Asia should focus on improving domestic demand: ADB

15:44, June 18, 2010      

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Asia should not pin its hopes on the recovery of advanced economies like the United States and should instead focus its efforts on improving domestic demand to ensure a sustainable, long-term growth trajectory, the Asian Development Bank says.

Echoing warnings of other international institutions, Cyn-Young Park, Principal Economist of the Office of Regional Economic Intergration of the Asian Development Bank (ADB), which is based in Manila, said in an recent interview with Xinhua that the region 's dependence on exports makes it vulnerable to the debt crisis in Europe, which, if worsens further, will drag down Asia's positive growth momentum.

"If Europe's crisis deteriorates further, it will affect the Asian economy because for some reasons, (the countries) have their structure very much focus on the export. A lot of its intra- regional trade... is not catering to the demand from the region but to that of the (advanced economies)," Park said.

About 60 percent of the developing nations' sales land in the U.S., Europe and Japan, according to the ADB.

"If you put them in perspective, the advanced economies tend to have stronger domestic demand...the contribution of export is only small (which means) that the external sector does not really account for a large portion of the economy," Park said.

"Meanwhile, the developing Asia tend to rely heavily on these external demands," she added.

Bulk of China's -- the region's main growth driver -- 48.5 percent export growth in May, for instance, were shipments to Europe and the U.S., which rose by 50 percent and 44 percent respectively from a year earlier.

India, another major growth driver in the region, on the other hand, has reported a slowdown in private consumption in the first quarter to 4.3 percent year-on-year -- lower than the 9.7 percent and 6.8 percent in the previous two years -- despite a faster growth of 7.4 percent in its gross domestic product.

"When one compares U.S. and China in the fair sense, as China grows into more developed, advanced market stage, it will have to have a stronger domestic base that is comparable to the size of the U.S. market. Currently, China (still) does not have that strong market base for the Chinese economy," Park said.

The same sentiment has long been echoed by other international institutions which have warned Asia's policy makers of a " spillover" of Euro's ills, highlighting the need to "restructure the composition of its economic growth."

In its April East Asia and Pacific Economic Update, World Bank emphasized that China needs to "rebalance its enabling a larger role for the service sector and private consumption, away from investment-heavy export-led growth."

To put it bluntly, Ajay Chhibber, one of the authors of a United Nations Development Programme-commissioned study on the impact of the global financial crisis on the Asia-Pacific region, said in a February interview with the Times of India that if Asia wants this century to be theirs, it has to get away from the export-led growth model.

Building on domestic demand and making it a more prominent engine of growth by relying less on exports, however, remains a key policy challenge for many countries in Asia over the medium term, the International Monetary Fund (IMF) noted in its June 2010 issue of the Finance & Development.

"The world recession has highlighted the unsustainability of tying growth too heavily to exports, which account on average for more than 40 percent of Asian growth," IMF said.

"With the recovery in advanced economies likely to be sluggish by historical standards and their demand likely to remain below pre-crisis levels, Asia will need to replace the shortfall in its external demand with a second, domestic source of demand if it is to sustain strong growth," it added.

While private domestic demand has contributed well to the region's recovery, IMF said it needs to "nurture this through policy measures" which vary from one country to another. Among its suggestions are increasing consumption, sustaining or increasing investment, especially in infrastructure, or boosting productivity in the service sector.

"Greater exchange rate flexibility fits into this policy package by helping raise private consumption and reorient investment toward production for the domestic economy," IMF added.

For now, however, Park said she does not expect Europe's woes to significantly affect Asia as long as the crisis will be contained at its current level. Asia will continue to experience a positive growth, albeit slowly, in the second half as the external environment becomes less favorable.

"In general, the performance of the Asian economies in the first half has been positive. Now we are expecting a slower momentum in the more advanced economies (and this) will affect differently across the region," Park said.

"Some of the countries which have bigger domestic demand base like larger economies China, India, Indonesia, Philippines and Vietnam, those who have generally stronger set of demand base will likely fare better than countries that rely heavily on external demand," she added.



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