When
the Global Financial Crisis struck in 2008, there
were many analysts who argued that some developing
countries – especially in developing Asia and in particular
China – could not only avoid the adverse effects of
the crisis but also emerge as an alternative growth
pole for the world economy. The extent to which economic
''fundamentals'' quickly unravelled across the developing
world came as a surprise to them, as falling exports
and dramatically reversing capital flows caused economic
distress in many countries and affected even the strongest
of them.
Even in countries like China that were earlier seen
as relatively immune, only very proactive countercyclical
measures, including fiscal stimulus packages and very
substantial monetary and credit easing, allowed the
growth momentum to be restored.
Nevertheless, it is certainly true that in many parts
of the developing world, and especially Asia, the
recovery was faster and sharper than was experienced
in the North. In China and India, average incomes
did not fall but continued to grow, albeit at a slower
rate. By 2010 it was being argued that in these large
countries and elsewhere, the growth engine was increasingly
decoupled from the sputtering and hesitant recovery
that was evident in the northern countries.
Now that prospects for the world economy are once
again looking gloomy, the relatively quick recovery
in several developing countries is being seen as a
potential alternative source of expansion. As the
US gets enmeshed in politically determined fiscal
constraints and the eurozone crisis plays out to create
chronic economic weakness and potential disaster in
Europe, it is clear that expecting any positive stimulus
from these two large regions is misplaced. Instead,
eyes are turning towards the BRICs, or to the region
of developing Asia, to provide another growth pole
in what will otherwise be a sagging and even dismal
global economic story.
Chart
1 >>
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Chart
2 >>
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To what extent are such hopes justified? Consider
the recent trends in growth and investment, as shown
in Charts 1 and 2. As is evident from Chart 1, while
overall GDP growth rates in emerging and developing
economies remained higher than in the advanced countries,
they also turned negative in the last quarter of 2008
and the first quarter of 2009. What is more striking
is the synchronicity of even quarterly changes, between
the advanced and developing economies.
It is true that the divergence between the two groups
of economies has grown slightly in the last few quarters,
but the difference is still less than it was in 2007,
during the global boom. More significantly, the direction
of movement appears to be similar for both categories
of countries, suggesting that the forces impelling
change are still largely determined by what is going
on in Northern economies.
In the period just before and after the Great Recession,
a similar story seemed to be the case for fixed investment
rates. However, since the middle of 2009 the picture
of fixed investment seems to have been more mixed.
Even so, the dampening effect on investor expectations,
emanating from the gloom in developed markets, is
evident.
Presumably one reason for the gloom is the impact
that the slowdown in the US and Europe has on exports
of developing countries. Here the story – described
in Chart 3 - is unambiguous and depressing. Export
growth rates from both advanced and developing countries
tend to move in tandem, and if anything, merchandise
exports of developing countries (in value terms in
this chart) have been even more volatile and fallen
even more sharply, including in the very recent past.
Chart
3 >>
(Click to Enlarge)
Incidentally, the picture would look even bleaker
if services exports were to be included, since service
exports have experienced substantial deceleration
in the recent past. This includes not just those services
that are affected by the slowdown in trade (such as
transport and related services) but also a range of
other more employment-intensive activities such as
tourism and IT-enabled services. Clearly, there is
little sign of decoupling in trade.
But suppose we consider specifically Asia, which is
still widely considered the most dynamic region. There
has been much talk of how greater integration within
developing Asia has already generated new patterns
of trade, investment and economic activity, and that
therefore increased Asian integration will provide
more stimulus to growth in the region even if other
areas stagnate.
There is no doubt that intra-Asian trade has increased
significantly in the recent past. As Chart 4 indicates,
since the turn of the century, Asian exports within
the region have not only been larger but have significantly
outpaced exports to other major trading partners or
regions. Even though there was a break in the upward
trajectory in the crisis year of 2009, the subsequent
revival of intra-regional trade suggests that there
is still a lot of inherent dynamism.
Chart
4 >>
(Click to Enlarge)
But still, it should be borne in mind that even though
intra-regional trade has increased, it is still only
around half of all of Asia's exports. Chart 5 shows
that while there have been changes in the share of
intra-regional trade, with increases in the recent
past, in this period it has been volatile around a
fairly narrow band, fluctuating between 49 and 52
per cent of total exports.
This means that global currents are still very significant
in determining trade patterns, particularly exports.
And since so many countries in the region are highly
trade-dependent and have generally chosen export-oriented
growth as the model, the slowdown in exports will
necessarily also affect levels of economic activity,
employment and future investment.
Chart
5 >>
(Click to Enlarge)
More than the quantitative indicators, it is also
the pattern of integration and the quality of the
activity that is important in this. Much of the rapid
increase in intra-regional trade in developing Asia
has been because of the emergence of a multi-location
multi-country export production platform, largely
organised around China as the final processor. This
is why more than four-fifths of such trade consists
of intermediate goods used in further production,
rather than final demand.
Such trade is obviously closely linked to the behaviour
of the ultimate export markets, which still remain
dominantly in the North, despite recent changes in
the direction of trade. Thus, for example, China (which
is the fulcrum of much of this kind of export-oriented
activity) still looks to the US and the European Union
for just under 40 per cent of its total exports. Reduced
demand from these areas will translate into reduced
demand for raw materials and intermediates required
for processing into goods for these markets. There
is already some scattered evidence that this process
has begun.
This suggests that expectations of Asia being able
to blithely withstand the latest round of economic
crisis are not just over-optimistic but probably wrong.
It also means that Asian governments have to be prepared
for this with proactive measures to cope, and that
business as usual simply will not work in the evolving
global scenario.
*This
article was originally published in the Business Line
on 20 February, 2012 and is available at
http://www.thehindubusinessline.com/opinion/
columns/c-p-chandrasekhar/article2913493.ece?
homepage=true
