Asia's awakening By Martin Wolf Published: September 21 2003 21:21 | Last Updated: September 21 2003 21:21 Asia's rise is the economic event of our age. Should it proceed as it has over the last few decades, it will bring the two centuries of global domination by Europe and, subsequently, its giant North American offshoot to an end. Japan was but the harbinger of an Asian future. The country has proved too small and inward-looking to transform the world. What follows it - China, above all - will prove neither. Asia is a European idea: it was invented by the ancient Greeks as a name for the nonEuropean part of Eurasia. Historically, this vast mass of territory was divided into four zones: the west, for almost 1,400 years the domain of Islam; the north, the world of the nomads; the south, the region of Hindu civilisation; and the east, dominated culturally and politically by China. To these must be added the islands off its southern and eastern coasts, the most important of which are now contained within Japan, Indonesia and the Philippines. Today, the economic impact of west Asia comes only from its oil. Russia and the shards of its collapsed empire make up Which is the largest north Asia. It is in Asia's populous east and, to a lesser degree, Asian economy, Japan or China? its south that a world-transforming change has begun. By 2002, Click here these countries generated 24 per cent of global gross domestic product at market prices, and a third measured at purchasing power parity (PPP) (see below). But they also contained 56 per cent of humanity. Their potential remains huge. In 1820, according to Angus Maddison, the economic historian, Asia (east, south and west) contained 68 per cent of the world's population and generated 59 per cent of GDP, at PPP. But it succumbed in the 18th and 19th centuries to economic stagnation, foreign intervention and outright conquest. By 1950, Asia's combined share of world GDP had fallen to just 18 per cent, even though its share of population was still 55 per
cent (see chart). Asia is waking up. Japan roused first, in the second half of the 19th century. After its defeat in 1945, it achieved a stunning ascent to developed status. Hong Kong, Taiwan, South Korea and Singapore followed in the 1950s, 1960s and 1970s. Suharto's Indonesia pursued a similar course from 1966, with some success. But the two giants, China and India, traumatised by foreign intervention, used their regained independence to pursue socialist autarky. Finally, in the 1980s and 1990s, most of the countries of east and south Asia, including the two giants, chose market-led economies, oriented towards world markets, under the tutelage of interventionist governments. Between the first oil shock in 1973 and the Asian financial crisis in 1998 the GDP per head of the resurgent developing countries of east and south Asia rose at a compound rate of 4.2 per cent a year, which meant a 2.8-fold increase in incomes per head.
This was the only region of the world whose growth after 1973 was far faster than before that watershed. Its countries are, in Mr Maddison's words, "replicating (in various degrees of intensity) the big leap forward achieved by Japan in the golden age"
of the 1950s and 1960s. Growth is accelerating: in the 1970s, according to the World Bank, real GDP per head of Asian developing countries rose at 3 per cent a year. In the 1980s, this jumped to 4.9 per cent. In the 1990s, it reached 5.4 per cent. Aggregates are misleading. Of almost no area of the world is this more true than east and south Asia. The region is diverse in its culture and beliefs. It contains the world's largest democracy, India; its largest notionally communist, but increasingly capitalist, state, China; and its most Stalinist country, North Korea. It contains China with 1.28bn people and India with 1.05bn. It possesses four more countries with populations above 100m - Indonesia (212m); Pakistan (145m); Bangladesh (136m); and Japan (127m) as well as a number of medium-sized countries in Vietnam (81m), the Philippines (80m), Thailand (62m), Burma (49m) and South Korea (48m). But it also possesses a number of small countries, from Malaysia and Nepal, with 24m people, to Bhutan with 0.9m. Above all, the region is divergent in prosperity, economic size and success. It contains five high-income economies: Hong Kong, Japan, Singapore, South Korea and Taiwan. (Australia and New Zealand would be added, if the definition were widened.) But it also includes a sizeable number of countries with real incomes per head, at PPP, that are 10 per cent or less of those of the highest-income countries. India, Vietnam, Pakistan, Bangladesh, Mongolia, Laos, Cambodia and Nepal all fall into this category. At market prices, Japan, the world's second-largest economy, dominates the region, with 56 per cent of the total GDP of east and south Asia. Together, Japan, China, India and South Korea generate 85 per cent of the GDP of east and south Asia, at market prices. At PPP, the picture is quite different. In 2002, China was the world's second-largest economy, followed by Japan and India. Together, these three countries generated three-quarters of regional GDP, at PPP.
