Thailand went through its fertility transition more quickly than almost any other country, with the average number of children born to the average woman declining from about six to two in little more than two decades, between about 1970 and 1990.

Fertility rates have since gone still lower, now standing at around 30 per cent below replacement level (the level that would lead to long-run population stability). This does not mean that Thailand’s population has stopped increasing. Population momentum — resulting from a continued relatively high concentration of people in the childbearing ages – may result in slow population increases for up to 10 more years. But after this Thailand’s population will begin to decline unless fertility rates increase substantially from their current level, or there is net immigration.

What are the issues, then, that Thailand faces in relation to population change? One is rapid population ageing, and another is urbanisation. The latter is concentrated on Bangkok and its surrounds, but increasingly also on regional cities such as Chiang Mai, Korat and Hat Yai. Equally, the international migration balance appears to be lowering the labour force’s average education and skill levels, as Thais moving abroad tend to be better-educated than migrants coming to Thailand from neighbouring Myanmar, Laos and Cambodia.

Still, Thailand has profited in recent decades from a demographic dividend, where its earlier decline in fertility has subsequently led to a population age structure in which the proportion of working-age people is very high. Such an age structure is favourable to rapid economic growth, something which Thailand has certainly achieved over recent decades. This demographic dividend is now drawing to a close, and the proportion of working-age people is beginning to decline, albeit slowly.

Thailand is fairly well placed to deal with the additional challenges this transition will pose for economic growth in coming years. Its education system has (rather belatedly) managed to achieve a much higher proportion of students completing their upper-secondary education. But the situation is not yet satisfactory. Thailand’s National Economic and Social Development Board reported that in 2008 the retention rate in primary education, from entry to the highest grade, and in upper secondary from entry to the highest grade, was 88 per cent and 53 per cent, respectively. A further problem will be Thailand’s ageing labour force, with a declining number and proportion of workers under the age of 29.

Considerable publicity has been given to the ageing issue in Thailand. The proportion of those aged 60 and above will increase from about 13 per cent at present to about 24 per cent in 2030. Most of Thailand’s elderly are healthy and able to look after themselves. Though the proportion living with children is declining, the proportion living with children or in close proximity to children remains quite high — 71 per cent in 2007. Therefore, despite a substantial flow of younger adults to the cities, the proportion of the elderly living alone is not high, and close contact can be maintained with absent children through the ubiquitous cell phone. Material support from children has declined only modestly, some workers are insured under the social security system, and the new National Saving Scheme is designed to provide a government contribution if fund members save until they reach retirement age. The greatest challenge is the provision of long-term care for severely disabled people and those suffering from serious chronic illness, especially in view of the increasing share of never-married Thais in the elderly population — a group that will become more apparent over the next two decades — who will have no children to rely on.

Thailand’s population policy focused on reducing fertility from high levels for almost three decades. Now Thailand must consider following the example of its low-fertility East Asian neighbours — Japan, South Korea, Taiwan and Singapore — in introducing policies designed to encourage marriage and childbearing. Though the policies elsewhere in East Asia do not appear to have been particularly successful, some have been in place for too short a time to make much impact. At a minimum, Thailand should be considering more generous maternity-leave provisions than are provided at present, more flexible working hours and improved subsidised childcare.  Merely copying other countries’ policies is unlikely to serve Thailand well, as its circumstances differ considerably from its neighbours.

Population projections for Thailand suggest that fewer than five million people, and very likely only one million (less than 2 per cent), will be added to the population before growth ceases. Bearing in mind continued population movements from rural to urban areas, this means that some regions will witness a drop in population because the growth of towns and cities in these areas will not fully compensate for rural depopulation. Planning for population decline is important to any country’s future, and Thailand can profit from the experience of European and East Asian countries that have had to manage population decline in rural and regional areas.

Gavin Jones is the Head of the Division of Demography and Sociology, Research School of Social Sciences of the ANU and was the Coordinator of the Demography Program of the ANU’s College of Arts and Social Sciences from 1990 to 1996.

This article appeared in the most recent edition of the East Asia Forum Quarterly, ‘Where is Thailand Headed’

1. Population prospects in East and Southeast Asia
2. Australia’s population policy and the resources boom
3. Paying for higher education in Thailand

The Australian Government is caught between two contending pressures regarding its population policy. The first is concern over the impact of rapid metropolitan population growth on urban quality of life, including in congestion, urban amenities and rising house prices.

The second is a business-advocated argument that a high population rate is necessary to sustain high aggregate economic growth, and ensure the continued vitality of the resources sector. This concern with continued growth, and the demands of the resources sector, is behind a series of decisions that will ensure continued growth in migration levels.

The government has conducted a sustainability inquiry in the hope of mollifying concerns about the costs of urban growth. The final report of the inquiry, A Sustainable Population Strategy for Australia, makes a series of statements about the need for better urban planning and more financial assistance for infrastructure. However, the report provides no concrete recommendations about the size and skill make-up of the immigration intake, or about how the government might alter the settlement pattern of migrants. Under current migration rules the great majority of migrants are located in urban centres, making migrant settlement patterns a major challenge.

The lack of substance revealed in the sustainability exercise indicates that the government’s chief priority is to meet business demands. This priority was implicit in the 2011–12 budget statements. Here, the government announced an expanded permanent migration program and a net overseas migration (NOM) target of 180,000. This target was consistent with Treasury’s 2009 Third Intergenerational Report (IGR3).

