Asia's rise far from inevitable
By Brad Glosserman
SEOUL - According to conventional wisdom, the global economic crisis is
accelerating the transfer of power and influence from the West to Asia. The
United States has been particularly hard hit by the downturn and America's loss
is China's gain. This shift is transforming international economic decision
making. The Group of Eight leading industrialized nations, the traditional
locus of power, has been fatally wounded. In the future, goes the argument, the
most important forum will be the Group of 20.
If this analysis is correct, then, the conventional wisdom suggests, another
fundamental shift in global economic activity is forthcoming. Western demand
will no longer serve as the primary engine of growth. Instead, Asian nations
will abandon their export-oriented economic models and embrace domestic
consumption to generate growth. That will put in train another set of "knock-on
effects", the most important of which is the development of social
safety nets - welfare systems - so Asian citizens will no longer feel obliged
to save so much of their income and will consume instead.
As usual, the conventional wisdom blurs hope and reality. The ultimate impact
of the economic crisis is far from certain and the future contours of the
global economy remain unclear. Trends have emerged, but their trajectories can
Start with the assumption that the West has been harder hit by the crisis than
the rest of the world. That is true: the West has lost more wealth, but it had
more wealth to lose. And the gap between Asia and the West had been narrowing
for over a decade as a result of Asia's growth. The most important question is
which economic model will facilitate a faster, more resilient and more durable
recovery. Will the Anglo-Saxon model - hopefully modified to trim its excesses
- best the state-centered approach that prevails in Asia?
In recent discussions, I hear a hint of smugness among Asians when conversation
turns to the impact of the downturn on the US. Given the interdependence of the
Asian and US economies - the US is the final market for many Asian products and
many Asian governments hold considerable amounts of dollar-denominated assets - schadenfreude
is a mistake. The much-talked about "decoupling" of the trans-Pacific economies
hasn't happened. As long as the US economy stumbles, Asia is unlikely to
experience sustained growth.
All recognize that this relationship has to change. The massive imbalances -
the US with its trade and current account deficits, Asia with its surpluses -
are unsustainable. But recalibration will take time. Equally important, it will
require Asian governments to reverse longstanding policies and attitudes.
First, those governments have to stimulate domestic demand. One option is
infrastructure development. Asia's needs are conservatively estimated at
hundreds of billions of dollars. But while those projects are needed to spur
regional development, they do nothing to absorb the billions of dollars of
products produced in Asia and consumed in the West. Ultimately, a consumer
market is needed to replace that demand.
To do that, governments have to develop welfare systems so that their citizens
won't be compelled to save so much. Savings rates throughout the region are
high because citizens worry about having enough money when they retire.
Equally important, Asian governments have to create new relationships with
their citizens. Those governments have historically kept a tight grip on
capital to direct funds to targets it deemed worthy, whether it be favored
enterprises or "strategic" sectors of the economy. Consumption-led economies
require greater autonomy for the consumer, and this is a fundamentally alien
mindset for most Asian governments and their powerful bureaucracies.
Asian governments are deeply engaged in social engineering, whether the
rationale is nation building, economic development, or just plain
authoritarianism. Control of the purse strings is the easiest way to create and
shape desired outcomes. Loosening this grip is critical to the creation of
domestic demand driven economies, and is a step that goes against the instincts
of virtually every Asian government.
This mindset will influence the utility of the G-20, the other "beneficiary" of
the current crisis. There is little doubt that the G-8, "the rich man's club"
of nations, is past its prime. The annual summits had become little more than
photo ops that produced largely empty declarations. The G-20, which represents
some 80% of the world's wealth, is a far more representative group: its members
come from all over the world, and they represent a wider range of political,
economic and social models.
That diversity has its drawbacks, however: reaching consensus is difficult and
agreements are largely rhetorical. It should come as no surprise, for example,
that despite the group's pledge in November 2008 to avoid protectionism, a
World Bank study found that 17 members had adopted new trade-restricting
measures by the following April.
The leadership that is needed from groups like the G-20 - or any nation for
that matter - requires governments to put global interests ahead of narrow
parochial ones. Leaders provide public goods, which entail the assumption of
responsibilities and costs that sometimes go against a narrowly defined
national interest. Asian governments have shown little inclination to take up
those burdens. They demand a seat at the table - which they have earned - but
are reluctant to assume the costs that come with real leadership. Instead,
leadership looks a lot like mediation: providing a forum for discussion and
looking for lowest common denominator solutions. That is acceptable in many
cases, but it is unlikely to work when dealing with tough international issues.
The desire to engage in social engineering is problematic when it comes to
economic leadership. In this arena, rules are made to maximize the group's
welfare, not just that of an individual nation. Yet a government's pursuit of
particular social outcomes means that economic rationality isn't necessarily
guiding its decision making; politics usually is. And that narrow conception of
national interest means that it is less likely to press for solutions that fit
other countries' needs.
The most important factor shaping the global economy will be the spread of a
"green mentality." While human dignity and equality demand that millions - if
not billions - more individuals should enjoy future prosperity, transplanting
the Western model of consumption to Asia would be a disaster. "A chicken in
every pot" and "a car in every garage" - even if they aren't SUVs - would exact
an extraordinary toll on the planet.
Asia's growing middle class should not be deprived of the hard-won fruits of
their success, but those societies should not emulate the West, especially if
that means repeating its mistakes. They need to develop notions of "the good
life" and "success" that better coexist with an increasingly burdened planet.
A key component of this mindset, and one that will have a powerful impact on
future growth and economic potential, is green production. Manufacturers need
to develop production models that use resources more efficiently: this will
include leaner production methods (ones that use fewer inputs), generating less
waste, employing recyclable materials, and consuming less energy. Countries
that recognize the importance of this model and shift to green production will
be tomorrow's "winners".
Critical to this process are consumers who demand greener products. This may
well determine Asia's future: if the ordinary citizen's consciousness is
"green", then governments and industry will follow suit. If this occurs, then
one of the most powerful emerging forces in the global economy will be driving
real and substantive change. Then the conventional wisdom may prove accurate