Though a large number of countries within the region have performed superbly, this is not universally true. In the 1990s, real incomes per head rose at 8.8 per cent a year in China and 6 per cent in Vietnam. India, Singapore and South Korea achieved growth of GDP per head of between 4 and 5 per cent a year. Bangladesh, Malaysia, Sri Lanka and Thailand managed between 3 and 4 per cent. Growth of GDP per head in Indonesia, Hong Kong, Nepal (and Australia and New Zealand) fell between 2 and 3 per cent. The laggards were Pakistan, the Philippines and - amazingly - Japan, which achieved only about 1 per cent a year growth in income per head. Note the generally strong growth, despite the financial crisis. But it did hit a few countries badly, above all, Indonesia. The diversity makes generalisation dangerous. But if we look at the region as a whole, we can make out four big features of the economic landscape. First, the region's role in world trade is increasing at a rapid rate (see chart). The AsiaPacific region generated 24 per cent of world merchandise exports in 2001, up from 10 per cent in 1963 and 18 per cent in 1983. Japan's share has been declining, from 10 per cent in 1993 to below 7 per cent in 2001. But China's is on the way up, from 1 per cent in 1983 to more than 4 per cent in 2001. India lags far behind. China seems
certain to surpass Japan this decade. By 2001, its merchandise exports already matched the UK's. Internal trade among east Asian developing and newly industrialised countries grew from 2.2 per cent of world trade in 1985 to 6.5 per cent in 2001. Over the same period, the trade of these countries with the rest of the world rose from 7.2 per cent to 12.1 per cent of the total. Accordingly, by 2001, more than a third of the trade of these countries fell inside the region. China's rise is putting pressure on other countries in the region, and beyond, particularly those that rely on exports of labour-intensive manufactured goods. Between 2000 and the first half of 2003 (at an annualised rate), China's trade surplus with the US rose by $28bn. Over the same period, the combined surpluses with the US of Japan, Taiwan, South Korea, Indonesia, Malaysia, the Philippines and Thailand fell by $26bn. Second, the Asian region is the world's most important capital surplus region. According to the International Monetary Fund's latest World Economic Outlook, east and south Asia ran a current account surplus of $246bn last year, $113bn of which was Japan's. Another $68bn came from the newly industrialised countries (Hong Kong, Singapore, South Korea and Taiwan) and $65bn from the developing countries, principally China and India. Asian savers are financing high- spending Americans. Behind these surpluses lie astonishingly high savings rates. Between 1997 and 2001, the gross national savings rate of the developing countries in the east Asian region was 37 per cent of GDP (see chart). This gave the region a phenomenally high investment rate, plus net capital exports of 3 per cent of GDP. China's gross savings rate is now 40 per cent of GDP. Meanwhile, Japan has the highest savings rate among the highincome countries, at 30 per cent of GDP. At the opposite end, US savings averaged
less than 18 per cent of GDP. Asian governments have also been prepared to accumulate foreign currency reserves at an amazing rate. This is partly because they wish to preserve export competitiveness. It is also because the Asian financial crisis taught them half of the message of Polonius: a lender, but not a borrower, be. Between January 1997 and June of this year, the Asians contributed 83 per cent of the increase in global foreign currency reserves, which rose by a total of $1,079bn. Thirty per cent of the increase in global reserves was in Japan and another 22 per cent in China. By June 2003, Japan's foreign currency reserves had reached $527bn and China's $347bn. Third, the region is also a magnet for inflows of foreign direct investment. In 2002, total inflows of FDI into developing countries fell to $162bn from $209bn the previous year. Of this total, $89bn went to south and east Asia. China was the dominant destination, receiving $53bn alone, against only $3.4bn by India. The stock of inward FDI in the region was $1,305bn by 2002, out of a total of $2,340bn for all developing countries. By that year, $448bn of this total was in China. Fourth, growth has had a sizeable impact on mass poverty. According to the World Bank, the number of people living on less than $1 a day, at PPP, in east Asia fell from 470m in 1990 to 261m in 2000. In China alone, the number fell from 361m to 204m. In south Asia, too, this number fell, though much less sharply, from 466m to 432m. Where, then, does the region go now and what will its impact be on the world economy and, indeed, the world? The most important part of the answer is that even in 2002, China's GDP per head, at PPP, was just $4,400 while India's was $2,600. Since the average GDP per head of the high-income countries was $28,000, the catch-up