The IGR3’s preferred, middle-range, population projection assumed that NOM would average 180,000 per year to 2050. The result was a projection of 36 million by 2050, from 22.5 million in 2010. At the time of the release of IGR3, this projection became known as the Big Australia outlook. Its release set off a debate about population policy which contributed to the political need for the sustainability inquiry.

The 180,000 NOM target has been criticised within business circles. This is because it is well below the actual NOM levels of recent years. There has been an explosion in NOM over recent years with a peak of over 300,000 reached in 2008–09. But the government has decided to reign in the major source of this peak, overseas students. It has done so by sharply diminishing the link between study in Australia and access to permanent residence via the skilled migration program, the major factor driving a surge in overseas student enrolments since 2005.

This decision was related to the policy of keeping NOM at about 180,000 a year. The government has decided that despite the importance of the overseas student industry as an export earner, it is expendable because it has made little contribution to assuaging skills shortages in Australia.

There has been some attempt to make Australia’s permanent residence migration program more responsive to employers’ needs, including those in the resource sector. But even under the reformed rules, employers located in the big metropolises have the same rights to sponsor workers under the permanent entry and temporary entry visa subclasses and there are few constraints on where migrants settle. There is a reluctance to change this situation because of the importance of population growth in the big cities, central to prosperity in recent years.

Instead, the government intends to satisfy the skill needs of the resource industries through the existing temporary worker program, the 457 visa. Currently, accredited employers (the requirements are easily met) can sponsor as many workers at trade level or above as they please to particular jobs for up to four years (renewable). There are strict limitations on the rights of the sponsored workers to move to another job with another employer. However,  recent reforms, pressed by the trade union movement, mean that employers must pay market rates to 457 visa holders.

In a further move designed to provide for the resources industry, the government has decided to establish a variation on the 457 visa entitled Enterprise Migration Agreements (EMAs). The EMAs will allow resource projects of at least $2 billion, and with a peak workforce of at least 1500, to recruit 457 visa holders on concessional terms. These include the right to sponsor semi-skilled workers, such as scaffolders, riggers or bulldozer operators. The EMAs will permit sub-contractors on resource industry construction projects to import entire project workforces from the contractor’s overseas work sites.

There are many loose ends in these arrangements. As the number of 457 visa holders grow so will NOM. Many of these 457 visa holders will seek to stay permanently. Currently around half do, mostly through being sponsored by their employer under the employer-sponsored permanent entry program. This will push NOM upwards.

The long-term effect on the demand for labour from the resources boom is also uncertain. There is growing awareness that structural change induced by mineral and energy exports will add to competitive pressures on metropolitan businesses struggling with the appreciation of the Australian dollar. How this will play out by comparison with the positive impacts of resource industry expenditure and a strong dollar on the metropolitan labour market remains to be seen.

As the situation stands, the Australian Government is facilitating continued rapid population growth in the major metropolises through its maintenance of a high migration intake. As a result, it must simultaneously manage the demands for infrastructure and housing in these cities and the needs of the resource industries. The tensions between these goals have not been managed well, and it is not clear that anything will change in the foreseeable future.

Dr Bob Birrell is Reader in Sociology and the founding director of the Centre for Population and Urban Research, Monash University. He is also joint editor of the quarterly demographic journal People and Place.  

1. Resources and energy: linking China and Australia
2. Bearing the consequences of population policy in Thailand
3. Population prospects in East and Southeast Asia

The Organization of Economic Cooperation and Development has just celebrated its 50^th anniversary. Among the many achievements of this group of advanced economies is the unprecedented improvement in the material lives of millions of their citizens.

Between 1960 and 2010, the number of people who had middle class or better living standards in OECD member countries more than doubled from around 400 million to over 900 million. Poverty, by global standards, was essentially eradicated.

Asia today faces the same potential. Economies in south and east Asia have grown fast for two decades now, and in some Asian countries, growth has been sustained for much longer periods. Most south and east Asian economies have passed the World Bank’s threshold of a per capita GDP of $1000 to become classified as middle income countries. But that still does not mean that they have a large middle class, at least not by global standards. A global middle class is best defined by the spending of households, not the income available to the economy. When households can afford small luxury items, when they can purchase consumer durables like cell-phones, cars, motorcycles, refrigerators, maybe own their house, enjoy vacations and leisure and afford to educate their children and to provide them with good health care, then they can be classified as members of a global middle class. One rough definition of when this happens is when households spend at least $10/person/day in purchasing power parity terms. Of course, to be classified as middle class, one would also want to exclude the rich, or the group of households that does not worry about how much they spend, or the price of goods and services, but can afford whatever they choose. That group can be considered those who spend more than $100/person/day. It is using this definition that the extraordinary growth in the OECD middle class has been computed.

By the same definition, Asia today has a middle class of around 560 million people, of which 230 million are in the rich economies of Australia, Hong Kong, Japan, Korea, New Zealand, and Taiwan (China). The rest live in emerging economies. This latter group is growing very fast as these economies grow. In China, because of the low share of labour in GDP and very low rates of household expenditure, the middle class is small — perhaps only 12 percent of the population — compared to what one would expect from an economy at its level of development. India also has a small middle class by global standards, only about 5 percent of its population, because it is still a rather poor country. But the middle class in both China and India is growing at extraordinary rates. If China is successful in its policy ambition to foster wage growth at least as fast as GDP growth, and if it continues to grow at its potential, its middle class could swell to 50 percent of its population in just 12 years. India’s middle class could rise even more rapidly because Indian households benefit more from Indian growth than do Chinese households, given the prevailing distribution of income.

