The growth of China and India has caused
significant policy shifts across Asia as countries
used to absorbing the attention of Western
politicians and investors suddenly find themselves
in the shadows, approaching obscurity. About the
only thing that now attracts global attention to
these countries tends to be of the wrong sort,
such as natural disasters and terrorist attacks.
The impact of the two growing markets in
the midst of world economy in a downward spiral
simply means that competitors will
have
to pay up dramatically to garner attention from
capital providers, let alone actually get any
money.
I wrote many moons ago about the
growing irrelevance of the Association of
Southeast Asian Nations (ASEAN) [1], which has now
been echoed by other media after the group failed
to find common ground this month against Myanmar.
Granted that any group that counts the
authoritarian government of Singapore as a
democracy has a long way to go on its definition
of human rights, the failure to agree on Myanmar
was nevertheless a pointer to the bleak future of
member countries who have lost the key economic
rationale to stay together.
More than
India, it is China that has helped to push ASEAN
into economic irrelevance, as the country vacuumed
up first the lower end of manufacturing and then
increasingly absorbed value-added industries. This
has left vast swathes of industry in countries
like Vietnam and Malaysia completely unviable in
the face of competition from the Asian giants.
Lacking the strategic depth required to
offer domestic consumption, ASEAN has found member
countries' reliance on exports suddenly poisonous.
The dilution of their trade protocols with China
helped to diminish tariff protection accorded to
key industries such as computer hardware and
automobile parts, in turn destroying the growth
potential if not the actual existence of many
manufacturing plants. That has in turn changed the
role of ASEAN from value-added manufacturing to
more basic industries, such as the export of
agricultural produce, mining and energy.
Central banks around ASEAN have failed to
catch on to the need for their domestic markets to
account for an increasing portion of economic
growth, which would have allowed them to free up
their currencies. Instead and thanks mainly to the
Asian financial crisis of 10 years ago [2], the
region's currencies are still "managed" to provide
competitive advantages for manufacturers in what
must count as one of the most futile tasks in the
global economy today.
Singapore is an
excellent example. Hoping against hope, the
country's central bank zealously guards against
any "unnatural" rise in the currency, in order to
provide some degree of staying power to its
strategic industries including manufacturing. With
Singapore’s manufacturers suffering from higher
employee costs, a miniscule domestic market and
marginal productivity gains relative to China and
India, I simply cannot see any of them surviving
under open competition. The last point goes to the
heart of ASEAN's current problems.
In the
days of yore, that is 10 years ago, ASEAN
benefited from significant competitive advantages
in the raising of capital. This in turn meant that
the region's producers could easily ramp up
capital-intensive industries, which amplified the
productivity advantage against China and India. In
the years following the Asian financial crisis,
capital has flowed freely into first China and
then India, effectively neutralizing any advantage
that ASEAN used to possess.
The gap
between the domestic technological prowess of
ASEAN and that of China and India has reversed
completely. In India for example, a domestic
company, Tata Motors, has announced that it will
introduce a car for US$2,500 [3], showing
cutting-edge engineering capabilities that will
leave the automobile manufacturers in Malaysia
gasping for breath should tariff barriers be
removed. The protected icons of Malaysian
automobile manufacturing such as Proton haven't
designed and developed a single doorframe on their
own, let alone a whole car.
The delicious
irony of this development is that the same Indian
company is reportedly the front-runner to buy the
Jaguar and Land Rover units of Ford Motors,
showing that it can raise substantial capital at
short notice even in the context of the current
crisis in credit markets.
Strategic
consequences While the strategic
consequences of China's growth have been most
dramatically felt by Taiwan, whose efforts to
remain recognized by a motley crew of Pacific
islands and South American countries have met
exponentially growing obstacles with every year,
the same effect is now being felt across the rest
of the region.
South Korea has been at
great pains to increase the contribution of its
services sector and has of late been projecting an
image of Seoul as the new financial center for
North Asia. This is because a country of 40
million people could simply not hope to both
innovate and manufacture competitively against
China for the next 20 years. This is why the
thinking among South Korean businessmen with
respect to North Korea is shaped by the need for
access to cheaper manufacturing facilities. That
has in turn imposed strictures on what any South
Korean government can do and say with respect to
the North.
India's neighbors have it
worse. Not one of them is a functioning plural
democracy to start with, with the possible
exception of Sri Lanka [4]. Even after ignoring
the niceties of democracy in Sri Lanka, the
decades-long civil war with Tamil separatists
appears to have worsened in recent days with the
killing of the political chief of the separatists
earlier this month seen as causing further
bloodshed in coming months. The deadly Tamil
Tigers could easily push the country into a sharp
recession, more than any changes in textile quotas
and the vagaries of the Monsoon on tea exports
ever could. Investors looking at returns similar
to those of India but with significantly higher
political and terrorism risks would obviously
choose against Sri Lanka in coming months.
I have already written recently on
Pakistan [5]. About the only thing that can be
added to that article is that the worst-case
scenario of Shaukat Aziz's departure unfolded on
the same day that the article was published.
Without his capable direction, I expect the
Pakistani economy to slide, with many foreign
investors likely to pull out as the political
environment worsens. It is of course not the
economy that Western countries care about for
Pakistan, as I wrote in the above-mentioned
article, but the fate of the country's nuclear
weapons. Remove these weapons from the picture and
it is unlikely that Pakistan would get any more
column space in major Western media than
Afghanistan does today.
Nepal and
Bangladesh have poor infrastructure to start with,
and political turmoil has made matters worse for
any turnaround in these countries. The troubles
caused by the Marxists and Islamic fundamentalists
in these countries [6] have caused many
industrialists to flee, despite obvious cost
advantages in place. An unstable political
environment means that foreign direct investments
are increasingly difficult to source. This is how
any downward spiral starts, keeping the poor in
desperate poverty.
The main, some would
say sole, export of these countries is people to
staff the factories of India. To be sure, that has
caused significant political backlash in India
itself, as seen in the recent attacks on illegal
Bangladeshi laborers in northeast states. Indian
media report that despite these attacks, the flow
of people fleeing Bangladesh for the relative
economic prosperity of India has only increased in
recent weeks. That is because the only thing
remaining for people left behind in Bangladesh
(and perhaps Nepal) to do is to sit around waiting
for the annual flooding of the Ganges.
Notes 1. Mid-life crisis for ASEAN
Asia Times Online, December 16, 2006. 2. Asia's scalded cats Asia
Times Online, July 7, 2007. 3. This will be the
cheapest mass produced car in the world, according
the auto industry insiders, although I do question
where in India these cars will be driven given the
parlous state of the country's infrastructure.
4. The strict definition of a plural democracy
doesn't work for Sri Lanka given the large number
of disenfranchised people in the country's restive
north, as a result of the country's patently
racist constitution. 5. Playing South Asia's World War III
game Asia Times Online, November 17,
2007. 6. The jihadi ate my
homework Asia Times Online, February
24, 2007.
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