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Asian Wealth Shift

It is difficult to make generalisations for a continent of 3 billion people with such a wide social, political and cultural diversity. However, given the much-anticipated economic dominance of Asia over the next ten years, it is certainly worth trying to do so.

It is clear that the world’s centre of gravity has gradually been sliding eastwards for a while now. Over the past ten years, Asia has accounted for half the world’s GDP growth and, from an Asian perspective, things are looking pretty good for the future. At the end of 2008, Asia’s GDP was just under US$14 trillion – roughly the same as the US – and all indications are that its growth will continue to outpace Europe and the US as we head into the next decade.

Growth in the global downturn

Some emerging countries barely noticed the recession while developed countries continue to struggle. In the last quarter of 2009, Thailand grew at an annual rate of 15.3% and Taiwan at 18%. Many economists expect growth in emerging markets to be four percentage points higher than growth in the rich world for at least the next five years. Indeed, thanks to rapid advances, many Asian companies have established their place in the global economy. Take for example India’s ArcelorMittal, the world’s largest steel company, or Lenovo, the HYPERLINK "" \o "People's Republic of China"China-based computer technology company which did not exist in 1990, bought IBM’s personal computer business five years ago and is now the world’s fourth-largest PC-maker, after Hewlett-Packard, Acer and Dell.

Nirmalya Kumar of the London Business School says that the combination of rapid growth and extensive internal restructuring has left many Asian companies with plenty of cash in their pockets. Profit margins of 10% are common – double the average in the West. And, because ownership is concentrated, companies find it easier to take risks. Even as Western companies reeled from the recent recession, emerging-market giants are shopping. India’s Tata Consultancy Services bought Citigroup Global Services, the outsourcing division of the American bank, for $512 million in October 2008. HCL, the Taiwanese technology group, snapped up Britain’s Axon Group for $672 million two months later. Reliance Industries, another Indian company, is pursuing LyondellBasell Industries, a chemical company, in a $14.5 billion bid, and Bharti Airtel, headquartered in New Delhi, has gobbled up Zain, a leading African telecoms company, for $9 billion.

Asian growth

Looking more closely, we might have underestimated Asia’s growth already. GDP figures converted at market exchange rates can understate real expansion because they don’t take into consideration that the price of many domestic products, food, clothes, electronic goods and so on are always cheaper in low-income countries (Thailand, China, Indonesia, India etc). This means that the average households in Asia do not need to spend as much money buying goods as their Western counterparts. Also, many Asian currencies are still recovering from the dramatic tumble they took during the financial crisis of the late 1990s, and Japan has also had to deal with a period of deflation. Given this, some argue that it is much better to measure growth through purchasing power parity (PPP), which takes lower prices into account. Through this lens, it is even clearer that Asia has done pretty well over the past couple of decades. Its share of the world economy has risen steadily, from 18% in 1980 to 27% in 1995 and 34% in 2009, and, all things being equal, Asian PPP will probably exceed the combined sum of America’s and Europe’s within four years. This isn’t surprising when you consider that three of the world’s four biggest economies by PPP (China, Japan and India) are Asian.

PPP or dollar spend?

We must tread carefully, however, because another school of thought suggests that PPP measures exaggerate the numbers and it is much more important to consider consumer spending in dollar terms. Over three-fifths of the world’s population live in Asia and their purchasing power accounts for a little over one-fifth of global private consumption. Although, overall, Asia is still a poor continent, with more than 71% of people living on less than a dollar a day, Asian consumers are clearly growing richer, with average earnings in many countries doubling in the past five years. Asians are now able to use their newly acquired disposable incomes to buy everything from mobile phones (43% of all sales are now to Asian consumers) to cars (35% of all car sales last year were in Asia).