While the two Asian giants are obviously the most important drivers of the aggregate numbers of growth in the Asian middle class, the exciting possibility is that many large South and East Asian countries could enjoy the same kind of prosperity — Cambodia, Indonesia, Malaysia, Thailand and Vietnam are poised to become predominantly middle class countries within a decade to 15 years.

If changes like this occur, the face of Asia will change in every way. Asia is on a pace to add 2.5 billion people to the ranks of the world’s middle class in just 20 years, if it can sustain its growth. And that is now the ‘billions of people’ question facing Asian policymakers: can they find a growth model that permits them to grow fast even if there is slow growth in consumption in the advanced countries, heretofore the main source of demand for Asia’s exports? If they succeed, the next two decades will be a coming of age for Asian middle class households. If they fail, billions of Asian could fall back into poverty.

Asia should take heart from the experience of the advanced economies. After all, they grew fast by trading among themselves, allowing all countries to expand together on the back of productivity growth brought about by specialised production in a competitive environment. Asia too can re-orient its growth towards servicing its own domestic demands, because its middle class is already a $5 trillion market. That is easily large enough to for firms to achieve scale economies and productivity growth.

But Asia today faces challenges that the advanced countries did not face. It is experiencing growing levels of inequality and faces issues of social stability if it cannot find a more inclusive pattern of growth. It is susceptible to the effects of climate change, and must dramatically change its energy pattern away from fossil fuels. It faces strong competition for other natural resources, including food. It must generate savings to build its cities and other infrastructure at the same time as it encourages its households to spend — Europeans were already highly urbanised in 1960. It must deal with a world that seems to be facing ever more shocks. The advanced countries, by contrast, grew in an environment of unprecedented stability, anchored by the Bretton Woods system and later by effective cooperation among the G7 countries whenever global shocks had to be managed. And despite increased regional cooperation, Asia lacks an institutional framework to ensure that it can prevent crises in any single country from spreading to others in the region.

All this simply means that Asia is not pre-ordained to achieve rapid growth and a booming middle class simply because it has had economic success in the past. Like any mutual fund, past performance is no guarantee of future success. That maxim is especially true in middle income countries, and many once-strong growth performers have fallen into a trap of slow growth. But a confident Asia that looks to develop its own middle class, that makes smart choices about its cities, that educates its people, that opens up its services sectors, that starts to innovate and to tailor products to meet Asian consumer preferences will be an Asia that generates an enormous middle class. In less than 20 years, Asia’s middle class could come of age.

Homi Kharas is a senior fellow and deputy director for the Global Economy and Development program at The Brookings Institution.

1. Asia’s middle class on the rise
2. South Asia and Asia’s middle-class future
3. Who’s afraid of China’s middle class?

The recent flare-up over the Diaoyu Islands—a Chinese fishing boat captain was arrested by the Japanese Coast Guard—has followed a well-worn script. An international incident, say, the publication of a Japanese textbook, the bombing of a Chinese Embassy or pro-Tibet protests in France or even a disputed football match, quickly leads to protests in China, which are quickly defined as ‘nationalist’.

The international press duly reports on outraged citizens shouting slogans, bearing flags, threatening boycotts and some form of retaliation against those who have dared to offend China (The New York Times article of September 19, 2010 features a photograph of a bellicose bare-chested man with a tattoo of the national flag). Government spokespersons tell the world that the ‘feelings of the Chinese people’ have been offended. But, generally speaking, within a week or so the protesters are gone and the causes for which their fury ascended like a whirling dervish become mild breezes. To wit: for all the bluster of Chinese ‘nationalists,’ French products and stores were not boycotted after the pro-Tibet protests, Japanese cars and electronic products remain highly prized, and applications to American colleges and universities have not declined because of dissatisfaction with American policies or actions. When observing the contemporary China scene a gambling man would never lose by betting long on economic self-interest over any contemporary ‘ism’.

I raise these issues to make a larger point about how we empirically evaluate any sentiment or ideology in China, whether it is nationalism or Marxism. Now is a particularly opportune time to think about this given the widespread acceptance of the notion that ‘nationalism’ replaced Marxism-Leninism-Mao Zedong Thought as China’s reigning ideology in the reform period.

What is the evidence for this?

Yes, it is true that the government has promoted ‘patriotic education’—but it is not clear that this campaign—which began, not coincidently, after the 1989 legitimacy crisis—has worked, that people who are otherwise quite cynical about corruption, the education system and rampant materialism would suspend their disbelief and become ‘patriots’. What about all of those ‘nationalists’ who stage colorful street protests and shout slogans, vent on the web or hack foreign websites? They are, overall, a tiny sliver of the Chinese population, and unrepresentative at that. The American Tea Party has a flair for the dramatic, but one could hardly conclude that ‘Americans’ share their sentiments about the government.

