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Asia through the CrisisPERSPECTIVES ON EMERGING ECONOMIES IN THE GLOBAL ECONOMIC RECOVERY
Maarten Kelder Nikhil Prasad Ojha Victoria Barbary
SEPTEMBER 2009
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Executive Summary ............................................................................... 4
Introduction ............................................................................................... 8
Crisis and Response ............................................................................. 2
A Microeconomic Map of Asia ....................................................... 4
The Entrepreneurship Vertex .......................................................... 6
The Role of Sovereign Wealth ...................................................... 86
Conclusion............................................................................................... 11
ENDNOTES...................................................................................................117
ACKNOWLEDGEMENTS...............................................................................121
Asia through the CrisisPERSPECTIVES ON EMERGING ECONOMIES IN
THE GLOBAL ECONOMIC RECOVERY
Maarten Kelder Nikhil Prasad Ojha Victoria Barbary
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AppendixExecutive Summary
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Executive Summary
WITH THE GLOBAL ECONOMIC CRISIS of 2008-2009 entering a new
phase that portends recovery, at least in the short-term, we can begin to view it in
perspective. One point now seems clear: the still-current theory that emerging high-
growth economies, particularly in Asia, are decoupled from advanced economies
and can independently manage their own recoveries and contribute to the resolu-
tion of the global downturn, is being disproven. In fact, the world we live in is
more tightly intertwined than ever before and is advancing toward ever greater lev-
els of global integration and interdependence. The financial turmoil originating inNorth America quickly spread to the economies of Asia and the rest of the world,
underlining the close and tight interconnections linking emerging and advanced
economies. Similarly, signs of incipient recovery in the summer of 2009 are appar-
ent not only in the emerging Asian economies, but also in the advanced economies
of Europe, North America, and elsewhere.
Asia through the Crisisillustrates this lesson by considering how Asian countries
responded to the crisis in this connected global reality, how their responses fared,
and how their economies are positioned to move forward. While recognizingthat Asia is merely a geographical conceit in reality, it is a vast and diverse
territory the report focuses particularly on the critical emerging economies of
China and India, which commanded so much of the worlds attention before
the crisis and have so far performed remarkably well. This performance testifies
partly to the specific and quite different macroeconomic responses, the mix of
fiscal and monetary policies, as well as the sector- and location-specific policies
CALL CENTER, BANGALORE, INDIA
Call centers are part of Indias quickly growing services sector. Exports ofservices are expected to overtake exports of merchandise as early as .
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that China and India have enacted. However, Chinas and Indias performance
also reflects solid underlying economic fundamentals that will persist and under-
gird their growth in the years ahead.
Observers had presumed Asia would be relatively insulated from Americas sub-
prime mortgage debacle and the ensuing crisis of the financial sector, but the shock
arrived swiftly after the failure of Lehman Brothers. In Q4 2008, GDP in Asia
(excluding China and India) plummeted by almost 15 percent, with traded-mer-chandise sectors suffering particularly hard blows. In China, where annual GDP
growth had been running in double digits, economic expansion braked sharply to
6.8 percent. Indian growth slowed to 5.8 percent from 8.4 percent in Q3.
And just as swiftly came Asias response, in the form of monetary and fiscal stimulus,
led by China rolling out a $588 billion package in November and India commencing
the first of three smaller packages the following month. Chinese fiscal measures
poured money into fixed asset investment mostly roads, railways, housing, and
other infrastructure and into subsidies, tax breaks, and other incentives to spur
the purchase of big-ticket items like vehicles, white goods, and televisions. After
several quarters of tight money, loosened monetary policy swamped the economy
in liquidity; firms expanded, jobs were created, and consumer spending rose, but
much of the bank loans wound up in property, equity, and commodity speculation.
Indias three stimulus packages were scattered across a host of targeted beneficiaries
and interest groups and seemed devised with May 2009 national elections in mind,
in which the Congress Party and the governing coalition prevailed. The packages
contained $8.2 billion of new spending primarily earmarked for rural infrastructure
projects and additional guarantees to the housing, auto, and small and medium
industrial sectors. Other spending was directed to an expanded safety net for rural
poor and to civil service pay increases. The FY2010 budget included an additional
$65 billion of new spending, most of which will go to rural areas under the populist
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rubric of inclusive development apparently with an eye to consolidating the
political gains of Congress and its coalition partners.
The stimulus packages of both countries are generally credited with producing the
resumption of impressive GDP growth rates in the face of a global slump China
may see 9 percent this year, and India 6 percent. But overall, both efforts yielded
mixed results. In China, continued heavy stimulus in export-oriented sectors led to
concerns about overcapacity and insuffi
cient economic restructuring away fromtraded manufactures and toward domestic consumption. In India, the picture was
reversed: businesses were disappointed that most of the stimulus was directed to-
ward consumption and that the government had missed an opportunity to invest
massively in infrastructure and thus help businesses reduce their transaction costs.
As the region recovers from the global downturn, its continued growth and pros-
perity will rest on the strength of fundamentals that came through the crisis largely
intact. This report is based on Monitor Groups research in three topic areas cen-
tral to national and local economic performance: 1) the sources and determinants
of microeconomic competitiveness; 2) the contribution of entrepreneurship to
economic growth and prosperity; and 3) the deployment of capital by sovereign
investors. Observing the records of prominent Asian economies during the global
crisis through these three lenses, we draw the following conclusions:
Despite broad popular interest in decoupling the notion that
Asias business cycle is, or is becoming, independent from that
of the advanced economies the record shows that the Asian
economies are increasingly and inextricably interlinked with thoseof other countries in the global economic system. Asian econo-
mies were profoundly affected by the crisis and their recovery will
proceed in concert with recovery elsewhere in the world.
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The Chinese and Indian economies will emerge from the crisis
with microeconomic competitive advantages intact. Those clus-
ters that were performing strongly going into the crisis will almost
uniformly emerge in strong, and perhaps even improved, posi-
tions. In China, sectors such as electrical equipment and lighting,
textiles, and apparel will thrive despite the rise of down-market
regional challengers that were harder hit by the global slump in
orders. India seems likely to be one of the winners coming out ofthe downturn, as many of its most competitive clusters such as
software, IT services, and business process outsourcing will find
ready markets as firms worldwide look to cut costs.
The fundamental source of competitive advantage in both China
and India remains low-cost production or service offerings, pri-
marily based on labor-cost advantages. Neither country to date has
established an innovation capability leading to high value-added
product and service offerings competitive with global leaders. For
either nation to thrive as home to competitive clusters in automo-
tive, alternative energy, fast-moving consumer goods, or certain
other sectors, it will need to upgrade its capacity to innovate.
The regions microeconomic competitiveness receives a powerful
multiplier from Asias spirit of entrepreneurship, a vibrant force
throughout the region and, according to the Monitor Entrepre-
neurship Benchmarking Survey, particularly well established in
China and India. Although individual entrepreneurs may have
suffered setbacks, the abundance of entrepreneurial spirit is a par-
ticular regional resource that elsewhere is so unequally distributed.
Much of the regions entrepreneurial energy will be expended in
the true engines of economic growth, small and medium enter-
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prises China alone has some 36 million SMEs, a third more
than in the whole of the European Union. In India, 13 million
SMEs operate in the formal and informal sectors, with formal-
sector SMEs employing nearly a million people.
The sovereign wealth funds of Asia symbolize both the regions
outward-looking intent as well as its increasingly tight economic
linkages to the developed West and to the world. As diverse in
character and constitution as their parent economies, these deep
pools of liquidity played a vital role in the stabilization of the
global financial services sector at the end of 2007 and begin-
ning of 2008. As such, the Asian parent governments signified
their commitment to the global economic regime and a sense of
responsibility for ensuring its survival. SWFs hurt by the losses
incurred during the crisis nevertheless remain active investors, al-
though with an increased sense of caution and a new appreciation
for risk.