Asia’s growth has been built primarily on Western consumption – or, more accurately, over-consumption. Export-led development has lifted significant markets out of poverty; in fact, the per capita income of people in the Tiger Economies of Hong Kong, Singapore, South Korea and Taiwan now rival, or in some cases exceed, that of many European countries. This is by no means a new phenomenon. A century ago, Japan was the first to understand the West’s almost insatiable desire for imports and began with a focus on light goods, such as raw silk and pottery, before moving onto heavier industrial materials like steel and chemicals. As early as 1914, almost a quarter of the world’s cotton and yarn exports were from Japan. In the 1960s, Singapore, Hong Kong, Taiwan and South Korea imitated Japan and flourished.

China’s booming economy

China also boomed after opening up its economy in 1978. Its ‘Special Economic Zones’ were designed to attract foreign capital to build factories to make ‘stuff’ for the Western market. Millions of products were quite literally ‘made in China’ and then shipped off to shops in London, Paris and New York. Malaysia, Thailand, Indonesia and, later, Vietnam all forged similar export-led paths to growth, so much so that the past ten years have seen Asia’s exports as a share of its GDP grow from 37% to 47%. Of course, the story is not the same everywhere: Singapore’s exports hit 186% of GDP in 2007 while Indonesia’s were less than 30%. Some countries, mainly for political reasons, have not jumped on the bandwagon – Myanmar and North Korea, for example, remain poor.

The export model has helped Asian countries improve their living standards quickly. Evidence suggests that China has benefited most from this arrangement, with a quadrupling of GDP and an increase in exports by a factor of five over the past decade, not to mention the ability to attract Western technology and expertise and the creation of millions of manufacturing jobs for the poor. It has been a dramatic shift in industry and the sheer speed of change has made it particularly challenging to maintain cheap and competitive manufacturing labour markets and yet ensure acceptable standards of living for the workers. But, so long as incomes are increasing, both government and the people have been content to ignore things like social services and good governance – privileges that Western societies take for granted. The main problem, perhaps, is that the ‘easy money’ obtained through exports has tempted some governments to put off other areas of economic development, the encouragement of domestic demand being a prominent example.


Until very recently this production of goods in Asia for Western consumers proved very satisfactory for all involved and Asian economies have grown on the back of the seemingly insatiable Western appetite for cheap clothes, electronics and toys. In their discussion of this, economic historians Niall Ferguson and Moritz Schularick have coined the term ‘Chimerica’ because both the US and China have played pivotal roles in the unfolding drama. China, in particular, has used its exports to build up its currency reserves to an unprecedented high. In 2000, it was of the order of US$1,654 billion, or slightly more than 10% of GDP. By 2009, it was US$2.3 trillion, equivalent to more than 50% of China’s annual output – or, to put it another way, enough to buy two-thirds of all the NASDAQ-quoted companies. China is also the world’s second largest net creditor after Japan (the net credit position takes account of equities as well as debt). America, on the other hand, simply consumed more and saved less, but, because the Chinese Yuan was pegged to the dollar, it still maintained low interest rates and a stable rate of investment. In retrospect, it was clearly unsustainable as over-consumption meant that between 2000 and 2008 the US outspent its national income by a cumulative 45%. That is, according to Helmut Reisen, head of research of the OECD Development Centre, total US spending over the period was 45% higher than total income – and a third of this consumption came from China.

Like all bubbles, this level of growth was unsustainable in the long term and the financial and economic crisis of 2007 to 2009 has meant that even the American thirst for buying now and paying later has ground to a halt under the pressure of toxic loans and bad debt. Not good for the US but equally not good for Asia, dependent as it on foreign buyers.

But what happens next? Asian economies, although not in themselves built on debt, have been buoyed up along with all the other assets including American houses and shares during the credit bubble of the past decade. The markets are clearly interconnected. The Asian Development Bank estimates that, because of the amount that is exported to the West, a decline of one percentage point in America’s growth rate knocks 0.3 of a percentage point off Asia’s.

