Asia Needs Investments More Than Consumption

The Economist NAILS IT this time (well conceptually speaking).

Asia needs more investments more than consumption.

According to The Economist, (bold highlights mine-and comments added)

``ASIA’S current-account surpluses have been widely (if unfairly) blamed for causing the global financial crisis. Large inflows of foreign money helped inflate America’s housing bubble, the argument runs. Many Western economists say that Asians should squirrel away less of their income and consume much more. But a more rigorous analysis suggests that in most Asian economies it is investment, not consumption, that is too low.

[I would add that experts proposing a currency elixir to resolve so-called global imbalances, are those living in NEVERLAND ignoring the fact that every economy operates on different structures, e.g. market, capital or production, regulatory and etc., would mean more than just a single dimensional approach. The implication, say for example, for China to expand domestic demand is to generate a credit bubble, similar to the Japan in the 80s]

``Even economists who believe that most of the blame for the crisis lies in Washington, DC, argue that Asian economies need to shift from exports and investment to consumption as their new engine of growth. In “The Next Asia”, a recently published book, Stephen Roach, chairman of Morgan Stanley in Asia, calculates that consumption in emerging Asian economies fell from 65% of GDP in 1980 to 47% in 2008. American consumer spending, by contrast, accounts for more than 70% of GDP. “Until export-led growth gives way to increased support from private consumption,” he argues, “the dream of an Asian century is likely to remain just that.” His prescription certainly applies to China, where private consumption fell to only 35% of GDP in 2008. But what about the rest of Asia?

``A country’s current-account surplus is, by definition, equal to its domestic saving minus its domestic investment. So Asian economies can reduce their surpluses by saving less (ie, consuming more) or by investing more. Which route is appropriate depends in part on why their current-account surpluses widened during the past decade. In China the blame lies entirely with saving, which rose faster than its investment rate. (India’s saving rate climbed just as steeply, but it was matched by an even bigger jump in investment, which kept its current account in deficit.)

As we tackled in Dueling Keynesians Translates To Protectionism? the principal goal is to produce so as to be able consume, as Adam Smith argued centuries ago, ``Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to only so far as it may be necessary for promoting that of the consumer. The maxim is so perfectly self-evident that it would be absurd to attempt to prove it. But in the mercantile system the interest of the consumer is almost constantly sacrificed to that of the producer; and it seems to consider production, and not consumption, as the ultimate end and object of all industry and commerce."

Hence any arguments based on heuristics (mental shortcuts) and or oversimplification of facts and theories, particularly on the currency magic wand, would be fallacious.

Besides, for experts to argue for imposing on other countries is to engage in reckless overweening presumptions- this risks provoking antagonism that would undermine or worsen the present conditions that would likely result to the opposite goals.

chart from SocGen's Albert Edward/Tyler Durden of Zero Hedge

Moreover, the liberals' proclivity to immerse in fingerpointing fundamentally shifts domestic policy failure accountability to other parties. As in the above, global investments has been MORE than savings which implies that the world, specifically the G-7 countries, has engaged in inflationism. Therefore, theories such as the "global savings glut" is nothing but an attempt to divert policy failures to others and at the same time justify inflationism.

Finally back to the Economist, ``A report by the Asian economics team at Barclays Capital concludes that to reduce their excess saving, most Asian economies need to invest more rather than consume more. Higher investment, especially in infrastructure, they argue, would not only reduce current-account surpluses but also boost growth and living standards. Better roads and railways would help farmers get their produce to cities and enable manufacturers to export their goods abroad. Clean water and sanitation could raise the quality of human capital, thereby lifting labour productivity."

Here we depart with the Economist or with Barclays Capital.

As seen in the earlier chart, Asia has engaged in massive spending during the early 90s but this didn't translate to the desired outcome. Yet the article didn't touch on why higher spending didn't engender domestic demand.

Well it's because investments then hasn't been directed at WHAT the market wants or needs, but instead had been fostered by bubble policies and profligate government spending which eventually led to the Asian Financial Crisis of 1997.

Moreover, as we previously argued, the protectionist-state capitalism model adapted by many Asian nations, e.g. ASEAN states, severely impeded market based investments.

Nevertheless, ASEAN and East Asia's thrust to integrate regionally and globally can be read as a major positive development going forward. [see Asia Goes For Free Trade]