Our review leads us to expect that, as Asias economies emerge from the crisis,
they will:
Remain tightly coupled to the Wests advanced economies, by
both circumstance and choice. The national and economic inter-
ests certainly of China and India, as well as those of Japan, South
Korea, and Asias other strong economies, are heavily invested in
national economic models based to a great extent on traded mer-
chandise and services.
Manifest significant differences in terms of economic, politi-
cal, and social models, paths to growth, sectoral strengths and
weaknesses, and contributions to the stability of international
economic institutions.
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Remain competitive and entrepreneurial. The crisis has, if
anything, heightened the sense among Asian companies and en-
trepreneurs of their own vulnerability and expendability in the
fury of the creative destruction that characterizes innovation in
market economies.
Pay increasing attention to productivity. Despite a GDP of nearly
$8 trillion, Chinese workers generate only about $6,000 per capita,
less than that of Kiribati.* Nearly 30 percent of Indians live be-
low the official poverty line. Chinese and Indian economic policy
makers seem to recognize the primacy of innovation in increasing
productivity one senior Chinese official went as far as to pro-
claim, Innovation is the most critical issue facing China.
Strive to balance their economies, taking into account tradeoffs
between bolstering domestic actors and personal consumption
and looking outward with export-oriented industries and services
playing a productive role in the global economy.
Asias rebound and Chinas and Indias passage through the global crisis on a sus-
tained growth trajectory highlight the importance of the emerging economic giants
to the region and to the world at large, but it also raises the critical question of the sus-
tainability of regions recovery, particularly that of China. Different scenarios for the
global economy potentially lead to very different outcomes for the Peoples Republic.
Regardless of the picture that eventually materializes, Chinas transition to domestic
* For all comparative macroeconomic indicators included in this report for example, GDP and per capita GDP weuse purchasing power parity (PPP) rates. As IMF researchers explain, Purchasing power parity rates are an alternative
way of calculating the exchange rate between countries based upon the comparison of prices of similar goods andservices in different countries. The PPP rate is defined as the amount of currency that would be needed to purchasethe same basket of goods and services as one unit of the reference currency, usually the U.S. dollar. Selim Elekdag andSubir Lall, Global Growth Estimates Trimmed After PPP Revisions, IMF Survey Magazine (January 8, 2008) http://imf.org/external/pubs/ft/survey/so/2008/RES018A.htm (accessed August 15, 2009).
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consumption as the key driver of economic growth and prosperity promises to be
one of the governments key economic and social challenges in the coming decade
and a matter of keen interest to the region and the world.
In Asia as a whole, not just in China, higher and more distributed rates of domestic
consumption will be driven by both a relentless creation of new businesses and in-
novative steps to increase the productivity of existing enterprises. This is the province
of the entrepreneur and the innovator. Asia has traditionally competed on the basisof cost leadership, execution speed, and flexibility. Future productivity will be based
on a more diverse set of competitive advantages, such as strategic foresight and in-
sight; product, service, process and business model innovations; customer intimacy
and understanding; capability to internationalize and to understand foreign markets;
and world-class human assets.
Given this transition, we cannot expect Asia even with its mature economies on the
rebound and its emerging economies returning to blazing annual growth ratesto
serve as the worlds economic locomotive. Each remains reliant to varying extents on
foreign markets and foreign direct investment and depends upon a rising economic
tide that lifts all ships, including those of the advanced economies, still the worlds
dominant economic players.
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AppendixIntroduction
photograph by Erik Charlton
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Introduction
INSIDE A CHINESE FACTORY
Assemblies of manufactured goods account for a significantshare of Chinese exports, and hence of GDP growth.
ASIA IS THE LARGEST AND MOST POPULOUS CONTINENT
on earth, home to more than forty countries and 60 percent of humankind. Geo-
graphically it extends from the River Bosporus and the Ural Mountains to the
Baring Strait, and the Arctic Circle to the tropical regions south of the equator.
In economic and business literature, this vast and diverse landmass is frequently
reduced to the dragon and the elephant China and India with little acknowl-
edgement of the role of other advanced and emerging countries in the region.
Although this report focuses on the current and future role of China and India in
the global recession, we want to put them into perspective, and acknowledge the
important role played by other Asian economies in global trade, manufacturing pro-
duction, research and development, and financial markets. Where would the world
be without Singapores trade hub, Japanese cars, or Korean electronics? Neither
should we neglect the smaller emerging economies of Asia Indonesia, Malaysia,
the Philippines, Thailand, Vietnam, in particular that do not often make head-
lines but have played a vital role in meeting the developed worlds consumption
demands through export manufacturing and agricultural production.
In this report, Asia denotes countries east of Indias western frontier, south of
Chinas northern border, and north of Indonesia and East Timor. Adopting a con-
vention established by the Economist Intelligence Unit, we divide these into three
groups: 1) Emerging Giants: China and India; 2) Advanced Economies: Japan,
Korea, and Singapore; and 3) Smaller Emerging Economies: a large set including
Indonesia, Malaysia, the Philippines, Thailand, and Vietnam.
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Introduction
Figure : The Economies of Asia
Emerging Asian Giants
Mature Asian Economies
Smaller Emerging Economies
India
Nepal
Bhutan
China
Burma
Bangladesh
Sri Lanka
Vietnam
Thailand
Laos
Cambodia
Malaysia
Singapore
East Timor
Indonesia
Philippines
SouthKorea
NorthKorea
Japan
These are an enormously diverse set of economies ranging from some of the richest in
the world such as Japan and Singapore to some of the most deprived Burma,
Laos, and Cambodia. Many of these countries, particularly the emerging economies,
have sustained significant economic growth over the past decade, increasing theirGDP and shifting the global economic balance eastward Asian economies now ac-
count for 31 percent of global GDP, compared to 26 percent in 2000.
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Introduction
Without a doubt, however, the largest contributor to the rise of Asia as a glob-
al economic powerhouse in the past decade has been China. As the chart below
demonstrates, China has nearly doubled its share of global GDP in this period,
increasing its GDP by nearly three times and averaging growth of nearly 10 percent
annually. By contrast, the emerging Asian economies, like most other developing
regions, have held their share steady. India falls somewhere between these two sce-
narios, building its share of global GDP by a single percentage point since 2000
by more than doubling its total GDP. But while Indias annual growth rate acceler-ated markedly after 2004, the Indian economy has grown by an average of seven
percent per year over the last decade, which has left it some way behind China. Far
from being economic giants moving in tandem, therefore, the dragon is definitely
outpacing the elephant.
Figure : Share of Global GDP by Region
Note: Asia includes: Bangladesh, Bhutan, Burma, Cambodia, Indonesia, Japan, Laos, Malaysia, Nepal, Philippines,Singapore, South Korea, Sri Lanka, Thailand, Timor-Leste, Vietnam
* IMF EstimatesSource: IMF World Economic Outlook Database April 2009
0%
20%
40%
60%
80%
100%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009*
UnitedStates
WesternEurope
Asia(excl. China &India)
India
Middle East &North Africa
Africa
Latin America andCaribbean
Others
China
24.0 23.0 23.0 23.0 22.0 22.0 22.0 21.0 21.0 20.0
22.6 22.6 22.3 21.821.2 20.7 20.3 19.9
19.4 18.9
7.2 7.6 8.1 8.6 9.09.5 10.1 10.8
11.4 12.1
8.8 8.7 8.5 8.4 8.5 8.5 8.5 8.6 8.6 8.6
4.0 4.0 4.0 4.0 4.0 4.0 4.0 5.05.0 5.0
3.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.02.7 2.8 2.9 2.9 3.0 3.0 3.0 3.0 3.0 3.2
15.0 15.0 15.015.0 15.0 15.0
14.014.014.014.0
13.0 13.0 13.2 13.3 13.5 13.6 13.7 13.8 13.8 13.8
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Introduction
Despite this impressive performance, it is important not to overstate the global
impact of the Emerging Giants growth. The United States has a $14 trillion econ-
omy 21 percent of total global GDP in 2008 Chinas by contrast is only $8
trillion, and Indias $3 trillion. Moreover, many people in these countries are still
extremely poor; although China has lifted half a billion people out of absolute
poverty in the past thirty years, in 2007 average rural income in China was less than
$1,000 per year and total average annual income in China is less than $6,000. 1 In
India, average annual income is less than $2,800, with 27.5 percent of Indians livingbelow the national income poverty line.2 Moreover, consumer spending a pri-
mary driver of economic growth is not only absolutely lower in comparison to
the West, but also proportionately. Private consumption only accounts for less than
40 percent of GDP in China (but an average of 60 percent of household income).3
Consequently, while we are looking at the worlds most economically vibrant region
in the midst of the current global malaise, it is important that the size and ability of
emerging Asian nations to drive the global economy now, rather than in the future,
is put into perspective.
