26 March 2014
Snake Baskets

Asia in 2013

Asia will muddle through in 2013, benefiting little from the revival of the US economy. But as in 2012, there will no doubt be some surprises.

Asia will muddle through in 2013, benefiting little from the revival of the US economy. But as in 2012, there will no doubt be some surprises.

In China, government stimulus will keep the economy afloat. The new government's focus will be on restoring internal stability and the image of the Communist Party, after the 2012 turbulence caused by the Bo Xilai and other scandals. There will be no attempt to tackle difficult reforms of state-owned enterprises and banks, despite the urgent need for rebalancing. Unless the new administration starts reform at some point, China will be stuck with a very low rate of productivity.

As US private sector deleveraging progresses further, and a solution is found to the fiscal cliff and government debt, the US will gradually move into a higher growth phase. But we will not see a return to the decade leading up to the 2008 Lehman shock, when China and other Asian countries benefited greatly from the US's debt-driven growth.

There will be new drivers of US growth. The renaissance of the domestic energy sector. "Insourcing" of some production previously outsourced to emerging Asia. Foreign investment, especially from China. An easing of limitations on skilled migration. The nascent third industrial revolution thanks to 3D printing.

We may even see the commercialization of innovations coming out of the US military's very active past decade. Don't forget that the world-changing Internet came out of the US military.

Some of these factors represent a switch in the growth dynamic from Asia to the US. But the re-emerging US dynamo will still underperform relative to potential due to the political inability to invest sufficiently in infrastructure, education, health and science. The International Telecommunications Union ranks the US only 15th in the world on its information and communications technology index, below some five Asian economies. The most shocking evidence of the deeply fractured US society is the declining life expectancy of the bottom 30% of the country.

Osama Bin Laden has inflicted a huge wound on the US economy and society through debt-financed wars, a bloated US military and the vast internal security apparatus.

We may also see President Obama's controversial "Asia-pivot" transformed into the elements of a partnership with China. The second-term president will be in search of a foreign policy legacy, and the Middle East will not provide that. Further, it is not in Chinese President Xi's interest to be constantly at war with China's neighbors. Obama and Xi look like two guys who can work together, if only Xi can control the People's Liberation Army.

China is now desperately alone, as Burma has shifted West, and China can't even control North Korea. The recent anti-Japan demonstrations will begin to cost China dearly, as Japanese companies look to India and Burma as new production locations, especially since China is losing its low-cost advantage.

The election of Prime Minister Abe in Japan will provide the opportunity for a fresh economic and political start. But although he is making good noises on deflation, Abe will not bite the bullet on more important initiatives like the Trans Pacific Partnership which are necessary to revitalize Japan's economy.

Continued weak leadership, and an inability to address Japan's fundamental problems, will feed political instability in this country which has the habit of changing prime ministers annually. We can only hope that Abe can restrain his right-wing, nationalistic impulses and those of politicians like Ishihara and Hashimoto. It will be important to avoid provoking China.

The election of President Park in South Korea means that a new deal with North Korea is possible, even after the recent rocket launch. More South Korean investment and food aid for the North in exchange for restraint on rockets and nuclear buildup would be a very positive development.

South Korea will continue to impress the world with its enterprises (like Samsung), K-pop (Psy and "Gangnam Style"), Korean wave and lady golfers. But competing in the field of continuous innovation can prove difficult as Japanese enterprises like Sony and Panasonic know well. And intellectual property challenges will always be there, as Korean enterprises are best at adapting the designs and products of others.

Indian economic dynamism is unlikely to be awoken by Prime Minister Manmohan Singh's belated and feeble attempts at reform. And Rahul Gandhi's inability to provide meaningful leadership to the National Congress Party will leave the country without direction. Large enterprises like Tata, an Indian strong point, will continue to find investing overseas more attractive than at home.

The South East Asian countries of Indonesia, Philippines and Thailand will be the bright stars of Asia, although the failing health of the King of Thailand casts a shadow over that country's internal stability. 2012 could be called the "year of Burma", with its surprising reforms being crowned by a visit from US president Barack Obama. But Burma will lose some gloss in 2012, as its fundamental weaknesses come into sharper focus.

Could there be a positive surprise awaiting us in 2013?

We have to bear in mind that North Korea is fundamentally changing as more information seeps across the border through DVDs, radio, telephones, USB keys and so on. There is also a growing marketization of the North's economy, including through trade and investment across its increasingly porous border with China. This exposure to the outside world shows North Korean citizens that something better is possible. Corruption is also undermining authoritarian control.

We don't know when, but one day there will be a surprise development in North Korea, especially as citizens begin to lose their fear of challenging authority. Already, citizens do much less reporting on each other. The leadership would be wise to open up more to special economic zones, as China some three decades ago.

In this "13th year", Westerners who suffer from "triskaidekaphobia" will be pessimistic. Asia does not however suffer from any such fear of the number 13. Indeed, it can be a decidely lucky number. When pronounced in Mandarin, it can sound like 'definitely vibrant' or 'assured growth'.

In Asia, we will also pass from the year of the dragon to the year of the black snake. Despite the snake's devilish connotations in the West, this 2013 year of Snake appears to be one of steady progress to Asian astrologers.

So Asians with a superstitious bent may well be more optimistic than me. And you never know, they may be right. Asia does have a track record of surprising on the up-side. This is how we arrived in this Asian Century.


John West
Executive Director
Asian Century Institute
Tags: asia, US economy, insourcing, foreign investment, Obama's pivot, North Korea, Burma

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