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Europe meets Asia_India_special_no_links

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					         Asia meets Europe - Europe meets Asia




Prof. Dr. Norbert Walter
Chief Economist Deutsche Bank Group
                              1
The basic facts
           2004   US          EU-25        Asia-10      China       India
 GDP
 nominal (USD bn)  11.730       11.537         4.170       1.660         650
 growth (%yoy)         4,4          2,3           7,4         9,5         6,5
 per capita (PPP)  37.360       23.160         5.130       5.430       3.620

 Population (m)        290           457       2.870       1.300       1.080

 Exports (USD bn)     1.170      1.202         1.890        590             80
 Imports (USD bn)     1.780      1.279         1.710        530             90


                                 2
How are we connected?


   EU-15 FDI stock in
                                                                          153
    Asia-10 (2002)


  Asia-10 FDI stock in
                                       40
     EU-15 (2002)


   EU-15 FDI flows to
                                 12
    Asia-10 (2003)


  Asia-10 FDI flows to
                             1
     EU-15 (2003)
                                                                        EUR bn

                         0       20   40    60   80   100   120   140     160    180
   Source: Eurostat




                                            3
Where do the Europeans put their bucks – sorry Euros?
Judging by the FDI stock data, EU-15’s favoured FDI destination in Asia
has been the more developed economies with stronger rule of law

       Composition of EU-15 FDI stock in Asia-10 (2002)

                                       4%   3%
                                                     13%
                                                                 China
                                                                 Hong Kong
                            22%                                  Taiwan
                                                                 Indonesia
                                                                 South Korea
                                                                 Malaysia
                            2%                                   Philippines
                                                           36%
                             4%                                  Singapore
                                                                 Thailand
                                  9%                             India
                                       3% 4%

         Source: Eurostat




                                                 4
Europe provides a huge market



• EU-25 with its 450 m consumers and a GDP of roughly US Size


• EU-25 not homogeneous:
  – “old” EU-15 with GDP growth of only 1.6 in 2005 and 1.9% in 2006
  – “new” EU members from Eastern Europe with growth rates between 3 and
    6%.
  – Average per capita income around USD 20,000 with new member states
    reaching only 50% of the average.




                                  5
Asia is coming

• Asia is inarguably the most dynamic market in the world
• low GDP per capita
• Asia is by far much less homogeneous than Europe in term of race,
 culture
• Within Asia there is a vast disparity in per capita income
• Asia impresses with continuously high GDP growth rates.
• on a PPP basis, emerging Asia is undeniably a large part of the world
 economy




                                    6
Economic relations in the region: Different intensity in
Europe and Asia


 Level of intra-regional trade much higher
 in EU-15, ...                                                … but growth in intra-regional trade much
                                                    2.5       faster in Asia-10
         Asia-10                           USD tr                                                             35%
                                                                                                         %
         EU-15                                      2.0                        Asia-10                        30%

                                                                               EU-15                          25%
                                                    1.5                                                       20%
                                                                                                              15%
                                                    1.0                                                       10%
                                                                                                              5%
                                                    0.5                                                       0%
                                                                                                              -5%
                                                    0.0                                                       -10%
   1999        2000   2001   2002   2003     2004                 2000         2001      2002   2003   2004
 Source: IM F, CEIC
                                                              Source: IM F, CEIC




                                                          7
The sucess story of the internal market in Europe

• Economic links between European countries are extremely close: They
 are each others main trading and investment partners.
• Two-thirds of EU-25 overall trade is intra-EU, more than 50% of FDI stocks
 are within the EU.
• Main reason: decades of economic integration
  –   free flow of goods, services and capital (and labour)
  –   Absence of border controls reduces transaction costs
  –   Mutual recognition of standards and regulations facilitates market access.
  –   Common currency abolished exchange rate risks for investment
• These unique advantages apply to companies and investors from outside
 the EU, too.