Popular views of economic growth in Asia, and in China and India specifically,
tend to miss or misread important aspects of the story. The Western media, for
example, has paid relatively little attention to the region and most of that to poli-
tics, natural disasters and other topics unrelated to economic performance. Among
economists and analysts, there is greater interest in decoupling, the notion that
business cycles in emerging markets such as China and India are moving indepen-
dently from those in the advanced economies that is, while fortunes in North
America and Europe are in decline, emerging markets remain relatively strong and
may even offer the prospect of leading the global economy out of the doldrums(see sidebar on page 17).
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Introduction
In the first half of 2009, the Western
media largely ignored the impact of the
financial crisis on Asia. Data gathered by
Media Tenor International indicates that
business and economics subjects only
accounted for 10.4 percent of all West-
ern media coverage of the region 50
percent less than the proportion ofcoverage dedicated to business across the
world. Rather, attention was focused on
stories about security and political issues.
As a result, the coverage of Asia in the
Western news media has been predomi-
nantly negative, as issues such as the civil
war in Sri Lanka, corruption in Thailand,
Chinas ongoing mission to purchase
Australian natural resources, and the trialand imprisonment of Aung San Suu Kyi
in Burma have dominated the headlines.
The negative reporting of Asia was exac-
erbated by the fact that as the economic
crisis intensified the Western media
turned inwards, reducing their coverage
of Asia in favour of a focus on the ef-
fects of the crisis on domestic economies
and those closer to home. Nevertheless,
when Asian economies were mentionedin the Western news, mostly in passing,
there was a significantly positive view of
the fiscal stimulus measures being taking
by their governments.
Consequently, in the middle of 2009
coverage of Asian economies started
to pick up as the widespread economic
recovery in the region provided a sparkof good news and hope in an otherwise
bleak economic picture for the United
States and Europe. Although China
remains the focus of the Western news
medias coverage of Asia, with nearly
70 percent of the coverage, the Indian
election in May also garnered significant
positive coverage for India, particularly
in the European media, which perceivedthe re-election of the Congress Party as a
force for stability.
The low level of Western reporting on
Asia, particularly as regards economic
and business issues, as well as the high
level of negative press for the region,
WESTERN MEDIA COVERAGE OF THE GLOBAL ECONOMIC CRISIS IN EAST ASIA
Topic Structure of International TV News, -/
East Asia
14.5%
41.7%
10.4%
13.7%
10.6%9.2%
All Countries
5.7%
28.8%15.5%
20.0%
16.2%
13.8%
Domestic PolicyTerrorism/SecurityForeign Affairs/War
BusinessAccidents/Crime/Human InterestOther Topics
Source: Media Tenor International
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underlines that Asian countries, even
China, are not presented in the West-
ern media as key players in the global
economy. It is therefore important for
Asian countries to exploit the current
surge of interest in their economies to
ensure their growing role in the recov-
ered global economy and their position
in the G20 are better understood. This
is fundamental to renegotiating their
position in the global political and eco-
nomic balance of power.
Asia In Economic Coverage, International TV News, /-/
20%
15%
10%
5%
0%
Q1 2007
Q2 2007 Q4 2007 Q2 2008 Q4 2008 Q2 2009
Q3 2007 Q3 2008 Q1 2009 Q3 2009Q1 2008
Share of all foreign news stores
Source: Media Tenor I nternational
Visibility of Asian Countries, International TV News, /-/
China
70%
60%
50%
40%
30%
20%
10%
0%
Japan India
Indonesia South Korea Malaysia
Source: Media Tenor International
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Introduction
This report takes a different view.Asia through the Crisisassesses the effects of the
global economic crisis of 2008-2009 on Asias economies, paying particular atten-
tion to China and India. It presents an analysis of why Asia was hit hard by the
crisis, how it has managed to rebound so quickly, and whether the recovery is sus-
tainable. The report draws on Monitor Groups research and expertise in three
topic areas central to national and local economic perfor-
mance: 1) the sources and determinants of microeconomic
competitiveness; 2) the contribution of entrepreneurshipto economic growth and prosperity; and 3) the deployment
of capital by sovereign investors. We expand on each of
these topic areas in the major sections of the report follow-
ing the next one, an overview of the macroeconomic and financial policy responses
by governments in the region, with an assessment of the results so far.
First, we penetrate beneath the discussion of national policy to examine the sources
of competitiveness in particular clusters and locations in ChIna and India. Data
from Monitors Global Cluster Mapping Dataset affords a clear picture of eachcountrys most competitive clusters prior to the crisis and the particular locations in
which these have been based. This forms the basis of an assessment of how these
clusters and locations will emerge from the crisis and what developments we can
expect to see in the future.
From there, we turn to entrepreneurship, one of the most powerful underlying driv-
ers of economic growth and prosperity in the modern global economy. Drawing on
the Monitor Entrepreneurship Benchmarking Survey, which has been conducted in
22 countries worldwide, including four in Asia, we compare and contrast China and
India on the key determinants of entrepreneurship, especially cultural attitudes and
mindset variables that are critical to long-term success. Both countries score high
on these important variables.
This report assesses the
effect of the crisis on Asiaseconomies, particularlyChina and India.
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Next, we examine the activities and behaviors of the regions sovereign wealth funds
as an indication of public investment strategy toward participation in the global
economy as well as in building stronger domestic economies. This section relies on
the Monitor-FEEM Transaction Database, the most complete source of publicly-
reported SWF investment activity available. This dataset enables an intimate view
of the critical role Asian SWFs played in attempting to stabilize the global economy
as the crisis began to unfold and a comparison of two funds, Singapores Temasek
and China Investment Corp., reveals the diverse impact of the crisis and the chal-lenges and opportunities it has posed.
Finally, this report concludes on an optimistic note, suggesting that while the Asia
economies are not yet strong enough to drive the world economy alone that they
are playing a more significant role than they have done for many years.
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Introduction
March 2008: Decoupling is not a myth.
October 2008: That was then. Now the emerg-
ing markets are in big trouble.
August 2009: decoupling is real but
Those commentsfrom TheEconomist,
columnist Paul Krugman, and PIMCO
CEO Mohamed El-Eriansummarize
the ebb and flow of the decoupling de-bate over the past 18 months. Although
this report takes the point of view that
decoupling is a misleading notion in an
era of continuing globalization, honest
analysts will in good faith disagree and,
like El-Erian, qualify their views with
nuance and caveats that move both sides
closer together.