I would suggest that it is critical to examine long term behaviors and commitments as a more accurate measure of patriotism in China, or anywhere else. Are Chinese economic nationalists? By the measure of calls for boycotts and statements of outrage at ‘x’ (take your pick: the US, Japan, France), yes; by a sustained boycott that requires sacrifice? Not really. There is no evidence that Chinese consumers prefer ‘Made in China’ products because they are manufactured in China and support Chinese workers.

The same can be said about military matters, both historically and in the present. During the Korean War, for example, the Chinese government mounted a propaganda campaign to mobilise support for the war (‘Resist American, Support Korea’). Unsurprisingly, the state media produced evidence of ‘rising nationalism’: protests, citizens happily contributing money to buy bullets for the army and the like. Many Western analysts concluded that Chinese supported the war, and the government enjoyed heightened legitimacy as a result, despite the high costs and stalemate.

But what happens if we shift the spotlight away from easily mobilise-able populations, like students, government workers and the press? Materials in archives, unlike newspapers and film clips, reveal that many ordinary citizens in Shanghai objected to the war, were confused about its objectives and admired the United States for its high standard of living; fear of reprisal should they not contribute to the war effort led many to hand over their money; peasants were often forced into the army and recruiting officers resorted to lies to recruit them; landlords and other ‘class enemies’ were sent to the front to fight the CCP’s war. When soldiers returned from the war, they were not treated well by employers or their fellow citizens, even those who were supposedly most exposed to state propaganda in cities.

The same sorry story repeated itself after China’s brief war with Vietnam in 1979: ballyhoo in the press and expressions of outrage against Vietnam, but archival documents show that veterans had a very difficult time taking advantage of their patriotic status when they sought better employment. Wives of military personnel soldiers could not easily capitalise in their status either. During the Cultural Revolution, when urban youth were parading around the county wearing military uniforms, investigations by the Shanghai Supreme Court revealed dozens of cases involving the rape of real soldiers’ wives, and soldiers who went AWOL seeking to avenge the crime. In fact, there is little conventional wisdom in Chinese politics that can survive the test of archival data unscathed.

Nationalism is a convenient concept for Western analysts to use—it ‘fits’ the way Westerners understand their own history and seems to explain various protests. But there is little documentary evidence that nationalism, Marxism or even hatred of Japan motivated millions of peasants to support the CCP in its rise to power. Nationalism did not prevent the bloodletting of the Cultural Revolution or contribute to better treatment of those who served their country in wartime or peacetime. At the moment, and until more archives are opened, we do not know how many current day ‘nationalists’ or ‘patriotic hackers’ are on the government payroll and directed by the party.

In the meantime, I would rather take the long-term view and ask: do the speeches and online chat result in meaningful, long-term action, and are they even authentic? Does evidence about actual behavior match the evidence from orations and comments to reporters? As with anything that we deem significant, the proof has to be in the data pudding.

Neil J. Diamant is an Associate Professor of Asian Law and Society at Dickinson College, Pennsylvania.

1. Chinese nationalism and where it might lead
2. The anniversary of the 1999 Chinese embassy bombing
3. Territorial disputes in East Asia: Proxies for China-US strategic competition?

The enactment in the nineties of the Urban Development and Housing Act (UDHA) of 1992 and the Comprehensive Shelter Finance Act (CISFA) of 1994, two pro-poor housing legislations, greatly changed the Philippines’ policy on housing the poor. From a highly centralised and heavily subsidised policy, the government moved to a market-oriented and participatory approach to housing. Despite these reforms, the problems with UDHA and CISFA have not delivered housing on the scale or of the quality that is required.

The National Shelter Program (NSP), which regulates housing production, regulation and financing, is the Philippines’ banner program for low-income housing provision. The NSP divides housing into ‘socialized’ (valued at less than USD 6,000, targeted at households up to the 30^th income percentile) and ‘economic’ housing units (valued at up to USD 40,000, targeted at households up to the 50^th income percentile).

Current housing efforts remain inadequate, with figures showing an acute housing shortage estimated at over one million units – still probably a gross underestimate. On average, the NSP has only delivered 26 per cent of its target, or less than 10 per cent of total housing need. Moreover, the housing backlog is likely to worsen,, due to worsening poverty and increasing urbanisation.

Several factors have contributed to hindering the outreach and sustainability of the NSP programs.

First, following the Philippines’ general decentralisation trend, the UDHA makes local government units (LGUs) responsible for being the UDHA’s main implementer. But most LGUs lack the capacity and resources for shelter and urban management. Moreover, LGUs are not often keen to accept low-income migrants for relocation, due to limited social services and economic opportunities, and housing maintenance costs.

Second, resettlement costs are increasing, increasing LGUs’ dependence on national subsidies. Lack of coordination between the lead national agency on resettlement – the National Housing Authority (NHA), LGUs and other national agencies further hinders the success of resettlement projects. Another problem is beneficiaries abandoning or transferring the home-lots they are awarded, due to a lack of opportunities and services.

Third, identifying suitable beneficiaries of government housing programs is difficult. LGUs lack incentives to develop databases for beneficiary registration, so the awarding of home-lots is often ad hoc and politically dependent. Tracking down the awardees of housing units has also proven difficult, due to lack of a monitoring system.

Fourth, under the UDHA, both the government and the community must eradicate professional squatters and squatting syndicates. But actual enforcement – arrests and prosecutions, has been sloppy, partly because of weak coordination between authorities and communities.