potential remains enormous. If the big regional players sustain stability and achieve steady policy improvements, they can grow rapidly for decades. Asia's rise, led by China, is just beginning. What, then, might such a rise imply? Consider three possibilities. The first is that, as it industrialises, China will shift the terms of trade decisively against manufactured goods, particularly labour-intensive manufactured goods, in favour of primary commodities (oil, other raw materials and even foodstuffs). This would have a big impact on the rest of the world. The second is that Asia becomes home to the world's deepest financial markets. Until the 1997 crisis, most Asian countries regarded the financial sector as a conduit for financing industry. They learnt, brutally, that the opening and liberalisation of such a financial sector is lethal. The obvious conclusion is that financial sectors need modernisation. That has started, but much more needs to be done. When it is, the new financial sectors will have access to the world's highest savings and most dynamic economies. These will be formidable advantages. The third is that India also makes the changes needed to generate growth of up to 8 per cent. Should it do so, the speed with which the centre of economic gravity would shift towards Asia could be even more astonishing. Even if it does not, Asia seems certain to become much the most important region within a few decades. Japan has already made a big difference. But Japan is a country of 127m, still traumatised by its defeat in the second world war. China has 10 times Japan's population and none of its bashfulness. Europe was the past, the US is the present and a China-dominated Asia the future of the global economy. That future seems bound to come. The big questions are how soon and how smoothly it does so. ........................................................................................................................................... The right numbers
Mirror, mirror, on the wall, which is the biggest of them all? At market prices, Japan's is much the largest economy in Asia, with a gross domestic product in 2002 of $4,266bn, while China's was only $1,210bn. At purchasing power parity, however, Japan's GDP was only $3,315bn, while China's jumps to $5,625bn. Japan's GDP per head at market prices is 36 times bigger than China's. At PPP, however, it is only six times bigger. So which are the best numbers? The answer is that for comparisons of standards of living, but not of an economy's international significance, PPP numbers are the right ones. International trade ensures that the prices of tradeable goods and services are much the same everywhere. But non-tradeables, mostly services, are much cheaper in poor countries than in rich ones. The productivity of a hairdresser is much the same everywhere, but the cost in China is far lower than in Japan, because wages (in dollars) are much lower. The solution, developed in ground-breaking research in the 1970s, was to revalue GDPs at common international prices. These are weighted averages of the prices of goods and services across countries, with the weights being the quantity of consumption in each country. These new prices are then normalised, to ensure that US GDP is the same at both market prices and PPP. Therefore, poor countries with exceptionally low domestic prices, such as China, have far higher GDPs at PPP than at market prices. Yet even though these figures do give a better picture of differences in standards of living, they can still be misleading. At PPP, China has vast expenditures on non-tradeable services and a far lower propensity to trade than at market prices. Consequently, China's huge GDP at PPP gives a grossly exaggerated picture of its current significance for the rest of the world.