Whats all the fuss about? We follow the
Asian Development Bank in technically
defining decoupling as the emergence
of a business cycle dynamic that is
relatively independent of global demand
trends and that is driven mainly by au-
tonomous changes in internal demand.i
But the real argument is chiefly over the
scenario many care most about: whetheremerging Asias business cycle is, or is
becoming, independent of, or decoupled
i Asian Development Bank, Uncoupling Asia: Myth and Reality,Asian Development Outlook 2007:Growth Amid Change(Hong Kong:ADB,2007) available at http://www.adb.org/Documents/Books/ADO/2007/default.asp (accessed August 30, 2009).
from, that of the G3the United States,
the Euro Area, and Japan. An essential
corollary posits a decoupled Asia will be
significantly less reliant on exports, more
driven by internal demand, and thus
insulated from external demand shocks.
By this logic, Asias emerging economies
would then be positioned to grow de-spite downturns in the developed world
and thus able to complement or even
supersede the G3 as the engine of global
economic growth.
Decoupling is thus akin to a partial
reversal of economic globalizationthe
integration of national economies into
the international economy through trade,foreign direct investment, transnational
supply chains, transportation, and flows
of short-term capital, human assets,
and technology.ii Paradoxically, decou-
pling is made possible by the progress
of globalization, and particularly Asias
export-led growth strategy, which con-
nects the emergent economies with their
developed G3 counterparts in robustexchange relationships. Decoupling in
effect requires the weakening of precisely
these seminal ties in favor of regional
ii Drawn, with modifications, from Jagdish Bhagwati, In Defense ofGlobalization(New York: Oxford University Press, 2004).
THE DECOUPLING DEBATE
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ones, proponents of decoupling generally
justify their view by citing this and other
empirical precipitants:
Trade flows between emerging-
market economies have increased,
more than doubling in the past two
decades, powered by the rise of huge
domestic markets in China and India.
Trade linkages between emerging
markets and the developed econo-
miesprimarily the G 3have
correspondingly contracted.
Demand for commodities from
large emergent economies like Chi-
na and India has bolstered growth
in commodity exporters like Brazil
and Russia.
Financial flows between emergent
economies have increasedChina
gets nearly two-thirds of its FDI
from other Asian countries.iii
iii M. Ayhan Kose and Eswar Prasad, The Decoupling Debate isBack! Foreign Policy Online(posted June 2009) http://www.for-eignpolicy.com/story/cms.php?story_id=5010 (accessed August28, 2009); M. Ayhan Kose, Christopher Ostrok, and Eswar S.Prasad, Global Business Cycles: Convergence or Decoupling?IMF Working Paper WP/08/143 (June 2008) http://www.imf.org/external/pubs/ft/wp/2008/wp08143.pdf (accessed August30, 2009).
Although proponents claim such forces
have already, or soon promise to, effect
Asias decoupling, they are also virtu-
ally unanimous in agreeing that Asia is
at present incapable of serving as an
engine of global growth or of leading
the world out of the downturn if the
United States cannot.
Those who resist the decoupling hypoth-
esis proceed from the baseline point of
view that:
The forces of globalization continue
operate as powerfully as ever, devel-
oped-country and emerging country
business cycles remain closely syn-
chronized across time, and external
demand remains a primary engine of
Asian economic growth.
Study after study has found, as did
the Asian Development Bank in
2007, that there is no evidence
pointing to Asias uncoupling
structurally or cyclically.
The evidence instead runs in the
coupling proponents favor. For
example, from January 2002 to May
2009, the Financial Times Stock Ex-
change (FTSE) All World Emerging
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Introduction
index moved in the same direction
as the FTSE All World Developed
index on 75 months out of 89a
correlation of 84 percent.iv
That said, stock markets around the
world are increasingly more synchro-
nized, undermining the usefulness of
equity market performance as an indica-tor of coupling or decoupling. Economic
fundamentals such as GDP, investment,
and household consumption are more
stable and consequently more reliable
indicators. Here the research of Swiss
economist Sbastien Wlti is informa-
iv David Oakley, Decoupling gains new group of cheerlead-ers, Financial TimesJune 11, 2009 http://www.ft.com/cms/s/0/657bedc2-56ba-11de-9a1c-00144feabdc0.html (accessed
August 29, 2009).
tive: when he examined trend growth
rates rather than actual growth ratesv of
emergent and developed economies, the
trend rates exhibited a high degree of
market synchronization, tending to move
together in the same direction at approxi-
mately the same times.
In studying the actual trend growthdata from 1990 to 2007, Wlti found
an increasing degree of business cycle
synchronicity between emerging and ad-
vanced economies, thus concluding that
decoupling was always a mytha view
that we share.
v That is, the average sustainable rate of economic growth over agiven period of time, deriving average growth rates from peakto peak or trough to trough and fitting these into a smoothedgrowth curve.
GDP Trend Growth Rates
10
8
6
4
12
0
-2
1980
TrendG
rowthRates
1985 1990 1995 2000 2005 2009
Share of all foreign news stores
Source: Adapted from Wlti, The Myth of Decoupling, based on data from World Economic Outlook Update, IMF, 6 November 2008.
emerging and developing economies
advanced economies
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Crisis and Response
MUCH TO THE SURPRISE of many seasoned commentators, the global
recession hit Asia hard and fast in the final quarter of 2008. Asia was not linked
directly to the epicenter of the financial crisis, a real estate collapse in the United
States that had begun a year earlier. Neither had Asian banks bought large quantities
of troubled mortgages or financial instruments derived from them. Furthermore,
before the crisis, Asia was in a strong macroeconomic position, and well placed to
resist pressures emanating from advanced economies, even after the ripples and
hiccoughs that had been felt in the financial sector during early 2008 turned intoa tidal wave in September following the collapse of Lehman Brothers, one of the
worlds biggest investment banks.
In the event, however, the impact on Asia was swift and sharp. In Q4 2008, GDP
in Asia excluding China and India plummeted by almost 15 percent on a seasonally-
adjusted annualized basis. In China, where annual GDP growth had been running
in double digits, economic expansion braked sharply to 6.8 percent, down from 9
percent in Q3 and 10.1 percent in Q2, while Indian growth slowed from 8.4 percent
in Q3 to 5.8 percent in Q4.
THE HONG KONG STOCK EXCHANGE
After Tokyo and Shanghai, Hong Kong is Asias third-largestexchange, with an August market capitalization of HK$ ,billion (US$ ,. trillion) and stocks listed.
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Figure : Gross Domestic Product, Constant Prices, Annual Percent Change
-12%
-9%
-6%
-3%
0%
3%
6%
9%
12%
15%
2005 2006 2007 2008 2009
China
IndiaVietnamIndonesia
MalaysiaKorea
Japan
Singapore
Source: IMF World Economic Outlook Database, April 2009
Asia was hit hard partly because, far from being decoupled from the West, it re-
mains inextricably entwined with the global economy. Although intra-Asian trade
expanded rapidly during the past decade, a large proportion comprises intra-in-
dustry processing and assembly through vertically-integrated production chains.
Virtually all growth in intra-Asian trade in recent years can be attributed to parts and
components, which were re-exported in assembled goods to the West the Asian
Development Bank estimates that 60 percent of the regions exports eventually end
up in the advanced economies. Asian economies thus had full-frontal exposure to
the drying up of demand from advanced markets, particularly the United Statesand the Eurozone, as their economies were unsettled by the credit crunch and then
contracted sharply after the fall of Lehman Brothers.
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The spillover was exacerbated by Asias product mix: high-and medium-technology
manufacturing exports such as motor vehicles and automotive equipment, elec-
tronic goods, and capital machinery. These sectors generally exhibit a stronger
cyclical response, owing to the products high value and reliance on financing. As
credit and income streams dried up in advanced economies at the end of 2008,
demand for high-end manufactures collapsed Japanese car exports, for example,
fell by nearly 70 percent between September 2008 and March 2009.