Fifth, the awarding of home-lots is often delayed by bureaucratic legalism and valuation issues. The establishment of eviction guidelines for urban poor settlements has been one of the highlights of the UDHA, providing informal settlers with some legal rights to the land they occupy. But these rights are sometimes disregarded, specifically in private lands, and monitoring has been weak, because no central agency or quasi-judicial body exists to ensure compliance.

Sixth, housing finance programs have limited outreach. For example, the Social Housing Finance Corporation‘s ‘Community Mortgage Program’ has been helpful, but lacks sufficient funding to expand operations. On the other hand, the Home Development Mutual Fund’s ‘Socialized Loan Program’, geared towards salaried workers, has not greatly benefited the poor

Not only does the Philippines have one of the lowest mortgage penetration ratios, but public expenditure on housing is one of the lowest in Asia, at less than 0.1 per cent of GDP on average,  The aim of CISFA was to strengthen the NSP through regular and higher annual budget appropriations between 1995-2002, but only 52 per cent of this  allotted increase in NSP funding was actually released. The entry of housing microfinance has been limited

Moreover, private sector funds remain considerably untapped. The UDHA intends to entice private investment in socialised housing through tax exemptions and regulation, but the incentives’s benefits are not clear. The UDHA also requires developers without socialised housing projects to set aside 20 per cent for low-income housing programs, but compliance has not been adequately monitored.

For the housing sector to be more responsive to the needs of the poor, several key reforms are required.

First, a reliable and sustainable poverty database system is needed at the local level. with clear and measurable parameters to identify suitable beneficiaries. The Department Of Interior and Local Government is currently working on a monitoring system to generate baseline information on poverty; this system could also be adopted for shelter programs.

Related to this, establishing a national resettlement policy will ensure a common framework for resettlement approaches, housing packages, and entitlement. NHA’s role as lead agency should be strengthened, with funds from the various resettlement agencies integrated into a common fund.

Second, a system of incentives should encourage and capacitate LGUs to perform their roles in shelter as identified in the UDHA. LGUs and the national police should also be empowered to more effectively curtail squatting syndicates.

Third, the Philippine government should develop a public-private partnership as a key strategy to resettlement projects. The tax incentive scheme for shelter needs to rationalised and made more responsive. At the same time, the government must increase public expenditure on housing, ensuring that the subsidy scheme is transparent and well-targeted.

Finally, NSP success requires a favourable environment for housing finance. Thus, the government must ensure the financial health of state-owned housing finance institutions, and encourage the entry of housing microfinance institutions, including foreign-based microfinance. Scale and sustainability will only come through through developed capital markets, not continuously using government funds. On the demand side, government should try to improve the bankability of the poor through community and livelihood development programs.

This article is summarised from a Phillipines Insitute for Development Studies (PIDS) Policy Note published here.

1. Social security and housing the poor in China
2. Australian housing: Baubles, bubbles and busts
3. China’s housing crisis

The Chinese official statistics say that the average rise in property prices was 10.7 per cent in February. The increase is accelerating from a year-on-year rise of 9.5 per cent in January. But this data may significantly underestimate what is going on for prime properties in China. My friends in Shanghai and Beijing say the rate of price increases of typical housing units is above 50 per cent a year and may reach 100 per cent, and that new property developments are spreading fast from first to second-tier suburbs, with less convenient transportation.

According to the official statistics, the rate of price increases of newly-built residential buildings (at 90 square metres and below) in Beijing, Shanghai and Shenzhen are 19.3 per cent, 11.6 per cent and 19.6 per cent, respectively. In the same category, the highest property inflation was in Sanya, Hainan Island, at 57.9 per cent. But the location and quality of the buildings are most likely not controlled for in the official statistics. (Beyond ‘average prices’, no detailed description is available.) Suppose that the market has more buildings in the second-tier than the first-tier suburbs; then the average price may be lower than the location-controlled index. Thus, official statistics most likely underestimate the size of the housing bubble.

In real estate economics, the quality-adjusted property price index can be constructed by the sampling of repeated-sale (identical) properties (like the Case-Shiller index), by running a hedonic regression (in many academic studies for particular cities), or by using expert appraisal (like the frequently quoted Japanese land price index). Having a quality-adjusted property price index is a critical base for timely policy decisions.

What is happening in China now is familiar to any Japanese aged above 45. Japan experienced one of the largest property bubbles in the 1980s. The land price index tripled in five years. (The six-city price index for residential land rose from 39.2 in September 1985 to 105.8 in September 1990. The commercial land price rose from 27.9 to 104.5.) First, the land price rose in central Tokyo, then spread to first-tier suburbs, other large cities, second-tier suburbs and finally to rural land. The recent US housing bubble had a similar process of moving from prime to subprime mortgages. The quality of borrowers progressively worsened. In both Japan and the US, the loan-to-value ratio rose sharply towards the end of the bubble. Is this bubble now being repeated in China?

