>Wake-Up Call for the Next Asia (MORGAN STANLEY)

In a growth-starved, post-crisis world, many have presumed that the baton of global economic leadership has already been handed off from the West to the East. The onset of the Asian Century is taken as a given. While such an outcome is entirely possible, I argue in my new book, The Next Asia (Wiley, September 2009) that it hasn’t happened yet. A silver lining of the Great Recession is that this transition may actually occur sooner rather than later — yet more by necessity than by design.

The enthusiasm over Asia is certainly understandable on one key level. On the surface, there can be no mistaking the sheer power of the Asian growth miracle. The broad collection of economies that comprise Developing Asia expanded at an 8.3% average annual growth rate over the 2001-08 period — basically three times the 2.8% average growth pace of the rest of the global economy. Putting it another way, the extraordinary dynamism of Developing Asia added about 1.2 percentage points extra to annualized global growth over the past eight years.

But here’s the critical catch: Over this same period, Asia has continued to direct an increasing portion of its production to others. The export share of Developing Asia’s GDP rose from 35% to 45% over the past decade, whereas the share going to internal private consumption fell to a record low of 45% of pan-regional GDP in 2008. As such, the region does not satisfy the most basic pre-condition of autonomous economic leadership — an economy where production support is dependent increasingly on home markets rather than on external demand.

In short, these are not the footprints of a new autonomous engine of global growth. As the shifting mix of Developing Asia’s GDP indicates, the region’s growth premium has been driven more by exports — and by the ancillary support of export-led fixed investment in infrastructure and export-producing capacity — than by internal private consumption. For now, the dreams of Asian-led global leadership are wishful thinking. Developing Asia is still more of a follower than a leader.

Validation of this critical deduction comes from the unmistakable repercussions of the current global crisis. In the aftermath of a US-led synchronous downturn in the developed world, every Asian economy either went immediately into recession or experienced a sharp slowdown. Asia’s ever-rising external connectivity made such an outcome inevitable. The Asia consumer — despite all the hype — wasn’t nearly strong enough to forestall this outcome.

The good news is that the region now appears to be rebounding. The bad news pertains to the quality of the recovery — an upturn that could very well be heralding a false dawn. That’s because it is being driven largely by an unprecedentedly vigorous bank-funded investment boom in China. On the heels of RMB 7 trillion in new bank lending in the first half of 2009 — by far, the sharpest six month burst of Chinese loan growth on record — surging fixed asset investment accounted for fully 88% of China’s total GDP growth in the first two quarters of the year. That’s more than double the 43% average growth contribution made by this sector over the previous decade and enough to take the investment share of Chinese GDP to over 45% — an unheard of investment ratio for any major economy in the modern era. To the extent that Asia has now become a China-centric growth machine — a transformation that can be validated by a sharply increased China focus to intra-regional trade flows — the sustainability of the Chinese recovery holds the key to recovery prospects for the region as a whole. Given the unbalanced character of the Chinese post-crisis rebound in the first half of 2009, there are serious questions in this regard.

To see the full report: WAKE UP CALL