Asias tightly integrated supply chain caused a chain reaction that spread the de-
mand shock rapidly across the region. Between September 2008 and February 2009,
exports fell at an annualized rate of about 70 percent in emerging Asia about
one-and-a-half times more than during the dot-com and
ICT crash in the early 2000s and almost three times more
than during the 1997 Asian financial crisis.
Chinas role as an assembly hub for final products in Asian
production networks meant that exports to China from the
rest of emerging Asia declined particularly rapidly as global
demand dried up, falling 80 percent between Q4 2008 and Q1
2009. The result was that companies across Asia cut production and reduced inven-
tories. In the first two months of 2009, industrial production in Japan, Hong Kong,
South Korea, and Singapore fell more than 50 percent on a three-month annualized
rate basis a record decline.
The Asian DevelopmentBank estimates that percent of the regionsexports eventually endup in the advancedeconomies.
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Nor was Asia insulated from the financial side of the crisis. On the whole, Asian
banks were better capitalized and less exposed to bad debt than those in the United
States and Europe. However, economies across the region suffered significantly
from the side effects of international credit markets seizing up. During the prior
decade Asias financial institutions became increasingly embedded in the interna-
tional financial system: Asian governments borrowed on international bond markets
and the regions banks used wholesale funding to support
growth, while the globalization of equity markets increasedinternational equity holdings in the region. This exposed
the economies to the effects of deleveraging and recapital-
ization in the United States and Europe: financing dried up
as LIBOR increased; capital fled back to the West as glob-
al institutional investors tried to reduce their exposure to
riskier assets in emerging markets; and reduced global risk appetite caused regional
currencies to depreciate the South Korean won was particularly badly hit, depre-
ciating by 20 percent against the dollar between in the first three months of 2009,
although it had recovered its value by June as the fiscal stimulus package stabilizedthe economy.4
Other Asian economies less tightly linked to the global supply chain, such as India,
fared better. Unlike China, where overseas sales have been a main growth driver over
the past three decades, exports account for less than a fifth of GDP in Indias still
relatively inward-looking economy, particularly in its dominant informal economy.
Moreover, less than a third of the workforce is employed in Indias primary export
industries: manufacturing, trade, transport, communications and services. India also
has a vast domestic market of nearly 1.2 billion people, whose household consump-tion of 60 percent of GDP is a substantial growth driver. This has insulated India
from the worst of the global economic turmoil: manufacturing remained healthy
despite exports plunging for a ninth straight month in June 2009 as global demand
fell for Indian-made goods from jewelry to garments. This reflected strong domes-
During the first sixmonths of , Asias
economies showedencouraging signs of
recovery.
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tic demand, particularly for cars Indias largest car manufacturer, Japanese-owned
Maruti Suzuki, announced a 33.4 percent jump in sales in July.
India was also insulated from financial exposure to the crisis as the Reserve Bank of
Indias Governor Y.V. Reddy had maintained a very conservative position prior to
the crisis. He prohibited the use of bank loans for purchasing undeveloped land to
discourage the formation of a real estate bubble, curtailed the use of securitizations
and derivatives in the Indian economy, and increased risk weightings on commer-cial property construction. Despite criticism from the countrys financial sector at
the time, Reddys stance has ensured that no Indian banks came close to failing,
required emergency capital injections, or had to write down their assets.
Bouncing is What Tigers Do Best
A recent Economistbriefing noted that Forecasters always seem to underestimate
the ability of the Asian tigers to rebound from recessions.5 It noted that within
twelve months of the 1997-98financial crisis in Asia, the Asian tigers had surged to
9.5 percent growth in 1999. Likewise, after the dot.com bust of 2001, Asian econo-
mies quickly regained their footing to dominate global economic growth before the
current downturn.
Today, the scenario appears similar. During the first six months of 2009, Asias
economies showed encouraging signs of recovery. Comparing Q2 2009 with Q1 at
an annualized rate, South Koreas GDP grew by almost 10 percent (though it is still
down 2.5 percent on Q2 2008), and Singapores by 20 percent (3.7 percent down
on the year). China does not publish quarterlyfigures, but experts estimate that
GDP jumped to 7.8 percent for the quarter (a percentage point increase from Q1).
Other economies in the region have not yet published their GDP figures, but are
also likely to indicate incipient recovery. Even Japan may have enjoyed robust GDP
growth: its industrial production rose by an annualized 38 percent.
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Figure : Export Growth Relative to Same Month Previous Year(Percent Change in U.S. Dollars)
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
Sep 08 Oct 08 Nov 08 Dec 08 Jan 09 Feb 09 Mar 09 Apr 09 May 09 Jun 09
Korea
China
SingaporeJapan
Source: Adapted from Caroline Freund and Matias Horenstein July Trade Watch, World Bank 2009
The collapse in output was exacerbated by destocking; with stocks now wound
down, orders are picking up. Export demand has remained sluggish across the re-
gion, although some green shoots are appearing particularly in ICT. Exports from
Japan rose a seasonally adjusted 1.1 percent in the same
time frame. These figures come as world trade appears to
have bottomed out and the World Bank detected a spark
in international trade in data for June. This might indicate
some initial inventory undershooting, but once these stabi-lized at a lower level, some recovery would likely follow.
Alternatively, it could reflect a real turning point, which will see the economies of
Asia, particularly Singapore, South Korea, and Japan pick up. Indeed, there are signs
that global demand is recovering and aiding Asian economies: Japans exports in
There are signs thatglobal demand is
recovering and aidingAsian economies.
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June fell by the smallest margin in six months, with exports to Asia and the United
States showing the clearest recovery, reflecting the performance of the regional
economies, most notably China, and the incipient revitalization of global produc-
tion chains.
Meanwhile, economies across Asia displayed increases in domestic demand re-
sulting from fiscal stimulus packages. Chinas huge RMB4 trillion ($587.7 billion)
countercyclical stimulus package has been the most widely discussed initiative inthe region. Announced at the beginning of November 2008, this vast infusion of
investment pumped into infrastructure including roads, railways, and low-cost
housing was designed to create jobs and keep consumers spending. Six months
earlier, concerned about the breakneck pace of growth, Chinas government had
halted many infrastructure projects under way. Now, in the face of a too-rapid
slowdown, the government turned the spigot back on. It also loosened monetary
policy, with a bank lending goal of RMB5 trillion ($588 billion) in total for 2009, a
total reached by June. Lending rates also were slashed to encourage companies to
take out loans and expand their operations.
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The result has been a surge in domestic economic activity while exports remain
in the doldrums. Across China, steelmakers, cement producers, and construction
companies are seeing sales soar as Beijings stimulus plan funded railways, airports,
and power plants. In July, for example, Chinas manufacturing sector expanded for
a fifth straight month as companies rushed to provide machinery and parts for the
public works program. Chinas Purchasing Managers Index a 100-point scale
where figures above 50 indicate an expansion rose in July to 52.8 from 51.8 in
June.6
It was also the third consecutive month that it had increased only slightly,showing that the recovery had steadily found firmer footing.
The stimulus package also sought to encourage individuals to spend. China has one
of the lowest household consumption rates in the world: in 2008 private consump-
tion in China only made up between 35 and 40 percent of GDP (falling from 46
percent in 2000), compared with 70 percent in the United States and a pan-Asian
average of 50-60 percent. To persuade Chinese consumers to open their wallets, ru-
ral residents received subsidies for buying vehicles and consumer durables such as
televisions and refrigerators, as well as electronic non-durables PCs and mobilephones. Urban residents have incentives to trade in their cars and home appliances
for newer models, while taxes on low-emission cars have been cut. Such subsidies,
particularly those in rural areas, have huge potential to increase consumption: less
than a third of rural Chinese households possess a refrigerator, for example. The
government also hopes that such measures will complement stimuli in other sec-
tors; tax breaks on autos apparently helped the domestic vehicle manufacturing
sector grow by 4.4 percent December 2008-January 2009, while sales increased by
over five percent in the same period. Moreover, by focusing on low-emission cars
for urban areas the Chinese government hopes to bolster manufacturers such asChinas largest privately owner car firm, Geely, which is looking to put its Gleagle
EK2 a small battery-powered hatchback into production later this year.
