Eight years on, Asia’s financial crisis seems a distant memory. Despite higher oil prices, growth has rebounded in many countries, private investment is gradually recovering, consumer confidence is strengthening and rising current account surpluses are swelling foreign exchange reserves, writes The Financial Times in an analytical piece.
However, the party could quickly end. The reason is that so much of east Asia’s recovery, like its pre-crisis growth, has been export-led. Its main motor is exports to China, whose own growth depends significantly on markets in the US and Europe. That leaves the region uncomfortably exposed to external shocks. The biggest threat is not from a re-pegging of the renminbi and other Asian currencies against the US dollar: most economies could absorb the competitive impact of any likely revaluation. The greater risks are, first, that simmering protectionist pressures will boil over in the US and Europe; and second, that east Asia will exhaust its capacity to fund the twin US deficits by acquiring US assets, so triggering a dollar collapse, soaring US interest rates and recession.
Asia needs to guard against those dangers. The best way to do so is to generate more of its own growth by stimulating domestic demand. Bigger investment in infrastructure is a priority. The World Bank estimates that east Asia needs to spend $1,000 billion on physical infrastructure. Many poorer countries are crying out for better schools and healthcare. Meanwhile, falling birth rates and rapidly ageing populations are creating a looming pensions problem. The crunch may be 20 years away but, to avert it, proper pensions schemes need to be set up and funds poured into them fast. One possible objection is that higher government spending could undermine the fiscal rectitude that many Asian governments have striven for since the crisis.
But with much cheap domestic capital available, there is room for more borrowing. And Asia has plenty of scope to expand private financing. As for pension funding, much of it will come from re-allocating existing savings. Far more important is how well the money is spent. Infrastructure investment in much of Asia is notoriously inefficient, often politicized and a source of corruption. These abuses need to be stopped, and the opaque procurement procedures that encourage them cleaned up.
But micro-reforms should go further. There is potentially huge untapped domestic demand in Asia for more diverse and efficient services, particularly financial services. But in many countries, their development is thwarted by rigid market barriers, primitive and anti-competitive regulation and poor corporate governance. As long as those problems persist, hopes that Asia’s embryonic pensions industry will boost productive private investment will be frustrated. Finally, Asia needs to liberalize trade further. Much intra-regional trade today consists of capital goods and products being shunted through cross-border supply networks on their way to China. The region needs to deepen integration by creating bigger local markets for finished products and for services.
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