Many Chinese officials tell us that they believe the origin of Japan’s stagnation for the 20 years after its housing bubble burst lies in its failure to stand up to US pressure for the yen to appreciate. Indeed, the yen rose from a low of 260 yen/dollar in February 1985 to 200 yen/dollar 10 months later and on to the high of 80 yen/dollar in May 1995. Japan’s economic performance in the past 20 years has lagged its potential, but I would not blame yen appreciation for this. In fact, policy counter-measures – monetary easing and fiscal stimulus against too-rapid yen appreciation – grew stronger in 1986. Monetary easing continued until 1989. Considering what was going on in the property market, this monetary tightening and strong regulatory measures, such as restrictions on loan-to-value ratios, should have been applied much earlier, in 1987 or 1988. A bubble may not be completely avoided purely by monetary tightening, but the damage may be reduced by early tightening and prudential regulations.

The Chinese authorities are doing better than their Japanese counterparts in the 1980s. The central bank is tightening regulation of loan-to-value ratios and trying to end easy credit. But they are hesitating to take up the best policy – interest rate hikes and appreciation of the Chinese renminbi. The property bubble is a clear sign of overheating. China’s reported inflation rate does not show rampant inflation, but that was also the case in Japan in the 1980s. If the renminbi is appreciated, any overheating of China’s export sectors will be slowed, while standards of living will improve with higher purchasing power.

China did allow the renminbi to rise from July 2005 and it appreciated by 20 per cent by the summer of 2008. Yet, productivity increases by China’s export sectors have overcome this appreciation. It is high time China resumes appreciation. It should not be resisted because it is what the US wants. It is time for China to learn the right lessons from the Japanese experience.

This article was first published here in the Financial Times.

Takatoshi Ito is a professor of economics at the University of Tokyo.

1. The People’s Bank of China’s latest rate hike and what it tells us
2. China needs to adjust its monetary policy now
3. China 2011: risks are from liquidity not liability

By now it is well known that Indonesia is weathering the global financial crisis (GFC) better than most countries. This is usually explained by lower dependence on exports, as well as the stimulus provided through fiscal and monetary policies.

Nonetheless, there is another reason behind Indonesia’s strong performance. Cautious policies by Indonesia’s government, banks, corporations and households over the past decade have resulted in low debt levels and limited refinancing needs. This served the country especially well in late 2008 and early 2009, when liquidity tightened around the world.

To begin with, careful fiscal management reduced the public debt ratio to 33 per cent by the end of 2008, which was amongst the lowest in the G20, and had the prospect of further decline. Consequently, the government was in a position to increase the deficit from roughly 0.1 per cent of GDP in 2008 to as much as 2.5 per cent in 2009, raising the growth rate by 0.5-1.0 percentage points according to IMF estimates. This is very different from many other emerging markets, especially in Eastern Europe which, because of high debt burdens, were not as free to provide fiscal stimulus. Moreover, if global economic conditions deteriorate again, Indonesia has the option of pursuing more stimulus.

Secondly, Bank Indonesia had built-up adequate foreign exchange reserves, currently equivalent to almost 200 per cent of short term debt on a remaining maturity basis, which provided a good cushion against capital outflows in the second half of 2008. While not as large as in some other emerging markets, reserves were sufficient to allow Bank Indonesia to intervene in the market to limit the fluctuation of the rupiah, and thus prevent a major decline in confidence. The key, however, was allowing the rupiah to fluctuate freely and absorb the impact of the capital outflows.

Thirdly, Indonesia’s banks have maintained ample liquidity and capital buffers. The capital adequacy ratio is around 17 per cent, compared with the Basel requirement of 8 percent. Also, banks hold about 23 per cent of their assets in Bank Indonesia paper or government bonds, considerably above international norms. Thus, the overall loan to deposit ratio is about 75 per cent, i.e. banks are mainly financed by deposits rather than the interbank market and/or foreign loans which proved much more unstable sources of funds during the crisis. The loan to deposit ratio is above 100 per cent in most of the East European countries which have been most affected by the global financial crisis. The large, systemic banks in Indonesia are in especially good shape. Thus, although bank lending growth has been reduced in line with the slowing economy, it has stayed positive, unlike many other countries where banks have had to rebuild their capital.

And what about the corporate sector? Currency and maturity mismatches were one of the key causes of crises in 1997-99. Many analysts thought that Indonesian corporations would be unable to refinance their debts in late 2008, perhaps triggering a balance of payments crisis. There was little confidence in data that suggested only moderate indebtedness. These sentiments were amplified when one conglomerate had problems in meeting some obligations in October 2008. In fact, the bulk of Indonesia’s corporations were in relatively good shape, in line with the rest of emerging Asia. There were very few bankruptcies and/or defaults during the crisis, unlike in mature economies.

Last but not least, Indonesia’s consumers, at about 13 per cent of GDP, carry a much lighter debt burden than in other countries. Thus, when banks around the world, including Indonesia, tightened credit standards in late 2008, the Indonesian consumer could continue spending. Nevertheless, the sharp fall in car and motor cycle sales probably could be explained by caution on the part of banks to provide credit.

Of course, the low level of debt in the economy only partly results from choices by the public and private sectors. The lack of intermediation in Indonesia to a large extent reflects the traumas of the Asian crisis: many high wealth individuals keep their fortunes abroad. Banks are very cautious in extending credit—loan recovery, especially in the case of large corporations, remains difficult because of problems in the judicial system. Access to finance, including credit, remains beyond the reach of much of the population. Had more credit been available to companies and households, the economy would have grown faster and Indonesia would have been a richer country. Scholars have found evidence from a variety of perspectives that suggests financial development, typically measured in terms of either credit or broad money relative to GDP, raises economic growth.

