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Asian Economy at Critical Crossroads

John West
AUSPECC/ Asian Century Institute

The East Asian economy is at a critical crossroads, according to the Pacific Economic Cooperation Council's State of the Region report. This PECC report reviews and analyzes the forecasts of major inter-governmental organizations, the Standard Chartered Bank and Oxford Economics. It makes an important contribution by virtue of its synthesis of business, academic and official perspectives, as well as the results of a survey of regional opinion leaders from all three groups.

The broad lines of consensus forecasts are well known. China's growth will be in the 7-8% range in 2013-2014, Japan in the 1-2% range, and the remarkably resilient ASEAN economies around 5-6%. But these forecasts are not written in stone. The risks and uncertainties for Asian futures are perhaps much greater now than they have been for a long while.

For example, respondents to the opinion survey considered a harder than expected landing of the Chinese economy to be the biggest risk to the region's growth. Indeed, China must "rebalance" its economy away from its export- and investment-driven model toward private consumption, as the Chinese leadership knows very well.

But as PECC says, "China will need to take far more aggressive steps to achieve this. In recent years, consumption has been growing only at around 3 per cent a year -- well below the growth of the whole economy." China's rebalancing imperative cannot be effectively achieved, while income inequality continues to rise.

It is difficult to increase consumption when incomes of the poor increase much less than the rich. Inequality is an issue afflicting the whole region. Quite rightly, PECC gives Asia a "red card" on this issue, citing the risks for social unrest and stability, as well as for support for open trade and investment.

Japan's "Abenomics" holds great promise and "may" revive the Japanese economy. But the necessary structural reforms of Abe's third arrow represent a daunting agenda. According to PECC, "These structural reforms include the relaxation or elimination of government restrictions as well as anticompetitive and onerous laws and regulations that enhances the vigor and efficiency of private-sector economic performance, the establishment of strategic special economic zones in which companies can enjoy preferential treatment in terms of tax and regulation, the expansion of investment in the energy sector, the augmentation of agricultural product and food exports, and the competitiveness of domestic universities".

As your eyes glaze over this mind-boggling list, don't forget that the international community has been pushing Japan to reform for decades now, with limited results. Of course, the moment for action could now have finally arrived. However, the emphasis on special economic zones suggests that comprehensive reform at the national level is still rather difficult to achieve.

PECC also expresses concerns at ASEAN's slow progress towards realizing its Economic Community by 2015 -- "there are questions on the nature of the economic community that the region will deliver". Particular challenges are "non-tariff barriers such as customs surcharges, internal taxes, administrative price fixing, single channel of imports, requirement of product characteristics, and labelling".

As PECC says, "the ASEAN Single Window is also challenged by regulatory incoherence and inefficiency". This is all very technical stuff. But you can never get a single market unless you clean up these murky issues. And ASEAN's penchant for "flexibility" can undermine the very effectiveness of its agreements.

Asia's massive infrastructure deficits in areas like transportation, water, electricity, sanitation, and above all, education are not only holding back economic development, but also contributing to inequality. The Asian Development Bank has estimated that for the present decade, developing Asia needs to invest around $8 trillion in infrastructure. Meeting these infrastructure requirements will require substantial engagement of the private sector, most notably through public-private partnerships.

But most developing Asian countries are lagging way behind in PPP readiness, for which strong macro-economies, sophisticated financial systems, and strong and clear legal and regulatory environments are necessary.

PECC's deepest worries concern trade and investment liberalisation, both the raison d'être of PECC, and the mantra of the Asia-Pacific region.

PECC's survey of regional opinion leaders reveal a disturbing lack of optimism and even interest in the WTO's Doha trade talks. The international consensus for cooperation has diminished since the onset of the global financial crisis, despite the pressing need for multilateral trade liberalization. At the same time, most Asian countries are now participating in either or both of the Regional Comprehensive Economic Partnership (RCEP) and Trans-Pacific Partnership (TPP) negotiations.

These trade talks do hold promise. But as PECC says, "If deadlines continue to be missed, or if these agreements are so watered down that they do not meet the needs of the 21st century economy, the business community will lose interest and the economic momentum of more efficient resource and capital use will be lost".

In conclusion, in order for East Asia to successfully navigate its way through the present critical crossroads "will require a significantly enhanced level of political leadership". And this is the case for all economies. Japan's poor performance over the past decades stands as a testament to the need for continuous policy innovation to foster growth. But, most regrettably, Asia is currently suffering from a dearth of leadership, as we have argued separately (see link below).

REFERENCES: - Pacific Economic Cooperation Council. State of the Region, 2013-2014 - Asia's dearth of leadership, Asian Century Institute (Cross-posted with permission from Asian Century Institute)

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