No joy from Asian growth without supply-side reform

Author: Peter Drysdale, ANU

The global economic outlook may be grim but it would be grimmer still but for Asian economic growth. There’s no dynamic growth pole anywhere else in the world and global uncertainties have increased around the rise of Donald Trump in North America and Brexit in Europe.

The global growth outlook continues to be downgraded as industrial economies struggle to resume healthy growth after the global financial crisis. A stagnation mentality infects much of the developed world. The growth outlook for emerging economies is also on the wane. Are China and emerging Asia — still by far the largest engine of growth in the world economy — able to avoid growth doldrums? Can China navigate the middle income trap to successfully reach high income?

The steady state in the Asian region is growth and dynamism that requires continuous structural change and adjustment. The trajectory of China’s potential rate of growth is certainly 2 or 3 percentage points lower than it was a decade ago (when average growth was 10 per cent) as the labour market becomes tighter and growth depends on lifting productivity through innovation and change, which can’t be delivered simply by applying other people’s technology to a growing labour force. Even at almost 6 per cent the massive Chinese economy would still grow at twice the rate of the world economy. India is on the way back towards its growth potential, upwards of 8 per cent over a coming decade in which the young will be pouring into its labour markets. And Indonesia is blessed with the chance of capturing a similar demographic dividend.

But Asia’s potential rate of growth should be closer to 7 per cent, not the 5 per cent or less it looks like being over this period. Can it achieve its 7 per cent growth potential while the rest of the world languishes?

Realising Asia’s growth potential requires ambition and the will within Asian polities to undertake the next round of reforms essential to lifting productivity and accelerating the structural change. A strong, mutually re-enforcing Asian growth environment will vastly increase the chance of growth success.

Are Chinese and other Asian leaders up to the challenge? This was a central question around the Crawford Leadership Forum in Canberra last week.

The message is that there’s not much joy likely to come from Asian growth without massive supply-side reforms in every economy in the region. The East Asian Bureau of Economic Research at The Australian National University estimates that without a good measure of success with supply-side reform in China, India, Indonesia and Japan regional growth is likely to be closer to 3.5 per cent or half its potential rate of close to 7 per cent.

The ambitions for reform in China, with the leadership’s supply-side and financial market reform mantra, and in India, under Narendra Modi’s ‘make-in-India-in-open-competition-in-the-world’ strategy are bold and correctly-targeted. Delivery will be more certain if there is collective commitment to a common reform effort.

The good news is that the Regional Comprehensive Economic Partnership (RCEP) negotiations provide a ready-made framework for the ASEAN plus 6 East Asian partners to seize the moment.

Asia’s economic interdependence grew under the global trading regime, not significantly through bilateral or regional trading arrangements. ASEAN, Japan, China, South Korea, India, Australia and New Zealand — which comprise the RCEP group — in 2007 already had a collective share in global GDP bigger than that of the Trans-Pacific Partnership (TPP) in purchasing power parity terms. The group has the potential to be twice the size of the TPP economies 15 years hence.

The RCEP grouping is where the global economic dynamism is awaiting full release.

In lifting the frontier of Asian growth through closer regional integration, East Asian governments will need to negotiate a single-undertaking trade deal as good as the TPP but they plan to go beyond that with an ambitious economic cooperation program. RCEP can aspire to be a model for a global set of principles-based (not prescriptive) rules for managing trade and other forms of international commerce in the 21st century.

President Obama says the RCEP deal lacks ambition and ‘won’t prevent unfair competition among government-subsidized, state-owned enterprises’. It won’t protect a free and open internet or intellectual property, labour standards and the environment, he reckons.

In fact RCEP must do more than these things to keep Asia’s structural reform-driven growth rolling. In truth an RCEP agreement can be signed when, and only when, there is commitment to comprehensive freeing of trade in goods, services and investments and an agreed path for its implementation together with a framework for economic cooperation. Concluding an agreement later this year that entrenches such ambitious commitments will give RCEP momentum and credibility.

There is no question that China, India, Indonesia and other emerging countries in Asia will have trouble joining the US-led TPP any time soon. But an ambitious, high-quality RCEP can offset trade and investment diversion from the TPP and work to integrate the entire Asia-Pacific region.

What’s needed is the right environment in the region for these countries to be able to take bold supply-side reforms at home. RCEP’s economic cooperation agenda positions it as a key vehicle for building economic and political confidence in effecting the next big structural transformation in Asia — right across the region between East Asia and South Asia, with China and India drafted to play the leading role.

Peter Drysdale is Emeritus Professor and Co-Editor of East Asian Forum and Head of the East Asian Bureau of Economic Research in the Crawford School of Public Policy at The Australian National University.

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27 June 2016 9:08 pm

This analysis fails to describe ‘supply side reforms’ in any detail. Does it involve such things as lower taxes for individuals and corporations and less labor market oversight/protections? The experience in the USA with lowering corporate taxes has meant greater profits but not necessarily more investment in r and d, capital improvements, and/or higher wages for workers. The demise of trade unions and bargaining power for workers has meant 30+ years of stagnant income growth, if any at all. This coupled with austerity by government leaders in recent years is largely what has fed the anger and alienation in voters that supports leaders like Trump, other nationalists, and/or votes like Brexit.

Besides failing to mention the importance of social justice this piece also does not note what kind of growth should be pursued. Is it to be more of the same: a reliance on fossil fuels with an extractive mentality that has little regard for the environment and climate change? IF this is where the members of RCEP end up going, the world is headed for more trouble than it already has.

I hope the leaders of ASEAN plus 6 can foster a different, broader paradigm of growth that includes these crucial elements in it. Are they up to this admittedly bigger and more complicated challenge?!?

Lintong Feng
30 June 2016 12:57 pm
Reply to  Richard

I share some of the sentiment in your comments. While supply side reforms or measures is a politically popular term in China, it is not clear what the past reforms would be defined as. Were they demand side reforms or were they also supply side reforms? I would have thought most of the economic reforms including the reforms to the economic systems were mainly supply side reforms in nature.
The Chinese government and the political leadership have used the supply side measures to justify their lack of appropriate measures in the demand side of the macro economic policies. And they, from time to time, were forced to use demand side macro economic policy measures. That is part of the problems in China that once the government has said something, it may sometimes become a political thing, so different views can be difficult heard irrespective their merits. That may lead to huge economic losses.