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CHINAS REBALANCING ACT
Chinas growth as an economic power
has been driven largely by its ability to
produce goods to meet the growing
credit-fueled consumption in the West.
The collapse of this equilibrium in 2008
led many economists to examine how
economies with large trade surpluses, like
Chinas, can save less and liberate their
surplus to balance out the global econo-
my and set it on the road to recovery.
The stimulus package and loosening
of credit is allowing China to shift its
engine of growth from exports to do-
mestic demand. But there are concerns
that although domestic consumption
is now driving growth in China, the
combination of consumption and
investment is unbalanced. Much as has
been the case for the past decade, the
bulk of Chinese government spending
is going into infrastructure and state-
owned heavy industries, increasing
investments share of GDP and run-
ning the risk of producing overcapacity,
particularly in chemicals and automo-
tive manufacture. By contrast, Chinese
household consumption has shrunk dur-
ing the last decade as investment-based
industrial growth has not created jobs in
labor-intensive service industries, pre-
venting employment keeping pace with
GDP growth. Consequently, house-
holds share of GDP has fallen, while
the proportion going to the government
as tax revenue and to corporates as prof-its and retained earnings has risen.
The fiscal stimulus has boosted Chinese
households purchasing power by creat-
ing jobs, improving the welfare system,
and creating tax breaks and subsidies
for purchasing some types of goods.
But these are not long-term measures
that can be sustained indefi
nitely. Thereal driver of household consumption is
private enterprise and entrepreneurship,
which increases income at the grassroots
and pushes wealth upwards. But the
countercyclical measures being enacted
by Beijing are largely being channeled
through state-owned enterprises, sidelin-
ing private enterprise, much of which
was focused in the export-manufactureindustries hit hardest by the global
economic slowdown. Neither has pri-
vate enterprise benefitted from the huge
expansion of credit; in the first half of
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2009 bank loans were mainly provided
to SOEs, leaving SMEs struggling to
stay afloat as they try to navigate their
way around international credit terms
and difficult-to-obtain bank loans in a
climate of high risk. Indeed, in July, a
report by the Chinese Academy of Social
Sciences showed that roughly 40 percentof Chinese SMEs have been forced out
of business during the current financial
crisis, with another 40 percent in danger
of going bankrupt.
Without attention, this situation could
undermine the inroads that China has
made into rebalancing its economy. The
Chinese government should liberal-ize financial markets and extend credit
to SMEs throughout China, not just in
urban areas, and take a more hands-off
approach to the financial system. This
may appear counterintuitive at a time
when governments worldwide are in-
jecting money into the banking system
and considering more regulation, but in
a centrally-directed economy the statemust take care not to stifle indigenous
entrepreneurship while leading economic
recovery from the top.
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Providing cheaper products for Chinese households to buy, however, is only half
the battle. Household consumption is so low in part because the Chinese save to
provide for their old age, education, and healthcare, which are not adequately pro-
vided by the government. Part of the stimulus has therefore been to improve the
social safety net. In January, the State Council passed a medical reform plan that
promised to spend RMB850 billion ($123 billion) by 2011 to provide universal
medical service to the countrys 1.3 billion population. In June, the Chinese govern-
ment ordered all listed state-owned firms to transfer 10percent of their shares to the National Social Security
Fund to bolster its assets. The short-term impact of these
measures may be modest at least, but may ease households
worries about future pensions and healthcare and encour-
age more spending and less savings.
These steps appear to be working. The World Bank raised
its 2009 growth forecast for China from 6.5 percent to 7.2
percent in June on the back of promising results: Chineseretail sales increased a hefty 15 percent in May; consumer goods are flying off the
shelves sales of furniture rose 33 percent and jewelry 29 percent, while passenger
car sales surged 47 percent in May from a year earlier. Per capita consumption in
Chinas urban areas, a key measure of consumer spending, rose 8.9 percent in the
first half of 2009 compared to a year earlier. Three-quarters of Chinas consumers
plan to maintain or increase their spending next year, nearly double that of America
and the European Union. But China still has a long way to go before household
consumption matches that of its Asian counterparts, let alone the United States.
Household consumptionis so low in part becausethe Chinese save toprovide for their oldage, education andhealthcare, which arenot adequately providedby the government.
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BUBBLE, BUBBLE TOIL AND TROUBLE?
Loose does not begin to describe Chi-
nese monetary policy this year. Chinese
banks were urged to lend RMB5 trillion
($588 billion) in 2009 as the government
eased lending restrictions to counter the
export collapse. In the event, data from
the Peoples Bank of China reveal that by
the end of June the total lent by Chinese
banks exceeded this by almost half again
to RMB7.4 trillion ($870 billion).
The lending boom has led to concerns
that the excess liquidity will fuel specula-
tion and cause asset bubbles, wasteful
investment, and high inflation. Chinese
companies received so much cheap
financing that they started buying equities
and real estate for a lack of alternatives.
2009 has seen the benchmark Shanghai
Composite Index gain 85 percent in the
year to August, with daily turnover on the
Shanghai Stock Exchange in July soaring
above RMB200 billion, the level reached
when it was about to crash at the end
of 2007. Whats more, Chinas housing
sales surged 45.3 percent in the first five
months of 2009 as stimulus spending
stoked investment and domestic demand.
In the wake of the U.S. subprime mort-
gage crisis, some observers worry that
eased lending standards have increased
likelihood of default and a reprise of the
U.S. housing bubble when the stimulus
wears off at the end of 2010. The likeli-
hood of such a situation is increased by
the fact that over-reliance on governmentspending for growth may undermine a
sustainable rise in households share of
GDP and thus increase the occurrence
of default.
Chinese authorities are well aware of
the potential danger. In July, regula-
tors ordered banks to ensure that
new loans are channeled into the realeconomy rather than being diverted
into equity or real estate markets. This
requires banks to monitor how their
loans are spent and came as auditors
found evidence of lending irregulari-
ties in the books of the Industrial and
Commercial Bank of China, China
Construction Bank and China CITIC
Bank. News that monetary policymight be tweaked caused investors on
the Shanghai Stock Exchange to worry
that tightening credit conditions would
hinder the flow of liquidity into the
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stock market, resulting in falls in the
index in August. The end of July also
saw the property market moderate as
tightening monetary policy curbed
available financing for developers and
buyers of second houses.
Similar concerns have been voiced acrossthe region, most notably South Korea,
where the government is taking steps
to cool a real estate bubble, and Viet-
nam, where the government has ordered
state banks to cap new lending to head
off inflation. This may result in Beijing
increasing the amount of banks tier one
capital, which was slashed at the end
of last year along with interest rates.The central bank has also ordered 10
banks, including Bank of China, to buy
RMB100 billion of central bank notes
with a maturity of one year and a return
of just 1.5 percent. This move is seen as
a warning to banks that have been the
most active lenders that they should now
start to rein in their excessive behavior.
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The other giant of the region, India, also moved quickly off the mark to protect its
economy from the worst of the recession. Between December 2008 and February
2009, the government announced three fiscal stimulus packages and six interest
rate cuts worth a combined $85 billion, or seven percent of GDP. Given that In-
dias economy is less than a third the size of Chinas, its stimulus was considerably
smaller and scattered across a host of targeted beneficiaries and interest groups.
Thefi
rst of these measures came in December, when the government promised tospend an extra Rs200 billion ($60 billion) on the schools, roads, power plants and
other development priorities set out in its latest five-year plan. It also authorized the
India Infrastructure Finance Company (IIFC), a government-owned financial com-
pany, to sell bonds worth Rs400 billion ($8 billion). IIFC is lending this money to
banks, which then pass it on to infrastructure projects worth as much as Rs1 trillion
($20 billion). A second stimulus package in February pro-
vided IIFC with access to a further Rs20 billion ($400
million) worth of tax-free bonds to expand its programs.
