The Coming of the ASEAN Economic Community

This article is contributed by The Insight Bureau. Called the 'GEMS Close-Up Report', these reports take a succinct but penetrating look at the current state of the global economy and the emerging markets. This particular report was jointly written by Dr Yuwa Hedrick-Wong who is a member of The Insight Bureau network of economics speakers.

By Dr Yuwa Hedrick-Wong

Global economic growth has slowed since the 2008/09 crisis. Over the 2001 to 2008 period, real world GDP expanded on average by about 4% per year. In comparison, the average annual growth rate of world real GDP between 2009 and 2012 has been around 2.9%, just under three-quarters of the earlier period.  In the coming years, a much slower growth of the global economy is expected, with virtually all the major growth engines of the world operating at reduced speed. China, for instance, which accounted for close to a quarter of world GDP growth in the previous decade , is likely to slow to 75% of its earlier speed, at best, and could be lower if some of the planned domestic reform policies fail to perform as expected. The euro zone, which accounted for a tenth of global economic expansion in the earlier period, is expected to have only very anemic and inconsistent economic growth, while a prolonged period of contraction cannot be ruled out should the crisis take a turn for the worse. The US, in the short term at least will see its economy struggle, due to its dysfunctional politics and high public sector debts, in spite of its underlying structural strength, an increasingly competitive corporate sector and a powerful shale oil and gas energy revolution. Taking all these into account, the average annual growth of world GDP of 2.9% from 2009 to 2012 is actually not a bad record. In the medium term -- the coming five years -- it is realistic to expect world economic growth to hover around 2.5% per year, or less than two-thirds of that of the 2001 to 2008 period.

Emerging Markets and the Imperative of Inclusive Growth

Much of the slowdown will come from reduced consumer spending in the developed countries that were some of the most important destinations for emerging markets’ exports. Given the level of export-dependency in many emerging markets, weaker external demand will hurt many of their export-oriented sectors, with rippling effects across the rest of the economy. Under such conditions, domestic demand in emerging markets will have to do more of the heavy lifting if robust economic growth is to be sustained. For domestic demand to become more effective as an engine of growth, its two key components of domestic investment and domestic consumption will have to be more productive and mutually reinforcing. In other words, investment in emerging markets will have to benefit the rank and file working people to raise household incomes such that private consumption can rise in tandem with investment. Increases in household spending in turn will then open up new opportunities to encourage further business investment. When all goes well, a virtuous circle can be set in motion with both domestic investment and domestic consumption benefiting from each other. For this to happen, ‘inclusive’ growth is required.
Inclusive growth can be simply defined as growth that is broadly based, which comes with improving income distribution and equality of opportunities for the vast majority of the society. In practice, it means economic growth that produces an expanding, dynamic, and increasingly prosperous middle class. Inclusive growth therefore requires that the fruits of an expanding economy be more equitably shared, benefiting not just a few large and powerful business conglomerates but mall businesses and entrepreneurs, as well as the workforce at large. It is only with inclusive growth that household income can rise in step with an expanding economy, thereby making domestic consumption a viable substitute, over time, for weaker demand for exports. In a slower growing global economy in the coming years as described above, inclusive growth will be the primary success criterion for emerging markets. It is a much more exact and demanding success criterion compared with those of the previous decade, and it will come as a rude shock to many emerging markets.
The reason for this is because emerging markets had been spoiled during the previous decade.  A tsunami of easy money from 2000 onwards had pushed up growth everywhere. In the beginning of the decade from 2000, it is estimated that capital flow going into emerging markets was running at an annual rate of US$200 billion. By 2008 this had risen to over US$1 trillion.  It was a rising tide lifting all boats phenomenon. In fact, one would have to have tried very hard to not grow at all. In the decades prior to the 2000s, in any given year about two-thirds of all countries in the world managed some economic growth. The remaining one-third suffers either stagnation or even contraction. In contrast, because of the tsunami of easy money in the 2000s, by 2007 only three countries in the world failed to grow; Fiji, Zimbabwe and the Congo. The same tsunami of easy money also fueled consumer spending in the developed countries, thus driving up demand for exports from emerging markets. Under these conditions, emerging markets could get away with little or no inclusive growth, at least for a time. But not anymore.


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