Rebalancing Growth in Asia

• Author: Eswar Prasad
• Position: Tolani Senior Professor of Trade Policy at Cornell University
• Pages: 19-22

Eswar Prasad is the Tolani Senior Professor of Trade Policy at Cornell University, a Senior Fellow and New Century Chair in International Economics at the Brookings Institution, and a Research Associate at the National Bureau of Economic Research.

Page 19

Asian emerging markets can improve their economic welfare by rebalancing growth toward domestic demand

WITH the increasing importance of Asian emerging markets in the world economy, rebalancing growth in developing Asia toward more reliance on domestic demand and less on exports is an important component of the global effort to stabilize world financial and economic systems.

Asia's export-oriented growth strategy played a role in the global imbalances that have characterized the international economy in recent years and played some role—though how much is hotly debated—in contributing to the global economic crisis.

Global imbalances—with large current account deficits in the United States and a few other advanced economies and big current account surpluses in oil-exporting countries and in emerging Asian markets, especially China—provided cheap money that worsened the root problems of weak regulatory systems and regulatory failures in the United States and other advanced economies. These imbalances remain troubling because if a disorderly adjustment does take place, through a sharp fall in the value of the dollar or a prolonged contraction in economic activity in industrial countries, it will be very costly and disruptive to the world economy.

Not only would a reduction of the imbalances in emerging Asia be helpful to the global economy, rebalancing may offer advantages to other countries in the region as well by making their high growth rates more durable, translating into more benefits for their citizens.

If rebalancing is a goal, the first question is how to evaluate the "balance" of an economy in terms of reliance on domestic versus foreign demand and also in terms of the composition of domestic demand. There is no definitive answer, but my approach is to evaluate growth patterns in the major Asian emerging markets—China, India, Indonesia, Korea, and Thailand—and then to analyze these patterns to see how this growth improves the economic welfare of the average household in these economies.

Growth patterns

One way to characterize the balance in a country's growth is to look at the evolution of the major components of its national output—private consumption, government consumption, investment, net exports—and employment.

Over the past decade, the share of private consumption in gross domestic product (GDP) has fallen in key emerging Asian economies and in the largest advanced economies, with the notable exception of the United States (see Chart 1). In China, there was a dramatic drop from an already low 46 percent in 2000 to 35 percent in 2008. By contrast, the shares of both investment and net exports rose markedly in China—by about 8 and 6 percentage points, respectively—between 2000 and 2008. There was also a significant decline in India's private consumption relative to GDP—from 64 percent in 2000 to 57 percent in 2008, with investment taking up the slack.

When we look at average GDP growth rates for the same countries, private consumption accounts for under one-third of China's GDP growth, less than any other economy in the sample (see table). Investment growth made a major contribution to overall growth rates in both China and India—accounting for nearly half of overall GDP growth. In China, investment growth has been the dominant source of GDP growth.

After evaluating private consumption and investment, it is important to assess how dependent a country is on external trade for growth. Even if a country has a high level of exports relative to GDP, it could also import substantially, meaning that net exports (exports less imports) contributed little to bottom-line GDP growth. China is popularly characterized as relying on export-led growth, but the direct contribution of net exports to GDP growth amounted to only 1.1 percentage points a year over 2000-08, just one-tenth of overall GDPPage 20 growth. However, in sheer volume, China's trade surplus of $295 billion in 2008 (6.8 percent of GDP) dominates aggregate Asian trade (excluding Japan) with the rest of the world.

Modest employment growth

Investment growth has done little to boost employment in China.

Country GDP growth GDP growth

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