Far from being bridges to nowhere, infrastructure spend-
ing in India is sorely needed, even more so than in China, if
economic growth is to continue. During the boom, Indias
industry expanded faster than the electricity grids capacity
to power it; its air traffic outgrew its airports; and cars rolled off production lines
faster than roads could accommodate them. The result has been that Indias GDP
growth is being pushed back every year by about two percent because of lack of
adequate infrastructure. The stimulus saw the infrastructure sector in India increase
by nearlyfive percent in Q2, up from 3.5 percent in Q1, with the best performances
coming in the coal, cement, and electricity generation sectors. As such, India seems
to be moving in the right direction, albeit slower than most private sector partici-
pants would wish, to enabling sustainable, long-term economic growth.
Indias GDP growthis being pushed back
every year by abouttwo percent because
of lack of adequateinfrastructure.
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In the first stimulous package, the Indian government sought to aid exporters by
providing a two percent interest subvention on export credit for labor-intensive
sectors, giving additional allocations for export incentive schemes and a full refund
of service tax paid by exporters to foreign agents. In the second, it extended the
duty-entitlement passbook scheme. This reimburses excise duty if the exporting
manufacturer uses partly or fully domestic inputs. It also enhanced duty drawback
benefits on items like knitted fabrics, bicycles, farm hand tools and some categories
of yarn. However, with global trade in its worst slump in generations, Indias ex-ports declined for a ninth consecutive month in June, with Q2 exports down 31.3
percent to $35.4 billion from a year ago. This has resulted in companies cutting
500,000 jobs in 10 industries in 2009. That said, in contrast
to other Asian countries, exports from India are not a ma-
jor driver of growth, and thus the dip in exports has not
been as great a drag on the economy.
The government coordinated each of its stimulus packages
with the Reserve Bank of India (RBI), which took simulta-neous aggressive steps to ease monetary policy, lowering Indias prime rate six times
through the first quarter of the newfiscal year. In doing so, Indias central bank,
like Chinas, reversed tight-monetary policies through which it had sought to ease
inflationary pressure. RBI took steps to expand rupee liquidity, including a signifi-
cant reduction in the cash reserve ratio the amount of bank reserves mandatorily
held with the central bank and a reduction in the statutory liquidity ratio the
portion of funds that banks need to keep invested in government bonds. The ef-
fectiveness of RBIs steps remains inconclusive; Indias financial press expressed
disappointment at lackluster efforts to expand credit as of the end of June 2009,according to RBI data, outstanding bank credit had risen 15.8 percent (some $2.7
billion) year-on-year.
With global trade inits worst slump ingenerations, Indiasexports declined for a ninthconsecutive month.
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The 2009-2010 Union Budget announced on July 6, 2009 is the most recent install-
ment of government stimulus efforts. Despite the global slump, the Indian economy
grew by 6.7 percent in the year to April 2009. The 2010 budget departs somewhat
from the three earlier stimulus packages in its even more pronounced turn toward rural
India and what can only be characterized as a market-building bottom of the pyra-
mid approach to stimulus. Under the rubric of inclusive development, the proposed
budget represents the fulfillment of electoral promises to low-income segments and
almost seems more pitched to expanding and consolidating Congress Partys politicaladvantage and that of its United Progressive Alliance coalition government than
to building on and augmenting the three previous stimulus packages.
On the whole, the results of the fiscal stimulus appear to be encouraging. In July,
the IMF improved its forecast for Indian GDP growth to 5.4 percent for 2009,
while the RBI slightly improved its growth outlook. It now expects GDP growth
at six percent with upside compared with around six percent in April. The
first quarter results of most manufacturing companies have been good, and many
companies have registered a healthy growth over the previous quarter. This is dueto declining input costs as international commodity prices are running at levels far
below the peaks of 2007, while the stimulus has boosted capital expenditure. Indian
companies are expected to invest Rs10.5 trillion ($215.25 billion) into industrial
expansion over the next three years, particularly in infrastructure such as power
generation and telecommunications.
Across the region Asian governments acted quickly to shield their economies from
the worst of the fallout from the economic crisis. Although many experienced swift
and steep declines in GDP growth, exports, and tightening lending conditions, the
stimulus packages enacted appear to have staved off the worst of the impact, at
least for now.
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Crisis and Response
In the last quarter of 2008, the bellweth-
er index on the Bombay Stock Exchange,
the Sensex, lost 60 percent of its value.
Like many emerging economies at the
time, Indian companies were hit by capi-
tal flight from Western investors as they
sought to reduce the risk profile of their
investments and deleverage their portfo-
lio. Having languished near the bottom
of the curve during the first quarter of
the year, the index showed a marked im-
provement April to June, rising from just
under 10,000 points at the beginning of
April to 14,645 on 1 July.
There are fundamental reasons why
investors have rediscovered equity
investing: risk premiums have reduced,
there are some signs that economies are
stabilizing and corporate results in India
have been surprisingly good. Three
quarters of the 30 Sensex companies
reported year-on-year increases in net
profits of an average 36 percent after
three quarters of weak earnings, beating
analysts expectations.
The recent surge in share prices has
helped the Indian economy in two ways.
First, a soaring stock ticker helped clear
away the glum mood in urban India,
where pessimists assumed the economy
was in worse trouble than it actually was.
Second, companies have used higher
share prices to raise capital, cut leverage,
and repair balance sheets, setting them-
selves up for a healthier future.
That said, most of the current surge in
share prices is due to the flood of global
liquidity that has been released by central
banks since September 2008 to prevent a
full-scale meltdown of the global finan-
cial system. Much like in China, India will
have to be careful not to foster a stock
market bubble on the back of an influx
of cheap money. However, stock market
growth has been checked by fears that a
ROBUST PERFORMANCE ON THE STOCK EXCHANGE
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poor monsoon rainfall was 29 percent
below normal as of August 12 will
slow domestic consumption and eco-
nomic performance in Indias agriculture
sectors by reducing farm output and
rural consumption, which are vital for
maintaining strong economic growth.
Bombay Stock Exchange: SENSEX Closing Trades August -August
8000
10000
12000
14000
16000
8/1/08 9/1/08 10/1/108 11/1/108 12/1/08 1/1/09 2/1/09 3/1/09 4/1/09 5/1/09 6/1/09 7/1/09
Source: Source: CEIC Data Company Ltd., Daily Database
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AppendixA Microeconomic Map of Asia
photograph by Erik Charlton
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A Microeconomic Map of Asia
THE REACTIONS TO THE CRISIS CONSIDERED so far in this re-
port focus on high-level, macroeconomic policies the mix offiscal and monetary
policies, stimulus packages, and investments that central governments and agencies
have pursued to curtail damage and regenerate growth. Its worth noting, however,
that in the modern global economy, the determinants of rising prosperity are not
macroeconomic but microeconomic competitive companies rooted in competi-
tive clusters.7
A microeconomic map of Asia looks less like a political map of the continent than
the night-time satellite photograph on the cover of this report. The bright lights
along the eastern and central spine of Honshu, Japans largest island; South Korea,
especially around Seoul; the Hong Kong-Shenzen-Guangzhou conurbation, and
areas around Shanghai and Beijing in China; Singapore and Bangkok in Southeast
Asia; and areas around Mumbai and New Delhi in the West and North of India:
these locations generate an overwhelming proportion of the continents wealth.
