For further information: Robert McGuckin
The Conference Board
(212) 339-0303
For Release Thursday, July 16 at 6:30 PM ET Release #4429
ASIA'S LONG-TERM GROWTH PROSPECTS ARE PROMISING,
IF REFORMS LEADING TO PRODUCTIVITY GAINS ARE CONTINUED
Asia's return to strong growth depends on economic reforms that will increase competition, intensify the diffusion of foreign technology, and increase productivity, according to a report released today by The Conference Board.
Financial and economic upheavals in Thailand, Japan, Indonesia, and South Korea will clearly stall growth in these countries over the next year or so, but pessimism on Asia has been overdrawn, according to the report, Perspectives On a Global Economy-Asia After The Crisis: Challenges for a Return to Rapid Growth, by Dr. Robert H. McGuckin, director of economic research at The Conference Board and expert on productivity and industrial organization, and Dr. Bart van Ark, consulting director for The Conference Board's international economic research and a recognized expert on international comparisons of productivity and living standards.
"The longer-term outlook is much brighter than is often suggested," says McGuckin. "These countries have many opportunities for expansion and growth, provided governments can create more competitive domestic environments that let resources flow to their highest value uses."
Income in the newly industrialized economies-Hong Kong, Singapore, South Korea, Taiwan-has risen rapidly over the past three decades, reaching about two-thirds the level in the U.S., but productivity in these countries is less than half that of the U.S. The Conference Board report says a critical need in these countries is to boost productivity.
"Asia has by no means reached its full potential, but opportunities in Asia will not be achieved without continuation of the economic reforms that have been opening up markets and nourishing restructuring and transformation of many of the Asian countries for the past three decades," says McGuckin. "While the specific reforms will differ by country, those countries that provide fertile grounds for competition will continue to be good bets for business investment."
"Future growth in Asia depends on investing in activities that raise productivity," says van Ark. "Financial sector reforms in the hardest hit economies are a necessary condition to attract new investment domestically and from abroad, but for the region as a whole, the possibilities for output growth depend on striking a balance between the accumulation of resources and their allocation to the most productive uses."
A TALE OF MANY ASIAS
The Conference Board report finds that while prospects for long-term growth in Asia are good, there are massive differences across countries. There are limits to how much growth can come from increases in labor and these are being reached in the newly industrialized economies where a substantial part of growth during the past three decades came from increases in worker hours.
Today the number of hours worked per year is very high and there is only limited potential to increase the employed proportion of the population. For many years, Asian countries also relied on extraordinary, rapid investments in machinery, equipment, and non-residential structures. Although these investments were accompanied by rapid growth in labor productivity until recently, there is some question as to whether this can continue. But with productivity levels in countries like South Korea and Taiwan at less than half of those in the U.S., investment opportunities that can improve resource allocations and bring in new technologies still exist.
Worker hours have increased in Southeast Asia (Indonesia, Malaysia, the Philippines, and Thailand) since the early 1970s, but there is room for further expansion. Much of Southeast Asia's recent productivity growth came from reallocations of capital and labor from the traditional low-to-high productivity sectors as these once agricultural economies industrialized, but the improvement in living standards is a more recent phenomenon and per-capita income and productivity levels are still much lower than in the newly industrialized economies. Investment has become a larger proportion of output, but the large gap in productivity with the newly industrialized economies and other more advanced countries leaves ample room for further growth.
South Asia (Bangladesh, India, Pakistan, and Sri Lanka) is only beginning to show signs of improved economic performance with under-utilization of labor a serious problem in all these low-income countries.
"This is particularly ironic in countries like India where wage levels are low and labor could be more fully employed," says van Ark.
While India has experienced faster growth since the early 1990s, its future course remains uncertain. Despite substantial reforms in the external sector, foreign firms are still highly restricted in the Indian economy. So new investment in India is likely to receive much lower returns than elsewhere in Asia. But, there are substantial possibilities for improvements in this area as well.
China is now often viewed as an emerging economic leader in Asia. The Chinese economy has been bigger than Japan's since the early 1990s. But despite rapid growth, China's per capita income and productivity levels are still very much in the lower range of the Asian region. However, there is enormous potential for improvement and China is taking advantage of it. Apart from a rapid expansion of the private sector, the state-owned enterprise sector in China is undergoing important reforms in terms of property rights that bode well for long-term growth. Also, China is open to foreign direct investment-an important channel of technology transfer.
Economic growth in Asia's most mature economy, Japan, has seriously slowed since the early 1990s and has now gone into recession. Productivity growth has stalled despite increases in capital intensity through large investments in machinery and equipment. Even though Japan is the most advanced economy in Asia in terms of output per working hour, it is largely a dual economy: It is the world productivity leader in some manufacturing industries, but it lags in other sectors compared with many major countries. While there is potential for improvement, Japan must address the serious imbalances in its economic structure.
THE ROLE OF COMPETITIVE ENVIRONMENTS AND THE NEED TO SHIFT RESOURCES
"Despite great differences among Asian countries, there is plenty of scope for fast growth in the long term that helps close the gap in living standards with the world's most advanced economies," says van Ark. "Reallocations of resources from lower productivity sectors like agriculture to higher productivity manufacturing are crucial to realize the potential for further growth. This is especially true in the poorer countries, that need to improve productivity and living standards."
However, many of these countries are sufficiently advanced so that productivity will arise increasingly from within individual manufacturing and services sectors and the competitive environments in these areas will become crucial determinants of growth.
Although many Asian economies have made substantial changes in this direction, there is much more that can be done, according to the report. For example, Japan's financial, retail, and agriculture sectors, and even some areas of manufacturing, suffer from rigidities. China, despite great progress, must continue to improve its flexibility, and India is far behind in the area of labor market flexibility.
"New policies in a wide range of areas, from promoting the development of domestic consumer markets, and facilitating shifts in labor from one sector to another, to removing barriers to foreign competition and investment, are needed," adds McGuckin. "Such policies involve institutional evolution-the particular form and timing of which will vary by country. However, in each country, the principle involved is the same. Facilitate the flow of resources to their highest valued and most productive uses."
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Source: Perspectives on a Global Economy-Asia After The Crisis: Challenges for a Return to Rapid Growth The Conference Board
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