                                           8
How does it work?

• Institutionalised policy harmonisation and close co-ordination.
  – 80% of business related regulation is collectively decided in Brussels.
  – e.g. trade and competition policy
• Still important factors for business are set on national level.
  – tax rates
  – labour costs/wages
• No “European super-state” but extended pooling of national sovereignty
  – However: Monetary integration complete ECB defines monetary policy and sets
    interest rates for 12 different countries
• EMU as a lever for political integration in Europe?




                                          9
 How far is an Asian-Union?


• Asia’s intra-regional economic linkages though still pale in comparison
 with Europe but on the rise
• prospects of integration as Asian Community or Asian Union appears
 distant.
• co-operation tends to focus more on the sub-regions
• The Asean co-operation frameworks seek to promote and facilitate trade
 and investment.
• Monetary co-operation in Asia is much more limited.
  – The Chiang Mai Initiative: liquidity assistance scheme among central banks
  – Asian bond initiative to develop a Asian bond market




                                           10
Who is investing in China?

     FDI into China by country
                                                                                                              100
      %                                                                                                       90
                                                                                                              80
                                                                                                              70
                                                                                                              60
                                                                                                              50
                                                                                                              40
                                                                                                              30
                                                                                                              20
                                                                                                              10
                                                                                                              0
      1991

             1992

                         1993

                                1994

                                       1995

                                              1996

                                                     1997

                                                                 1998

                                                                        1999

                                                                                  2000

                                                                                         2001

                                                                                                2002

                                                                                                       2003
                    EU                        US, Dollar Block                 Japan
                    Southeast Asia            Asian Tigers                     Hongkong/Macao
    Source: CEIC




                                                            11
India, relies much more on the EU and the US



          FDI into India by country
                                                                                                                 100%
                                                                                                                 90%
                                                                                                                 80%
                                                                                                                 70%
                                                                                                                 60%
                                                                                                                 50%
                                                                                                                 40%
                                                                                                                 30%
                                                                                                                 20%
                                                                                                                 10%
                                                                                                                 0%
            1992

                   1993

                           1994

                                    1995

                                           1996

                                                  1997

                                                           1998

                                                                       1999

                                                                              2000

                                                                                     2001

                                                                                            2002

                                                                                                   2003

                                                                                                          2004
                          US      EU 15    Asia 9        Japan         Mauritius     Other countries

          Source: CEIC




                                                                  12
Institutional framework: European integration vs. Asian
co-operation

                Asia                               EU


• Intergovernmental co-operation,        • Integration, incl. Pooling of
  „policy dialogue“                        sovereignty
•Policy competition                       Policy harmonisation
• Loose cooperation in monetary policy   • One currency for 12
• Ad hoc projects, agreements, policy    • Treaties and contracts
  networks
• Working groups, committees             • Institutionalism
• integration business driven            • integration politically driven




                                    13
Europe as a role model for Asia?

• Success of European integration clouded
   – competitive shortcomings
   – reluctance to structural reforms
   – Weak growth
• US and Asia enjoyed close to record growth rates
• Asia, and in particular India and China are new players in the game
• The challenge of globalisation
   – larger EU- member states show a lack of commitment to reform
   – New member states from Eastern Europe willing to reform.
• Debate over course of economic policy in Europe
   – neo-liberal course or a “Social Europe”.
• Lisbon Agenda and market orientated reform a precondition to position
 Europe as a role model




                                   14
What are we in for?

 Europe:
  –   political stability,
  –   single market on high income level
  –   currency stability
  –   well-qualified but ageing workforce
  –    good infrastructure
 Asia:
  –   fast growing markets
  –   highly motivated workforce
  –   production sites with good value for money
  –   young societies addicted to new technology and progress




                                            15
India: Top growth performer

         India
     Malaysia
        China
     Thailand
       Turkey
      Ireland
    Indonesia
       Korea
      Mexico
        Chile
         USA
    Argentina
        Spain
                                      Average annual GDP growth rate,
        Brazil
                                                         2006-2020, %
      Canada