Tightening Western belts

So, because the once profligate Western consumer is now saving – or, at least, not spending – Asia needs a new market. This new market might well be Asia’s own population. Trade within Asia is already growing at roughly twice the pace of trade with the outside world. From almost nothing twenty years ago, China is now India’s biggest trading partner, with bilateral trade that may top $60 billion this year. Central Asia’s trade with China jumped from $160 million in 1990 to $7 billion in 2006. And China is now the biggest merchandise exporter to the Middle East. In fact, over the past few years, China has been exemplary in using bilateral trade agreements to build up a strong network of partners that helps drive sustained export growth.

However, for now, Asia as a whole also needs to manage its finances. It is in a good position because its foreign assets have provided a cushion against the vicissitudes of the recession. As Asian growth continues to outstrip that of the US, it gets harder for Asia’s exporters both to keep exporting in volume and to keep importing the greenback. In truth, the average Asian exporters don’t necessarily want their currency to strengthen because a strong currency effectively raises their prices abroad and reduces their competitive advantage. It is therefore understandable that places like China would like continue to keep the Yuan undervalued to ensure it retains Western buyers for its myriad product ranges. It is a situation that Ferguson and Schularick argue ‘would introduce new and dangerous distortion to the global economy’.

Asian shoppers

On top of this, although increasing numbers of Asian consumers have developed a taste for shopping, private consumption currently accounts for only about half of Asia’s GDP (compared with 72% in the US), so there is considerable room for growth. Three billion Asians currently spend a little less than US$7 trillion on consumer goods; in comparison, 300 million Americans spend up to US$10 trillion. Today China has 55 million middle-class households: by 2025, this is expected to quadruple to nearly 280 million. As prosperity filters through and the middle classes become big spenders, there is the expectation that the region’s emerging economies could soon grow enough to offset falling consumption in the US and the EU. So, as American and European belts tighten, expect the Asian consumers to drive the new markets of the next decade.

China is, of course, the movie star of Asia, with exponential growth potential. China now has a market-orientated economy with a flourishing private sector and it has an increasing presence on the international stage – goodbye collective agriculture; hello liberalised prices, fiscal decentralisation, increased autonomy for state enterprises, diversified banking systems, stock markets, and perhaps, most importantly, foreign trade and investment. As a result it has quadrupled its GDP since 2000, raised exports by a factor of five and has now overtaken Germany to become the world’s largest exporter. Chinese exports, which jumped ahead after WTO accession in 2001, are generating higher and higher trade surpluses. Not bad for a country which not so long ago had a centrally planned economy and was closed to international trade.

The Chinese dragon

It is difficult for many people in the West to comprehend China’s size and scale. China is now the world’s biggest market for many household products, including TVs, refrigerators and air conditioners. It tops the world car sales charts despite car ownership currently resting at fewer than fourteen vehicles per thousand citizens (compared with more than 400 per thousand in the US). It has 400 million internet users compared with America’s 240 million and India’s 80 million. And the Chinese market is only going to get bigger. In fact, China is already well on the way to becoming the world’s biggest market for pretty much anything you can think of.

Of course, this growth is not without its problems. The Chinese government faces numerous development challenges, including reducing its high domestic savings rate and correspondingly low domestic demand; creating jobs for approximately 200 million rural labourers and their families as they relocate from the countryside to the towns (10.8% of people still live on less than $1 a day); and containing the environmental damage resulting from the economy's rapid transformation. It also sits on a demographic time bomb as a consequence of the ‘one child’ policy, which means that China is now one of the most rapidly aging countries in the world. The government in Beijing is doing its best to find solutions to these onerous problems and is also actively seeking to add energy production from sources other than coal and oil. However, like everything in China, the solutions it needs are enormous in scale.

Indian ambition

Given China’s problems, it is worth discussing the other drivers of Asian wealth. Take India, for example, which is second only to China as a fast-growing large economy. Unlike the giant export-driven Chinese economy, India has emerged relatively ‘unscathed’ by the global economic downturn according to the Asian Development Bank. During the past two decades, it has moved away from its former ‘command and control’ policies to become a market-based economy. Like China it has a large domestic market with substantial numbers of poor people. However, unlike many of its Asian counterparts, India has a limited reliance on exports, which account for less than 20% of gross domestic product. In fact, the resilience of the economy rests on a huge domestic market, and, even better, India’s domestic demand was largely uninterrupted by the financial crisis. Some export sectors did suffer, though, including textiles, but are now recovering.

