Asia Beyond the Crisis: Growth Led by Large Developing Economies

Asia's resilience can be explained by two major reasons.

First, in the decade after the Asian crisis of 1997-98, the economies of the region underwent a far-reaching systemic transformation, which gave them new structural strength. Governments have largely curtailed their interventionist industrial policies and effectively ceased to keep afloat ailing companies and financial institutions. Corporate governance and management have significantly improved. Today, the voices of shareholders, including international investors, are heard clearly as never before.

In the first half of the decade, according to the Marakon Consultancy, the representative Asian companies provided an average dividend yield (the ratio of dividend payment to the stock price) of 3.5 per cent against 1.5 per cent at the S&P 500. Asian businesses have shifted from high to low leverage (debt-equity ratio) management. Exposure of the region's financial institutions to toxic financial products is minimal.

Second, in the LADCs, robust domestic demand - not only investment, but also private consumption - offset the negative influence of the dramatic export squeeze. In China, in the first half of 2009, retail sales increased 14.7 per cent year-on-year. In Indonesia, private consumption grew 6 per cent in the first and 4.8 per cent in the second quarter.

 The rise of the LADCs' domestic demand is a key trend, which can work as a growth driver for the regional and global economy for decades to come.

Their middle class is visibly expanding, but still comprises only a small portion of the total population. For instance, in India, according to the most optimistic estimates, it accounts for no more than 300 million people). There is a lot of room for further expansion. In a new development, low-income families are also becoming increasingly active consumers.

However, the scale of LADCs' domestic demand, especially private consumption, is still too small to drag the world economy out of recession or make up for the abrupt fall in consumer spending in the West. In 2008, private consumption in the three largest LADCs hit US$ 3 trillion: $1.6 trillion in China, $1.1 trillion in India and $300 billion in Indonesia. The Philippines and Vietnam add just around $100 billion each. The total comprises less than one third of the private consumption in the US only (around $ 10 trillion).

 The room for a further demand boost in Asia is very limited. Policy measures to stimulate consumption through various subsidies and cash handouts can be only short-term, not to mention the inevitability of restraining public expenditure after the 2008-2009 spending spree. The global economy re-balancing idea may set a conceptual framework for the long term, but it is not a feasible policy guideline for today. New structural strength and steadily rising domestic demand provide a good starting point for LADCs' post-global crisis growth.

 One more important recent trend in these countries is the spread of growth and development from a few metropolitan areas to a wider range of townships and, increasingly, to rural areas. In China - whose rise was led by big cities in the export-oriented eastern coastal provinces - less developed, but more domestic-demand-oriented central and western provinces are now coming to the forefront. In the first half of 2009, while the national economy grew 7.1 per cent, in the central provinces of Anhui, Hubei and Henan, growth exceeded 10 per cent, and the fastest runner was Inner Mongolia with 16.2 per cent.

In India, according to the advertising agency Europe RSCG, of the 80 million households comprising the middle class, only 25 million were in the major metros. Mercedes sells more cars in the small town of Ludhiana than in Mumbai.

In Indonesia, this decade is marked by a significant rise in incomes and of consumption by families living in the areas around plantations and mines.

This trend will exert strong positive influence on overall Asian growth rates in the long run. The 2010s may be the decade of the LADCs, which means their increasing roles as both producers and market creators.

But, to utilise their potential, they have to address great challenges. The major one stems from the energy and natural resources-intensive pattern of their growth. In China, total primary energy consumption per dollar of real GDP (2000 US$, market exchange rate) is 2.7 times larger than in the US and 4.2 larger than the European average. In India it is larger 1.9 and 2.9 times respectively; in Indonesia, 1.5 and 2.4 times. With enormous environmental problems, this pattern tightens global markets for petroleum and other natural resources, creating strong inflationary pressures worldwide. The bell tolled in 2006-2007, when, coupled with food inflation, they threatened to put an end to Asia's growth story.

As the global economy rebounds, those pressures will return, amplified by the inflationary effects of the stimulus packages unveiled in 2008-2009.

 To find solutions, LADCs have to work harder to move to the energy-saving growth model, and developed countries have to do more to support such a shift. If the 2000s were the decade of LADCs' structural transformation, the 2010s have to become the decade of economic efficiency.

Ivan Tselichtchev is a professor at the Niigata University of Management and the author of "Asia's Turning Point: An Introduction to Asia's Dynamic Economies".