                 0   1   2    3   4           5          6              7
     Source: DBR




                             16
India 2020: Growth scenarios
                                                                                     Baseline scenario: “Measured pace of
                                                                           6          reforms”
  GDP per capita
  USD, '000 (PPP)                                                                     - Average real GDP growth 2006-2020 = 6%
                                                                                      - Policies will be effected at a measured pace
                                      "Indian tiger"                       5          - Incorporates high social returns from expected
                                                                                      investment in infrastructure
                                                                                     Upside scenario: “Indian tiger”
        "Measured pace of
                                                                           4
                reforms"                                                              - Average real GDP growth 2006-2020 = 7.5%
                                                                                      - Pace of reforms is more aggressive and
                                                                                      implementation is deeper
                                                                           3
                                      "Reform holdup"
                                                                                      - Privatisation resumes at a similar pace as in FY
                                                                                      03/04
                                                                                     Downside scenario: “Reform holdup”
                                                                           2
                                                                                      - Average real GDP growth 2006-2020 = 4%
 2002

          2004

                 2006

                        2008

                               2010

                                        2012

                                               2014

                                                      2016

                                                             2018

                                                                    2020




                                                                                      - Reforms process slows down significantly due
 Source: DBR
                                                                                      to protracted resistance from various political
                                                                                      constituents
                                                                                      - Fiscal deficit worsens further and agriculture
                                                                                      remains dependent on the monsoon




                                                                               17
Structural drivers of growth: Population
Large population and favourable demographics                                      Key facts:
                                                                                   - Approximately 1.1 bn population
                                                                                   - Population growth of approximately 1.5%
1.6                                                                    44
      bn                                                       %                   - Young demographics: in 2002, about 33% of the
1.4                                                                    42          population was less than the age of 15 and only
                                                                                   roughly 5% was over the retirement age of 65
1.2
                                                                       40         Population growth expected to decline to about
1.0                                                                                1.3% by 2020, but will still register the 2nd fastest
                                                                       38          population growth among DBR’s sample of 34
0.8                                                                                countries.
                                                                       36
0.6                                                                               The dependency ratio (i.e., ages 15-64 of the
                                                                                   cohort as per cent of total population) will decline
                                                                       34          steadily in the coming years
0.4

0.2                                                                    32

0.0                                                                    30
                                                                                  Implications:
        1990


                 1995


                              2000


                                     2005


                                              2010


                                                      2015


                                                             2020




                                                                                    - Significant portion of the population will be within
                                                                                    the working age group, implying that India’s
         Population (left)                  Dependency ratio (right)                supply of labour will rise significantly
Source: Ministry of Finance                                                         - DBR estimates that India will add about 250 m
                                                                                    in the world supply of labour  in two years, India
                                                                                    would be adding a number of workers equal to all
                                                                                    of Germany’s labour force!


                                                                            18
Structural drivers of growth: Human capital
Level of education still lags that of others in the
region …                                                                                                        Population growth alone is not the only
                                                                                                    100          foundation of sustainable growth. The quality of
                                                            Net enrolment ratio, %                               labour plays a critical role in unleashing
                                                                                                    95
                                                                                                                 productive capacities.
                                                                                                    90

                                                                                                    85
                                                                                                                Education indicators show disparities between
                                                                                                    80           the male and female population, among the
                                                                                                    75           states, and lag by international comparison.
         IND            THA             IDN             CHN             PHL           MYS
    Source: World Development
                                                                                                                The encouraging point is the government’s clear
… but has the highest availability of skilled labour                                                             initiative to increase enrolment between the age
   Denmark                                                                                                       6 to 14 by 2020  implementation is key.
        India
  Singapore
 Philippines
         USA
   Germany                                                                                                      While India still has room to improve, it is widely
   Malaysia
 Hong Kong                                                                                                       recognised for possessing a large number of
     Russia
      Turkey                                                                                                     high-skilled workers and world class engineers.
South Korea
   Thailand
      Mexico
       Brazil
       China

                    0               2               4               6                8              10
*) Data are based on response from IM D's annual Executive Opinion Survey. High score equals high
availability of skilled labour.
Source: IM D Yearbook, 2004