Nevertheless, looking ahead, strong balance sheets represent an enormous growth opportunity for Indonesia. While consumers with huge debt ratios, such as in the US and UK, will likely have to limit their purchases for years to reduce debt levels and ensure adequate pensions, Indonesian households have room to take on some more debt which should boost economic growth. At the same time, many corporations are cash rich and debt free, and will be able to finance investments including in infrastructure if attractive opportunities arise. Moreover, with their relatively low loan to deposit ratios, banks are in a position to support both consumption and investment. Additionally, Indonesia’s government has room to finance the building of infrastructure as well as to raise social spending. Deficits of 2 per cent of GDP over the next few years would not increase the government’s debt burden significantly. Thus, the current cautious government fiscal strategy is especially wise given the expected increases in private sector debt.

Of course, it is not sufficient for investors and consumers to have the capacity to take on more debt, the government has to offer a better legal and regulatory environment. To translate its strong fiscal position into roads and ports, Indonesia’s government must implement investment projects more effectively. This is the most difficult part, but not the subject of this article.

In sum, the Indonesian private sector has room to take on more debt and this could be an important driver of growth in the period ahead. However, the bodies supervising banks and other financial institutions will need to monitor the increase in the debt of households and companies closely to avoid a rapid and excessive rise. One of the lessons from the global financial crisis is that it is not sufficient to supervise individual institutions but to look for vulnerabilities in the system as a whole. Excessive credit growth in the system is usually an excellent predictor of future asset bubbles which could ultimately threaten the financial system as a whole. The challenge for policymakers therefore is to ensure that rapid credit growth is not accompanied by a relaxation of loan origination and risk assessment standards. Hence, there is a need for continued improvement in bank regulation and supervision.

Milan Zavadjil is a senior representative at IMF Indonesia.

1. The Greek tragedy: Global debt crisis and balance sheets
2. Indonesia: Blessed by strong economic growth and the curse of resources
3. India: Confronting the Global Financial Crisis

In his review of the Australian Government’s defence white paper, Greg Sheridan, Foreign Editor of The Australian, says, ‘just for the record’, that the US economy is six times as big as China’s. He claims that the white paper’s assertion that China has the potential to overtake the US as the world’s largest economy by 2020 is ‘silly’ (‘A battle of words’, Weekend Australian, 2-3 May, p. 22).

Sheridan also claims that the use of the purchasing power parity (PPP) method to compare the relative size of economies is ‘sleight of hand’ which gives rise to a ‘statistical illusion’ and ‘a meaningless measure’.

He is wrong on all counts. Even on the discredited ‘market’ exchange rate method that he persistently champions against the unanimous advice of economic statisticians and index number theorists, the GDP of the US is now only three times as big as China’s, not six times as big (IMF, World Economic Outlook Database, April 2009).

Curiously, Sheridan describes the exchange rate-converted GDP number for China as being in ‘real dollars’ – in fact, the result of converting China’s GDP in local currency units into $US using the exchange rate yields nominal dollars. In order to obtain a valid comparison in ‘real’ dollars, it is necessary to allow for the obvious fact that, on average, the Chinese currency equivalent of the $US will buy more in China than those dollars will buy in the US – though this is not necessarily true of all components of expenditure or of all regions and cities.

Sheridan accepts uncritically the white paper projection of real increases in Australian defence spending of 3 per cent annually up to 2018, thereby recognising the principle that comparisons of spending in one country over time must be corrected for differences in price levels. For the same reason, comparisons between countries at the same point in time must also be corrected for price differences – I don’t understand why Sheridan, and many others, cannot see the inconsistency in their position.

GDP is a measure of output, and cross-country comparisons of GDP must be informed by an understanding of what the statisticians’ concept of GDP measures. The white paper refers to an undefined concept of ‘economic strength’, which it says ‘is also a function of trade, aid and financial flows.’ According to these ‘market-exchange measures’ the white paper asserts that ‘the US economy is likely to remain paramount.’

This is certainly not obvious. So far as the value of exports in $US is concerned, the US dropped from first place in the world in 2000 to third place in 2007, after Germany and China. In contrast, China’s place on the export league table rose from sixth in 2000, after the US, Germany, Japan, France and Canada, to second in 2007.

China led the world in ‘high-tech exports’ in 2006 ($US 271 billion), with the US running second ($US 219 billion) and Germany third ($US 155 billion). (IMD World Competitiveness Yearbook 2008, p. 438).

So far as investment flows are concerned, it may be questioned whether the US’s huge and continuing current account deficit is an indication of ‘economic strength’. According to the latest IMF estimates, the US will run a cumulative current account deficit of $2.8 trillion over 2009 and the next five years, while China will have a cumulative current account surplus of $3.8 trillion over the same period. These numbers imply a massive increase in the international indebtedness of the US, and a correspondingly large increase in China’s net international assets.

I do not suggest, as Greg Sheridan has, that the argument about relative economic strength in the white paper is ‘incoherent’ and ‘silly’ – but I do believe that the authors should have paid closer attention to the meaning of the economic measures upon which they relied, and offered a more detailed analysis to underpin their conclusion that the US ‘is likely to remain dominant.’ If they are somewhat distrustful of comparisons using the statistician’s GDP measure (with PPP converters derived from the International Comparison Program), they should consider the implications of physical indicators of production of the kind that provided measures of relative economic capacity before macroeconomic aggregates such as GDP came to dominate discussion of relative ‘economic strength.’

