What is driving the Asian dynamo?

There is no question that the "new Asia" -- primarily India and China and others in "developing" and "transition" Asia -- is poised to become one of the world's growth regions.

India's economy has doubled in real terms since 1990, while China's economy has tripled. Japan's economy, in contrast, has grown by only 15 per cent over the same time period. Recent growth rates are also impressive: over 8 per cent in the last quarter for India and 9 per cent for China over the last year.

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The most recent World Economic Outlook expects a continuation of these "new dynamics." It projects a world growth rate of about 4.1 per cent for 2004, while India is expected to grow at 5.9 per cent and China at 7.5 per cent.

Malaysia and Thailand are projected to grow at 5.3 and 5.1 per cent respectively in 2004. Vietnam is expected to grow by 7 per cent, while Bangladesh, another contributor to high regional growth, is predicted to have a growth rate of 5.8 per cent. Japan's forecasted growth, in contrast, is 1.4 per cent for the coming year.

This growth performance is even more marked in comparison to other regions of the world. Both the WEO and the 2004 Global Economic Prospects report note that Europe seems to be losing momentum, with adverse consequences for Eastern and Central European trading partners.

A recent IMF report argues that the US's growing deficit is a potential threat to the world economy. Overall, the predicted growth rate in the advanced economies, at 2.9 per cent, is substantially below the expected world average.

Furthermore, the GEP predicts mixed growth performance in Latin America. Brazil and, to a lesser extent, Argentina are expected to drive growth in that region while Venezuela and the Andean countries will most likely weigh down the regional average.

Africa, despite its recent slow growth due to low commodity prices, is the only region expected to have a growth rate comparable to new Asia. The WEO predicts an average growth rate of 5.6 per cent in 2004.

I say "poised" to become one of the world's growth regions, however, so that I can be sure to bring up some of the conditions important for realising this forecast. After all, "one faces one's future with one's past" as eminent author Pearl S. Buck has noted.

One important answer to the question of "What is driving the Asian dynamo?" is "ongoing and continued reforms" to move beyond past policy mistakes. Both India and China face important and challenging reforms to make their current high rates of growth sustainable.

India must stay the course with the current round of reforms, namely restructuring the regulatory environment for crucial infrastructure such as the electricity system, enacting laws to encourage greater fiscal discipline, and continuing with financial sector reforms.

Reducing some of the remaining restrictions embedded in industrial and labour market regulations is also an important priority. Sustaining growth will also depend on some reforms in the agricultural sector.

China's future growth depends on its ability to navigate the complex transition to democracy while at the same time continuing to move beyond the hybrid system of state-private sector partnerships to a more market-oriented economy.

The financial sector, in particular the mounting proportion of nonperforming loans on the books, is also a concern. The Bank of China's January 8 announcement that it disposed of $8.7 billion in non-performing loans last year is evidence that there is ongoing attention to these matters, but these efforts must be sustained.

Finally, China faces the challenge of formalising its de facto federal system to ensure responsible fiscal behaviour and good governance at national and subnational levels.

The sustainability of the "new dynamics" in other parts of "new Asia" also depends on the continuation of trends such as the reconfiguration of production networks within the region, further improvements in investment climates, rebounding private consumption in those economies hit by the currency crises in the late 1990s, and continued political stability.

The World Bank's half-yearly update on East Asia attributes a large part of the region's growth to such changes. It cited developments such as the fact that trade within the region accounted for 60 percent of export growth in the past year and the improving investment climate in Thailand among other countries as key contributors to dynamism.

Looking forward, the policy priorities for Thailand, Indonesia, Malaysia, Vietnam, and other developing and transition countries are to continue prudent macroeconomic policy, in particular the management of capital inflows to avoid the asset bubbles and inefficient allocation of capital of the past. Continued improvements in financial sector regulation and diversification of capital markets are important steps along this path.

Assuming that these reform agendas remain focused, then several key economic factors will drive the "Asian dynamo." First, regional trade is on the rise and I expect this trend to continue over the coming years.

Developing and transition countries in East Asia, in particular, have seen regional exports rise by 520 per cent since 1985, more than twice the growth rate of exports to the rest of the world. Half of East Asia's exports now go to other Asian countries.

While this trade is in some part consumer goods -- as we would expect given the rising incomes of the large and growing middle class -- trade in parts has been one of the fastest-growing shares of intra-regional trade. The fact that intra-regional exports of parts and components increased by more than 35 per cent over 1995-2001 suggests a growing integration of industrial production.

Trade links between East Asia and South Asia are also rapidly deepening. Trade between India and China crossed the $5 billion mark for the first time this year, with $5.33 billion worth of bilateral trade recorded from January to September of this year.

This marks a nearly 55 per cent increase over the same period last year. India's exports to China, at $2.95 billion during this time period, were over 85 per cent higher than the corresponding period in 2002.

Second, several countries in the region have important demographic advantages. While Japan and China's societies are aging relatively quickly, United Nations Population Division projections show that India will have an increasing proportion of working age adults (15-59) in its population until at least 2020.

The country is expected to have an additional 47 million people of working age (15-59) by then. The proportion of working age adults in the population is expected to be over 60 per cent for nearly the next five decades.

Bangladesh and the Philippines, similarly, are projected to have a high ratio of working-age population to dependent youth and senior citizens. The relatively young labour force also has the important advantage of being freshly educated, thus more likely to be skilled in the most current technologies.

Third, the process of globalisation and increasing market orientation of these societies is unleashing the entrepreneurial spirit and in that way driving growth. Small and medium enterprises are increasingly able to obtain financing, both domestically and internationally.

Legal and institutional are providing greater protection for intellectual property rights. Infrastructure improvements have contributed to more efficient production processes. All of the changes are ongoing but, with the pent-up innovative ingenuity, every incremental change brings added growth enhancement.

Finally, the "new Asia" dynamo is driven by comparatively rapid absorption of the latest technologies for infrastructure as well as in the manufacturing and service industries. "Technology leapfrog" is an important advantage of relatively under-developed infrastructure and production facilities.

Mobile phones in China and India, for example, are rapidly creating greater connectivity between rural and urban areas, at much less capital cost than expanding traditional landlines. Cisco reports that businesses in Asia are rapidly adopting business-to-business software and systems integration technologies, leaping directly from more traditional personal relations to the technological frontier.

These technological changes not only increase labour productivity in the directly affected industries, but can spill over to upstream suppliers. The adoption of modern manufacturing technology in the Indian automobile and defence industries, for example, has created pressure on the Indian machine tool industry to develop new products to meet their changing needs.

The Asian dynamo is thus driven by a combination of economic and political factors. The region has important natural advantages in the sheer size of some of its countries' labour forces and the geographical proximity of its most dynamic growth centres.

"All rising to great place is by a winding stair", to use the words of Francis Bacon. The key to reaping the benefits of these advantages and supporting a long-term dynamo, however, is continuation of the ongoing policy shifts toward more integrated and labour, goods, and financial markets.

(An excerpt from a speech to the World Economic Forum in Davos by Planning Commission member N K Singh)