Asia’s Growth Engine Purrs

Shang-Jin Wei, a Columbia Business School professor and a preeminent expert on the Chinese economy, outlines three drivers that will propel Asia’s growth.

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It’s a popular notion that the United States functions as the world’s growth engine. But the numbers tell a different story, said Shang-Jin Wei, the N.T. Wang Professor of Chinese Business and Economy, and currently chief economist of the Asian Development Bank, in a recent presentation at Columbia Business School.

Over the past five years, the United States contributed nearly 10 percent of global growth, but that was paltry compared with the 31.2 percent push from China and less than the 11.8 percent bump from India. This year, the ADB still expects Asia to rack up about 60 percent of global growth, compared with 14.4 percent from the United States.

The Three Rs

“Developing Asia continues to grow,” said Wei, who predicted the region as a whole would barrel along at 6.3 percent in 2015, the same pace as last year. When it comes to key growth drivers, he referred to the 3 Rs: Reforms at home meant to pave the way for capital accumulation and continued upward mobility of Asia’s middle class, recovery in advanced economies that will prop up exports and investment in Asia, and reduction in commodity prices.

“Lower oil prices provide opportunities throughout developing Asia,” he noted. For starters, it makes subsidies less necessary, said Wei, who pointed to Indonesia’s reduction of its costly fuel subsidies. “That single item changed the budget from a deficit to a surplus,” he said. Lower fuel prices also make inflation less buoyant — the Asian Development Bank predicts a benign 2.6 percent across the region in 2015.

Lower commodity prices also make the building of infrastructure more affordable, said Wei. He cited the World Economic Forum estimate, which assumes developing Asia will need to spend $750 billion a year to build infrastructure, and suggested that figure might be modest compared with what’s actually needed.

The China/India Race

These rosy predictions come despite a moderation in Chinese growth. Wei expected other Asian developing markets to take up any slack from China’s sagging juggernaut. For 2015, the ADB forecasts India’s GDP will grow at a 7.8 percent clip this year, faster than China's 7.2 percent pace. (Wei acknowledged the Bank’s estimate of China’ growth is higher than the official 7 percent forecast from Beijing. “They may be managing expectations,” he said.) He credits India’s surge with reforms kicking into gear as well as a material change in methodology regarding how the country tracks the economy.

Three primary risk factors could upend Asia’s growth scenario, though. Exports could slow significantly if the Greek debt crisis roils Europe or the Russian Federation endures a deeper recession. Slower-than-expected growth in either China or India could drain momentum from the whole region. And increasing US interest rate yields could siphon investor capital previously earmarked for Asia.

More Reforms Needed

Despite progress, Wei cautioned, Asia still has a long way to go to catch up with advanced economies. Noting that “development does not automatically lead to inclusive growth for all citizens,” he pointed out that just 27 percent of adults in developing Asia keep money in a formal financial institution, compared with 93 percent in high-income countries.

Lower deposit rates result in a higher cost of capital, since lenders have to draw from a more shallow pool. Wei called for reforms that would make for a more robust local financial system. “Financial development must support growth, inclusion, and stability,” he urged, adding that “financial instability disrupts growth and hurts the poor.”

Rural communities, in particular, face challenges, since financial institutions find it expensive to build out into unserved areas. Wei suggested one solution might be for banks to partner with local merchants to offer financial services.

Altogether, Wei is optimistic about developing Asia — particularly China. “I believe the economy can improve sufficiently to offset any drags on growth,” he said. ”The fundamentals are in place to support this.”

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