Rising Asia in a reconfigured world
By Shahid Javed Burki
Monday, 07 Feb, 2011
ONE thing has become clear as the global economy continues to recover from the Great Recession of 2008-9. The Asian states were much better equipped to deal with the downturn than the governments in the more developed economies of the West.
This is shown by the latest numbers on the rates of growth in gross national products in various parts of the globe in 2010. According to the data released recently by the Asian Development Bank, the numbers also show how far Pakistan has been left behind but also suggest how the country could play the catchup game.
East Asia led the pack of the recovering countries with an average growth rate of 9.3 per cent in 2010 after an increase of seven per cent in 2009. This means an increase of almost 33 per cent in the rate of growth, indicating a sharp recovery from the recession.
China was largely responsible for the buoyancy of East Asia. It’s GDP increased by 10.2 per cent. South Asia followed with an increase of 8.7 per cent in 2010 after a more sedate seven per cent increase in the previous year.
South Asia’s impressive performance was due to the speed of recovery of India, Asia’s other large economy. The Indian GDP increased by 9.2 per cent in 2010. The South Asian performance would have been even more impressive had the economic situation in Pakistan, the region’s second largest economy, not been that troubled.
Latin America and the Caribbean managed a respectable 5.7 per cent GDP growth rate following a contraction of 2.2 per cent in the previous year. It too was helped by the region’s largest economy – Brazil. Even sub-Saharan Africa managed to grow by 4.7 per cent compared to 1.7 per cent in 2009. Here Ghana stood out as the best performing economy.
Compared to these impressive rates of increase in the GDPs of the developing world, the economies of rich countries remain weak. After contracting by 3.4 per cent in 2009, they grew by 2.8 per cent in 2010. As was the case with the developing world, the industrial world’s recovery was also led by its largest economy – the United States. Within different regions of the developed world, size also played a role.
While the smaller economies of the European Union suffered – at least two of them, Greece and Ireland are close to bankruptcy – Germany, the area’s largest economy, seemed to have shrugged off the recession and was performing reasonably well.
What do these different regional growth rates tell us? A number of important conclusions emerge from this quick overview. The first is that size matters. The larger economies have shown to be much more resilient compared to the smaller ones. This is the opposite of what was occurring when the global economy was going through a boom. Then the smaller economies showed greater buoyancy compared to the larger ones.
It is interesting to note why that happened. It was shown that when international trade is expanding rapidly as was the case in the booming 1990s, it was easier for the smaller nations to sell their products and services in an expanding global economy and in an economy in which personal incomes were increasing rapidly.
Ireland thus was able to export its IT services to the industrial and commercial sectors of the industrial world. Similarly, Greece became an even more attractive destination of European tourism. Second, it helped that the smaller economies embedded in larger economic systems.
The incorporation of the smaller European countries in the European Union system meant that they had the markets they could easily exploit. They could also draw upon more easily on the financial resources available in the capital markets of the large countries. The French and German banks bought large denomination bonds from the smaller countries. When the receipts of these bonds were used for low yield investments as was the case with the building of the infrastructure and related facilities for hosting the Athens Olympics, the result was disastrous.
My concern today, however, is to underscore the important point that in the world emerging after the Great Recession of 2008-09, Asia will occupy a very different place from the one it had before the slowdown began.
And within Asia, China will become increasingly dominant. This is for three reasons. By far the most important of these is the rise of China which, as already indicated, was able to achieve a double digit rate of growth after a brief pause produced by the Great Recession. The pace of Chinese recovery meant that the country’s economy was able to overtake that of Japan and become the second largest in the world. This happened sooner than was generally expected. With this new position, China has joined the United States as the world’s two largest economies which will have to work together to shape the global economic system.
The second important reason for the different impact of the rise of China is that it will be able to convincingly offer a development paradigm from the one that made the United States such a dominant influence in the global econo my in the last few decades of the 20th century.
The two countries, the United States and China, arrived in different ways in reaching their present positions.
The Americans gave much more freedom to the private sector, pulling the state so far back that it had no idea how the financial sector was working to produce prosperity. That prosperity proved to be short lived since the riches that were created – in particular in terms of home ownership when assets were acquired by the people who could not afford them – could not be sustained.
America is still dealing with the problem of home foreclosures that have significantly reduced the wealth, and hence the purchasing power, of hundreds of thousands households.
China to a considerable extent and the adjacent East Asian countries to a lesser extent continue to rely on the state to oversee the working of the economy. Whenever the Asian economy seemed to be losing its balance, the state stepped in to restore equilibrium. In other words, in the new paradigm the state will have a much greater role in setting the direction the economy should be moving. The third reason why the new global order that is being constructed around Asia will be different is the emphasis the state and the society are paying in developing human skills. Enormous amounts of resources are being committed to improve the standard of education attained by the student body. Asia is investing impressively in the development of its large human resource.
In this context China has taken the lead. It is preparing for the 21st century more fully and more determinedly than any other large Asian country. Its investment in human resource development even more than the size of its economy will pose a challenge to the rest of the world. This was recognized by President Barack Obama in his State of the Union Speech delivered on January 24.
China’s rise in Asia and in the world and its focus on developing a highly skilled workforce to improve the technological base of the economy; the break-neck speed with which it is expanding and modernizing its physical infrastructure; its aggressive outreach to the countries in its neighborhood; its building of a modern system of communication to link itself with the adjacent countries pose a challenge but also provide opportunity for nations such as Pakistan that are struggling to find their place in this fast changing world.
The Planning Commission in Pakistan is currently embarked on producing a mid-term growth strategy. It is rightly focused on what it calls the “soft approach” meaning the development of the country’s large human resource. However, in taking this route it needs to determine how it can take advantage of the rising colossus right on its borders which is also building its human capacity to produce a more vibrant economy that is relevant for the 21st century.
What the last few decades have shown us is that it is well for relatively small economies to embed themselves with those that are large. The Planning Commission, therefore, must also include a regional strategy in its development framework.