Asia's shoppers key to its economic future

Asia's growth has been predominantly led by exports.

In a growth-starved, post-crisis world, many presume that the baton of global economic leadership has already been handed off from the West to the East. The onset of the Asian Century is taken as a given. While such an outcome is entirely possible, I argue in my book The Next Asia that it has not happened yet. A silver lining of the Great Recession of 2008-2009 is that this transition may actually occur sooner rather than later - yet more by necessity than by design.

The enthusiasm over Asia is certainly understandable on one key level: on the surface, there can be no mistaking the sheer power of the Asian growth miracle. The broad collection of economies that comprise Developing Asia expanded at an 8.3 per cent average annual growth rate from 2001 to 2008, basically three times the 2.8 per cent average growth pace of the rest of the global economy. Putting it another way, the extraordinary dynamism of Developing Asia added about 1.2 percentage points extra to annualised global growth over the past eight years.

But here is the critical catch: over this same period, Asia has continued to direct an increasing portion of its production to others. The export share of Developing Asia's GDP rose from 35 per cent to 45 per cent over the past decade, whereas the share going to internal private consumption fell to a record low of 45 per cent of pan-regional GDP last year. As such, the region does not satisfy the most basic precondition of autonomous economic leadership: an economy where production support is dependent increasingly on home markets rather than on external demand.

As the shifting mix of Developing Asia's GDP indicates, the region's growth premium has been driven more by exports, and by the ancillary support of export-led fixed investment in infrastructure and export-producing capacity, than by internal private consumption. For now, the dreams of Asian-led global leadership are wishful thinking. Developing Asia is still more of a follower than a leader. Validation of this critical deduction comes from the unmistakable repercussions of the global crisis. In the aftermath of a US-led synchronous downturn in the developed world, every Asian economy either went immediately into recession or experienced a sharp slowdown.

Asia's ever-rising external connectivity made such an outcome inevitable. The Asia consumer, despite all the hype, was not nearly strong enough to forestall this outcome. This gets to the essence of the Next Asia, the daunting transition from an externally dependent growth model to one that derives increasing support from internal private consumption. Most important of all, it lays bare the recipe for an Asia that can finally stand on its own; an autonomy that can be realised only by drawing support from its own vast population of 3.5 billion people. I remain optimistic that Asia is very much headed in this exciting direction. It is just a question of when, not if.

As is the case for almost all the opportunities of the Next Asia, the key to this transition undoubtedly lies in China. There has, of course, been considerable debate over what it will take to spur a consumer-led growth impetus in China, ultimately the key driver of the Next Asia. There is no silver bullet. Rural income support is undoubtedly critical, especially for a nation that continues to have close to 60 per cent of its vast population residing in the countryside. So, too, is the need to develop a consumer-products industry, together with a wholesale and retail distribution and service and infrastructure.

But, in my view, the main impediment to Chinese consumption remains excessive levels of precautionary saving. Recent estimates by the Cornell University economist Eswar Prasad put China's household saving rate at 37.5 per cent last year, up a stunning 10 percentage points from the 27.5 per cent reading recorded as recently as 2000. Chinese consumers remain very much predisposed toward saving. Until that changes, a transition that can be enabled only by the funding of a modern social safety net - social security, private pensions, medical and unemployment insurance - China's macro imbalances can only worsen. That would make it all the harder to stay the course of sustainable growth and development.

Consequently, the time is ripe for China to move aggressively in building a modern social safety set as a key pillar of a pro-consumption macro rebalancing strategy. The benefits would be enormous. Not only would China better insulate itself from future external demand shocks, but also a reduction of excess personal saving would go a long way in cutting China's current account and trade surpluses, thereby soothing potential trade frictions and tempering protectionist risks.

Moreover, the resulting shift in the mix of the economy away from industrial production-led export and investment to more of a services-based consumption dynamic would go a long way in lowering the energy and natural resources content of Chinese GDP. That, in turn, would lead to a lighter, cleaner strain of Chinese output; extremely helpful for the nation's daunting pollution abatement and environmental remediation objectives.

Two and a half years ago, Wen Jiabao, the Chinese premier, unwittingly wrote the script for the Next Asia. He warned that while China's economy looked strong on the surface, beneath the surface it was increasingly "unstable, unbalanced, unco-ordinated and ultimately unsustainable". These "four uns," as they were eventually to become known, can be effectively addressed only if China, and the rest of Asia, embraces a new mantra of consumer-led growth.

The Great Recession of 2008-2009 underscores a new urgency to this challenge. It is Asia's wake-up call that the old ways of export-led growth have just about outlived their useful existence. Asia has long been the world's most exciting growth story. But if its 3.5 billion consumers now play an increasingly greater role in shaping the region's economic development, the excitement will take on an entirely new dimension. The Old Asia was always limited in its capacity as an engine of global growth. Not so with the Next Asia and its potential to culminate in the long-awaited flourishing of the Asian Century.

Stephen Roach is chairman of Morgan Stanley Asia