Looking at the two fastest-rising economic powers in the region, amid all the focuson rapid development it is easy to overlook that these countries are not monoliths
with evenly distributed patterns of growth and prosperity within them. In fact, in
both countries, growth rates vary dramatically by location and cluster. As noted ear-
lier, the crisis did not manifest much effect on the microeconomies of India, which
either were shielded from the worst effects of the recession or, like its vaunted soft-
ware and business process outsourcing clusters, poised to rebound quickly. China is a
AT BAOSHAN IRON & STEEL
Visitors tour a facility of Baosteel Group, Chinas biggeststeel producer, the sixth-largest in the world.
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different story, however. Its growth before the crisis depended more on exports ulti-
mately to the advanced economies. As foreign demand dissipated, China accelerated
its turn away from an export-driven to a consumption-driven economy. At the same
time, Chinas regional policy moved its focus from development along the coasts and
northeast interior to its western interior. How effective these policies will prove is an
open question, especially with the recovery of the developed economies and the re-
turn of high demand for Chinese exports produced mainly in coastal areas.
Asian Economies and Global Competitiveness
To perceive the contours of Asias post-crisis economy, it is necessaryfirst to under-
stand the sources and drivers of competitiveness across the region. In the modern
global economy, the primary instrument of competition is not the country but
the company. Companies occupy the front lines, and when they thrive in competi-
tion, they produce a host of benefits to their constituencies: products and services
valued by their customers; profits for reinvestment and distribution to owners;
rising wages, increasing employment, and increasingly attractive opportunities foremployees, partners, and suppliers; tax revenues for government; innovation, phi-
lanthropy, volunteerism, and other benefits to society.
The segmentation of the Asian economies according to their competitiveness and
prosperity is apparent in Figure 5, which arrays GDP per capita, the best single
measure of a nations prosperity, against the Business Competitiveness Index, a
now-standard metric established by the World Economic Forum to measure the
competitiveness of enterprises operating in particular countries.8 As the figure re-
veals, for all the progress India, China, and other emerging markets are making, they
must still travel a long distance to catch up to the most prosperous countries in Asia
and other parts of the world.
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The progress achieved so far is the result of historical increases in competitiveness.
Looking ahead, the Asian economies must constantly improve their competitive
performance, and they must move beyond reliance on existing sources of competi-
tiveness to create and sustain new ones.
Figure : The Relationship Between Business Competitiveness and GDP per Capita
Brunei DarussalamSingapore
Japan
Korea, Rep.
Malaysia
ChinaThailand
Sri Lanka
Indonesia
IndiaVietnam
Cambodia
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
2.5 3 3.5 4 4.5 5 5.5 6
United States
Luxembourg
Norway
Kuwait
ChadBurundi
VenezuelaAlbania
Slovenia
Italy
Poland
South AfricaChile
Iceland
Ireland
Israel
Denmark
GreeceTrinidad &
Tobago
Estonia
Philippines
Business Competitiveness Index
2008 GDP perCapita US$
(PurchasingPower Adjusted)
Source: World Economic Forum, Global Competitiveness Report 20082009
Many factors affect the competitiveness of companies, including the macroeco-
nomic environment, the liberalization of trade and investment, the condition of
physical infrastructure, and the willingness of people to work hard and contribute
their energy, ideas, and enthusiasm. The strongest Asian economies have performed
well in these respects. But competitiveness is ultimately a local phenomenon. In
large nations, some regions and communities are more competitive, and hence
more prosperous, than others because they have supportive local environments
apart from geographical or other natural advantages. Competitive companies in
such environments operate not as isolated actors, islands unto themselves, but as
part of clusters networks of interdependent, interrelated companies and institu-
tions supported appropriately by government and societal policies and agencies.
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Competitiveness is thus rooted in specific locations, and it is important for gov-
ernments and companies to work together to build and maintain vibrant these
competitive clusters.
All competition is based on the cultivation and deployment of assets. In the mod-
ern global economy, sustainable competitive advantage is shifting from a base in
physical and financial assets toward a base in human assets and knowledge assets.
In recognition of this trend, governments and companies must work together tomake three commitments: to increase the quality and supply of specialized human
assets, to support innovation in its broadest sense, and to
promote entrepreneurship. We portray these commit-
ments as the vertices of the Triangle of Competitiveness
(Figure 6), a simple graphic that depicts the drivers of
prosperity.
Specialized human assets are people with particular
characteristics and skills that enable them to thrive in or-
ganizations and contribute to their competitive advantage.
Low-cost, unskilled labor is not an enduring source of
competitive advantage because it is widely available in too
many locations. Specialized human assets, in contrast, are
a major source of sustainable competitive advantage because of the investment
and attention necessary to develop them and keep them at the frontiers of practice.
Innovation includes not only creativity and invention, but more importantly, the
capacity for rapid commercialization. What is often lost in discussions of research
and development is the great importance of development in the pairing. Innova-
tion extends beyond products and services to include best demonstrated practice
in processes, management, and organization. The need to innovate applies across
all areas of the value system, from suppliers through companies, partners, and dis-
Competitive companiesflourish as part of
clusters networksof interdependent,
interrelated companiesand institutions
supported appropriately
by government andsocietal policies and
agencies.
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tributors, and it involves not only what companies strive to do by themselves but
also what they do in partnership with outside actors and institutions.
Figure : The Triangle of Competitiveness
SPECIALIZED
HUMAN
ASSETS
INNOVATION
ENTRE-
PRENEURSHIP
Entrepreneurship provides the means by which economies constantly generate
progress and ultimately renew themselves. The growth and prosperity of particu-
lar economies correlate highly with their encouragement of entrepreneurs. Most
new jobs are created by entrepreneurs and small and medium size enterprises.
Similarly, most innovations originate outside of big companies in small entrepre-
neurial organizations.
Competitiveness in China
By any measure, Chinas growth before the crisis was astonishing, averaging 9.63
percent per year from 2000 to 2008. Before the crisis, exports of goods account-
ed for a significant portion of this growth. China is the third-largest exporting
country in the world, after the United States and Germany. Looking at a cluster
map of China, one sees why. As Figure 7 reveals, China possesses many large and
globally competitive clusters in textiles and apparel, plastics, metals and machinery,
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automotive equipment, lighting and electrical equipment, information technology
products, and communications equipment. The size and strength of these clus-
ters is extraordinary, with few precedents in industrial history, perhaps rivaling the
United States in about 1950, West Germany in the 1960s, or Japan in the 1980s.
On the other hand, China was not at this time globally competitive in clusters such
as agriculture and agribusiness, heavy machinery, construction, or education and
knowledge creation.
Figure : Employment Specialization of the Economy:China Compared toGlobal Economy for -
Note: Global economy = 95% of world GDP; Clusters Air Transportation; Aircraft, Aerospace, & Defense; BusinessServices; Communications Services; Financial Services; and Hospitality & Tourism omitted for lack of data; Datasetgives total 2007 traded employment for China as 65MM and is directional in nature only given lack of data for smallbusinesses with
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HOW TO READ A CLUSTER MAP
The cluster mapsi of China and India in
this section may require brief explana-
tion for some readers. Every nation has
some employment in nearly every cluster,
though clusters that are traded across bor-
ders provide a better indication of global
competitiveness given their high degree of
specialization across geographies. The the-
ory is that rising employment in a nations
traded clusters is a sign of a competitive
economy, although cluster employment
specialization in populous emerging
economies such as China and India should
be treated carefully since many clusters in
these nations compete on low labor costs
relative to advanced economies and gener-
ally are not as concerned with increasing
labor productivity.
The cluster maps here portray traded
clusters of goods and services. Each
bubble on the chart is a traded cluster,
with its size proportionate to the number
of employees reported to the govern-
ment and recorded in official statistics.
Each map has two axes: 1)percentage share
of cluster employment, which represents
i The Monitor Cluster Mapping Dataset covers more than 94
percent of global GDP. The database uses official employment,
establishment, average wage, export, and patenting statistics pub-
lished by national governments as well as information reported