Asia Not Immune To Global Slowdown But Not Its Hostage, says ADB Chief Economist
Dr. Ifzal Ali, Chief Economist at the Asian Development Bank, discussed the outlook for Asian economies during the global slowdown at a special meeting held Wednesday, April 9, 2008 at EMTA’s New York office. Ali rejected the "myth" of decoupling, but forecast that Asia would still experience solid growth despite the weakening US economy.
Ali began his remarks by stressing the record growth levels achieved in Asia in 2007, led by GDP increases of over 11% in the People’s Republic of China (PRC) and nearly 9% in India. Ali noted that high growth rates were not limited to these large economies but were widespread throughout the region.
Aggregate Asian growth will only be fractionally below the 5-year moving average in 2008, Ali projected. "If we can actually realize the ADB’s current forecast of 7.6%, Asia will remain the fastest growing region in the world," he emphasized.
However Ali recognized that Asia would not be immune from the effects of the global economic malaise. In fact, exports to the US in such industries as garments, footwear, toys and sports equipment all weakened in 2007; and because the US slowdown is coinciding with slower growth in Japan and the EU, Asian exporters find themselves with limited options in terms of turning to new markets.
Ali specifically attacked the "decoupling" hypothesis, emphasizing that trade flow data does not demonstrate any sign of Asian immunity from the US slowdown. While some analysts have insisted that intra-Asian trade can substitute for G-3 demand, Ali pointed out that most intra-Asian trade flows consist of raw materials, parts and components sent to the PRC for assemblage into final goods then exported to the G-3. There are also no signs of financial market decoupling either, according to Ali, with Asian debt issuance down 31% year-to-date and equity markets generally down 25-40% across Asia.
Inflationary pressures will mount and are a concern. "For ten years, we had high growth and low inflation; that era is over," Ali cautioned. Ali then specified that signs of economic overheating are occurring in countries such as Vietnam and Pakistan, where inflation stood at approximately 8% last year, and noted the nearly 5% inflation last year in the PRC.
Fuel and food prices will test new highs in the next year, Ali predicted, although he believes that fundamentals point to oil prices averaging $85 a barrel in 2008 and $95 in 2009, while there will be some level of "volatility and noise." Fertilizer and rice prices are also climbing rapidly, he noted.
How can Asia best insure long-term growth? "Asia must walk on both legs – manufacturing and services," he declared, with modernization, technological improvements and productivity increases essential in both sectors.
Ali concluded his presentation with a comment that "the slowdown gives policymakers an opportunity not to take historical growth for granted." He suggested that the recent rising standards of living might have allowed for "reforms in some countries to go into a deep slumber." In contrast, the present situation highlights the importance of productivity improvements which cannot occur without policy reforms.