Europe has its own mess to deal with. The IMF meetings in Washington in September and the political follow-up that is now playing out across Europe have done something to staunch the financial bleeding, but make no mistake, the European economy is still in emergency triage despite the decisions last week to boost the debt rescue package to 1 trillion euro.
In Asia, the question is whether there’s any chance that strong growth will not be knocked off course by the continuing weakness in the developed world. Success in avoiding that scenario depends on whether extensive structural reform is put in place to shape expansion of the investment so that it continues to roll out in ways that ensure it is productive and that economic growth does not run into the sand.
On the evidence of the past two years, emerging market economies in Asia and elsewhere might have had some reason to think that there was ‘trend decoupling’ between their growth rates and those in the old G7 economies: events of the last few months have significantly dispelled that illusion as interdependence through expectations and market sentiment, as well as more directly through trade and finance, has ensured that problems in the industrial economies wreak their havoc around the rest of the world. The political fragilities that were exposed for all to see in stitching together the fiscal deal between the White House and Congress in America, and in the trying to arrive at a doable deal in European Union have taken their toll on world markets everywhere.
De-coupling clearly has its limits on many fronts, and this week’s lead essay from Ding Dou worries aloud about US Congress threatening currency and trade war, while China and the rest of the world struggle and bumble toward a new growth model. The Obama administration, while it ‘supports the goals’ of the Schumer currency bill that has passed the Senate, has not yet endorsed the strategy it proposes and the House of Representatives is decidedly uneasy about the trade consequences of supporting the bill. So trade war is still a threat rather than a reality.
The Asian emerging market economies are still in a stronger position than their industrial country partners, with demographic dividends still to reap, much lower debt ratios, and economies that enjoy the benefit of powerful ‘catch up’ to the industrial country frontier. The potential rate of growth in emerging economies remains high because the ‘convergence gap’ — the gap between productivity levels in industrial countries and developing economies — remains large even for economies like China and India. This hasn’t changed because the world has fallen into recession.
With these assets, what’s to stop emerging economies powering the global economy from its industrial country malaise?
The long-term trajectory that foresaw the emergence of these new economic powers has been both elevated and truncated. Catapulted forward by their economic resilience during the global financial crisis, the BRICS already have a more prominent place and role in the global system. The prediction, less than a decade ago, was that they would account for under 10 per cent of global output at the end of the first decade of the 21st century. Already they hold more than twice that share. And now global consumption growth in the years ahead is predicated on their continuing and rapid growth, with the lacklustre outlook for most of the G7 industrial world.
The potential for productive investment in infrastructure in the emerging economies is enormous. The OECD estimates global infrastructure requirements to 2030 to be in the order of US$50 trillion. Much of this demand is in Asia, also the primary source of the savings that are currently sloshing around the global economy. There is almost a trillion dollars worth of infrastructural investments there that have been given the once-over by the Asian Development Bank. China may be facing a temporary problem of over-heating, but its stock of capital relative to population and income is low. India and Indonesia offer vast scope for investment infrastructure. The US also needs to make large investments to rehabilitate or extend its economic infrastructure. More generally, global investment is at an historically-low share of global output.
The Asian six in the G20 can take a lead here. On a visit to Jakarta at the end of September, Japanese METI minister Yukio Edano announced that Japan would support the reconstruction of Jakarta’s ramshackle port capacity, including a new airport, and help to build a long overdue urban railway system. This is the kind of infrastructure investment that will both boost Indonesian productivity and lift Japan’s and the G7’s recovery and growth prospects.
It is time for G20 leaders to look beyond the G7 funk and focus on the opportunity for sustaining global growth through a development agenda, driven by robust investment and growth in the BRICS.
This strategy for global recovery can succeed, of course, only if it is complemented by vigorous structural reform in the emerging economies that must drive it. There cannot be sustained growth through ramping up infrastructure investment if that investment is not productively and efficiently deployed.
Growth in Asian and in other emerging economies against the global tide is not sustainable on the pre-crisis growth model. But the room to grow is there and that presents an opportunity which the world can ill afford to forego.
Peter Drysdale is the editor of the East Asia Forum.