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Asians face the end of growth in double-digits

By Ovais Subhani
REUTERS, SINGAPORE
Thursday, Apr 11, 2002, Page 19

"The Asian crisis has taken quite a bit of the gloss off the Asian miracle. Investors will now be looking through the cyclical upturn to identify economies that can grow on a sustained basis."

Paul Sheard, Lehman Brothers' managing director

Confidence in the "Asian Miracle" was once so unwavering that in 1997 World Bank President James Wolfensohn termed the Asian financial crisis a "hiccup," a comment he later had to qualify.

Now, as Asia's economies claw back from their second slowdown in five years, after 30 years of almost uninterrupted growth, economists caution that a quick return to double-digit growth is unlikely due to underlying structural problems.

And it's not just economists who are seeking to temper expectations. Singapore President S.R. Nathan warned last month that sizzling growth rates may be a thing of the past.

"That phase of our economic development is over," he said.

The Asian Development Bank on Tuesday underlined the view that the best may be past, forecasting regional growth will be "below historical long-run growth rates" in coming years.

How things have changed.

For instance, an International Monetary Fund working paper estimates that while an average non-Asian in 1990 was 72 percent richer than his parents in 1960, the corresponding figure for an average Korean was no less than 638 percent.

Few investors in that high growth period took notice of the academic debate on the sources of growth in the region and on warnings by some economists that these economies would eventually run into, maybe not a wall, but certainly a hill.

Sustainable growth

Now, rather than marveling at the rapid growth rates, a growing body of economists are looking more closely at the chinks in Asia's economic armor.

"The Asian crisis has taken quite a bit of the gloss off the Asian miracle. Investors will now be looking through the cyclical upturn to identify economies that can grow on a sustained basis," said Paul Sheard, Lehman Brothers' managing director and chief economist Asia in Tokyo.

The Asian Development Bank's "Asian Outlook 2002" says that growth in the next few years would depend on the strength of external conditions but in the long-run ultimately domestic conditions and structural issues would matter.

"The primary medium- to long-term internal risk to the ability of a large number of member countries to generate stronger growth rates is that slow progress in structural reforms will inhibit domestic demand and productivity growth."

Broadly speaking, long-term economic growth is seen as a function of three factors -- employment growth, investment growth and growth in productivity, defined as the best use and management of existing resources both capital and human.

Labor & Capital

The academic debate took a dramatic turn when in 1992, Alwyn Young, then a professor at the Boston University, and later in 1994 MIT's Paul Krugman, argued that that rapid growth had come primarily from high rates of capital infusion -- more factories and machines -- and labor force participation, not productivity growth.

High rates of investments in a low productivity environment, eventually suffer "diminishing returns," a phenomenon that plagued the Soviet Union. Demographic factors like a shrinking work force also takes its toll.

The UN estimates the ratio of working-age population to nonworking-age in East Asia will start declining from 2010. By 2050 the population age 60 years and older will rise to 31 percent from 12 percent in 2002.

.Paul Sheard puts the dilemma more simply.

"It [rapid growth] was a period when lots of favorable factors were stacked up.

"[There was a] very favorable external growth picture, a very big technology gap, the ability to free up resources within the economy like people moving from the countryside into urban areas and a lot of direct foreign investment. It's difficult to see all of those factors coming back," he said.

Productivity-foreign investment nexus

Only productivity growth can compensate for the diminishing impact from the other two factors of the growth equations, said Kenneth Courtis, Goldman Sach's vice chairman in Tokyo.

"The bottom line is pretty simple. We know what the demographics are and you can't really change them. It's really on the productivity side where the difference are going to be made," he said.

The optimists among economists subscribe to the view that an essential component of growth in East Asia had been the acquisition and mastery of foreign technology that has contributed to efficiency gains and productivity growth.

But foreign investment flows to East Asia are facing a serious challenge due to increased risk aversion, bursting of the high-tech bubble and a shift in the region's economic center of gravity after China's entry into the World Trade Organization.

Demographically, too, China is in the perfect sweet spot for the next 20 years, with 75 percent of its billion-plus population still in the countryside, providing a deep, low-cost labor pool.

In a recent research note Cliff Tan, Salomon Smith Barney's regional economist in Singapore, showed that since early the 1990s when China started to receive larger foreign investment, Singapore has seen the sharpest absolute rise in structural unemployment, followed by Taiwan and Hong Kong.

Korea appears to have escaped a sharp rise but probably due to an already high average unemployment rate.

"These disparities imply a rising role for structural factors in driving future growth. It shows that in Asia a rising tide no longer lifts all boats," Tan said.
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