers...Investment will not kick in until external demand starts to recover...

The reason for the region’s reliance on an external recovery to lift its own growth prospects is well-known: the focus of many regional economies on export-led growth means that they do very well when the global economy is expanding, but suffer disproportionately during global downturns – as has been seen in the sharp falls in regional export and industrial production numbers since the final quarter of last year. The region’s network of intra-regional supply chains turned out to be a strong transmission mechanism for the collapse in rich country demand, and the normal path for regional recovery would be to wait for that process to reverse direction.

In the meantime, why can’t China substitute for the missing demand from the developed world? After all, signs of recovery in the Chinese economy are one of the most-cited of the green shoots that optimists have been spotting in the world economy over the past couple of months. Even some in the US are looking to Chinese stimulus to deliver some growth. 

Further, the World Bank report notes that China’s contribution to global incremental output is now the largest in the world, and that thanks to China, growth in developing East Asia and the Pacific will be the fastest among the world’s regions, and the region’s contribution to global GDP growth will remain the largest in the world (both in PPP and US dollar terms). The Bank goes on to note that if China is excluded from the grouping, developing East Asia’s performance is then forecast to be lacklustre, with projected growth well below the Bank’s forecasts for Latin America, the Middle East and North Africa and Sub-Saharan Africa.

One reason China cannot be more than a partial substitute for the fall in demand from the developed world is scale: the value of China’s imports in 2007 was less than half that of the US alone, before taking into account import demand from the other major advanced economies (although growth in Chinese imports in US dollar terms in 2007 exceeded growth in US imports). 

A second explanation is to do with the composition of Chinese imports and the nature of Chinese stimulus. The IMF report argues that while domestic demand has remained resilient in China, this has had little benefit to other regional economies, because Beijing’s policy response has shifted the composition of demand away from manufacturing investment, which largely uses imported machinery and equipment, and toward public investment, which is more reliant on domestic inputs. The Bank makes a related point, which is that import demand from China is likely to shift to raw materials, capital goods and consumer products, and away from parts and components, implying a redistribution of demand across the region.

If these institutions are right in their analyses, then the familiar story of the shift in the balance of  world economic power towards Asia still remains a strictly qualified one.

Photo by Flickr user schaffner, used under a Creative Commons license.

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