Two such items that bear upon future economic and military potential are steel and cement. China is, by a large and increasing margin, the world’s largest producer of both commodities. The country’s crude steel production rose from 1.7 times to 5.0 times the corresponding US level between 2001 and 2007, and its cement production rose from 6.8 to 14.6 times that of the US level over the same period (UN, Monthly Bulletin of Statistics, December 2008). There is also evidence of rapid growth in China’s consumer goods industries.

Ian Castles is Visiting Fellow in the Crawford School of Economics and Government at the ANU and was a former Commonwealth Statistician.

1. China and Japan in landmark shift in Asian economic power? – Weekly editorial
2. PPP is not ‘basically a con’
3. Measuring the progress of Indonesia’s democracy – Weekly editorial

Greg Sheridan, foreign editor of The Australian, has criticised Prime Minister Rudd for suggesting that ‘by 2020 China could replace the United States as the world’s largest economy.’ He claims that this is ‘impossible’ because ‘the US economy is five times as big as China’s’ (‘No pandering to China in PM’s Asia Plan‘, The Australian Literary Review, November 2008).

This is wrong. Even if the GDPs of the two countries are ‘compared’ using the discredited practice of exchange rate-based conversion, this year’s estimated GDP of the US is only 3.4 times that of China. And if the purchasing power parity (PPP) results of the International Comparison Program (ICP) are used, the US GDP is only 1.8 times that of China (IMF World Economic Outlook Database, October 2008).

The latter measure implies that the estimates cited by Mr Rudd would be realised if, as can reasonably be expected, China’s average growth rate in the coming decade exceeds that of the US by 5 percent annually. The Prime Minister’s statement is unexceptionable.

The 2005 ICP was the largest and most complex global statistical project ever undertaken. Using detailed lists of closely comparable products, national statistical offices submitted the prices of thousands of items to regional coordinators. These were aggregated up to 129 basic headings, for each of which the estimated value of the expenditure was also submitted. The regional results were brought together in a Global Office housed at the World Bank, under the supervision of a Global Executive Board chaired by Dennis Trewin, the former Australian Statistician. The operation was supported by a Technical Advisory Group of eminent experts from academia and from national and international statistical offices.

In his article in ALR, Sheridan said that PPP was ‘basically a con’. He claimed that it ‘rests on the proposition that a man in Peru gets fed, so does a man in France: therefore a bowl of rice in Lima should be given the same economic value as a meal of lobster and filet mignon in Paris.’

This too is wrong. The ICP’s product lists covered over 100 items of food, which were priced in each locality using well-documented procedures for determining the sample of outlets for individual products. If the Program’s experts had been so foolish as to equate the Peruvian’s rice with the Parisian’s filet mignon, their estimates of the real cost of ‘getting fed’ would have been similar in both places. In fact, they found that real expenditure on food per head was over two-and-a-half times greater in France than in Peru.

Sheridan also asserted that ‘Rudd was presumably referring to some version of the famous Goldman Sachs BRICs study’, and claimed that that study’s forecast that China could become the world’s biggest economy by the late 2020s was ‘only possible if you measure by purchasing power parity rather than real dollars.’

This is wrong yet again. The Goldman Sachs study used exchange rate converters, not PPPs. There is no reason to doubt that the Prime Minister’s reference to ‘some estimates’ referred to those made by leading authorities, not to the flawed forecasts of an investment banking firm. Sheridan’s criticism of unnamed ‘China boosters’ for according the BRICs study ‘a place of central scriptural authority’ is misdirected, because Sheridan himself gives unwarranted credence to the Goldman Sachs numbers (as quoted in a book by former Economist editor Bill Emmett).

Finally, Sheridan predicted that ‘The US is likely to remain the world’s only super-power through to mid-century.’

It is impossible to know in 2008 whether or not such a forecast will be realised, but it is not reassuring that its author accepts the official statisticians’ concept of GDP but rejects the statisticians’ advice about how the estimates for different countries should be compared. This important issue is discussed in detail in Ian Castles and David Henderson, International Comparisons of GDP: Issues of theory and practice, (in World Economics, Jan.-Mar. 2005: 59-85) and in the sources cited therein.

Those who wish to use relative GDPs as a measures of a country’s potential to achieve super-power status have a responsibility to inform themselves of the way in which national GDP estimates are prepared, what they purport to measure and how they should be used to make cross-country comparisons.

Far from being ‘basically a con’, PPP-based estimates are the only valid basis for cross-country comparisons of GDP. If they are judged to be deficient, GDP comparisons should not be made at all. As Jacob Ryten, former head of economic statistics at Statistics Canada and consultant to the UN Statistical Commission on the ICP, has correctly observed, ‘The only viable alternative to the use of inadequate PPP-based estimates is better PPP-based estimates’ (quoted in Castles and Henderson, op. cit: 69).

Ian Castles is a Visiting Fellow, Crawford School of Economics and Government, ANU, and former Australian Statistician (1986-94).

1. Measuring China’s size and power
2. China’s energy intensity target: On-track or off?
3. China and Japan in landmark shift in Asian economic power? – Weekly editorial