                                                                                                          19
Structural drivers of growth: Openness
Rising integration in world trade …                                             Trade as a % of GDP has increased over
                                  Merchandise trade, % of GDP
                                                                     30          the years ...
                                                                     25
                                                                                … while tariffs have declined significantly,
                                                                     20
                                                                                 indicating India’s gradual process of
                                                                     15
                                                                                 opening its economy.
                                                                     10
                                                                                  - weighted average tariff has more than
                                                                     5
                                                                                  halved between 1990 and 2003, from
                                                                     0
 1970               1980               1990                   2003
                                                                                  50% to just slightly above 20%.
                                                                                  - However, the current average is still
… but still has to catch-up with its Asian
counterparts                                                                      high when compared to the average of
                                                                 200              the ASEAN-5.
  Merchandise trade,
  % of GDP                                                       150            Current initiatives:
                                                                 100              - Increasing trade alliances with ASEAN,
                                                                 50
                                                                                  China and with developed countries

                                                                 0
                                                                                  - Developing new special economic
          1990                 2000                2003                           zones (SEZ)
        India          China            Thailand          Malaysia
  Source: World Development Indicators, 2004



                                                                          20
Structural drivers of growth: Investment
Foreign direct investment has significant room to                                                       Foreign direct investments (FDI) have been low.
catch-up
                                                                                             60
         USD bn
                                                                                             50         FDI is needed in infrastructure:
                                                                                             40           - USD 75 bn in the power sector
                                                                                             30
                                                                                                          - USD 25 bn in telecommunications
                                                                                             20
                                                                                             10           - USD 50 bn in airports, seaports and roads
                                                                                             0
  1995          1996 1997                   1998          1999 2000      2001 2002        2003
                               China FDI Flows                    India FDI Flows                       Huge investments are also needed on the
     Source: UNCTAD                                                                                      agricultural sector.
Rising investor confidence                                                                                - The agricultural sector still relies on the
                                 (1)
                                                                                                          vagaries of the monsoon.
        1           CN
                    US           (2)
        2
        3            IN          (6)                                                                      - While the sector’s contribution to GDP is only
        4           UK           (7)
        5           DE           (5)                                                                      23%, it still employs 60% of the population.
        6           FR          (11)
        7           AU          (19)
        8           HK          (22)
        9            IT         (12)
       10
       15
                    JP
                    MY
                                (15)
                                (23)
                                                                          FDI Confidence                Prospects for investment are good as investor
                                                                            Index, 2004*
       20
       25
                    TH
                    TW
                                (16)
                                (20)                                                                     interest has increased  2004 AT Kearney
                                        0.0             0.5       1.0     1.5       2.0    2.5
                                                                                                         Investment Confidence Index
  *) Low values indicat e low conf idence. 2003 ranking in ( ).

  So urce: A T Kearney




                                                                                                  21
Structural drivers of growth: Macro framework
Price stability has improved, fiscal deficit
                                                                      Institutional framework is mixed
Achilles’ heel

  20                                                        10              Control of
         %
  18                                                                        Corruption

  16                                                        8
                                                                          Rule of Law
  14
  12                                                        6            Regulatory
                                                                        Effectiveness
  10
                                                                        Government
   8                                                        4
                                                                        Effectiveness
   6
                                                                              Political
   4                                                        2                 Stability
                                                                                                                                 India
   2                                             % of GDP               Voice and                                                China
   0                                                        0          Accountability                                            Singapore
       1980                  1990                2000
                                                                                          0        1       2        3        4        5        6
                    Consolidated fiscal deficit (RHS)
                                                                       Note: The six governance indicators are measured in units ranging from
                    Inflation, WPI-based (LHS)                         about -2.5 to 2.5, w ith higher values corresponding to better governance
                                                                       outcomes. Data have been rescaled to 0-5.
  Source: Reserve Bank of India

                                                                       Source: World Bank Governance Index 2002




                                                                 22
Structural drivers of growth: Summary


1. Large population and favourable demographic trends


2. High-skill level in labour force; improvements in overall education
   needed


3. Rising integration into global trade and investment


4. Improving macro policies and institutional framework




                                  23

				
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