India’s fast-growing economy, with its strong internal focus, also has global ambition. India is increasingly a leading source of process and business model innovations. For example, the launch of the Tata Nano, the world’s cheapest car, a couple of years ago has done a lot to position the Indian automotive industry as the centre for low-cost innovation, particularly in small vehicles. The industrial sector is also on the rise, currently expanding at a double-digit rate, and the services sector is now at 55% of GDP. Only agriculture, accounting for 20% of GDP, is under-performing, curtailed as it is by poor harvests and low rainfall.

Education, education, education

Education and knowledge have played a key part in India’s growth. India produces 3 million graduates a year and about twice as many engineering and computing graduates as America, counting those with bachelor’s or master’s degrees. In addition, partially because of inadequate physical infrastructure, India is also witnessing some of the fastest rates of adoption for distance learning. Since 2001, 24x7 Learning, one of the country’s leading e-learning technology platforms, has welcomed over 1 million students to the various courses that it hosts for both academic institutions and corporate universities. The thirst for knowledge is strongly supported by the state: Indian legislation ensures that a government or public sector employee who earns an online degree will benefit from an increase in both pay scale and pension.

A young (70% of the 1.2 billion population is under 35), educated workforce has attracted the hi-techs, such as HP, IBM, Microsoft and Accenture. Global drug giants, such as Novartis, GSK, Eli Lilly, Pfizer and AstraZeneca, have all began turning to India as a base for R&D and Indian-born companies are increasingly carrying out original research themselves – at much lower cost than elsewhere. Today, India has some 110 drug manufacturing facilities approved by the US Food and Drugs Administration. Although the drug discovery business is unlikely to reach the size of the country’s IT and software industry, the market for contract pharmaceutical work is about US$38 billion so the opportunities for well-educated, hard-working Indian professionals are considerable.

Infrastructure investment

However, although India’s growth rate has been among the highest in the world, it remains a low-income country, with inadequate infrastructure being a significant barrier to development, particularly in rural areas, home to 70% of India’s population and the 52% of the workforce that is primarily engaged in agriculture and related activities. Any development strategy will need to contend with the harsh realities of low productivity in the countryside, a massive movement of people to the cities (India’s urban population is expected to double over the next two decades to 575 million), and extensive poverty in both rural and urban areas. India plans roughly to double investment in infrastructure to $500 billion over the next five years, or about 8% of GDP each year, with private investors contributing 40% of the total, not only to expand capacity but also to improve the quality of service. India’s stated aim is to grow inclusively, which means that it may take a little longer than other nations. Manmohan Singh, the prime minister may have put his finger on it: ‘It is probably true that we are a slow-moving elephant but it is equally true that with each step forward we leave behind a deep imprint. There is a price that we pay in trying to carry all sections of our people along ... It is perhaps a price worth paying.’

Japanese innovation

No discussion about Asia can be complete without considering the impact that Japan continues to have on economic growth. Despite being at the forefront of innovation and trade in the post-WWII era, Japan was one of the hardest hit countries during the global financial crisis. It is doing its best to address this by finding new domestic markets and markets closer to home – namely, in China – but Japan has deep-seated problems of deflation, huge public debt, ugly demographics and, worst of all, indecisive leadership. Unless things change radically, Japan’s difficulties may well hold back economic recovery for years to come.

ASEAN effect

The finance ministers of the Association of Southeast Asian Nations (ASEAN, comprising a monarchy, a military dictatorship, communist states and democracies) are only slightly less ebullient than their counterparts in Asia’s major players, predicting that the region's economy is expected to expand by between 4.9% and 5.6% in the next year. Incrementally, their resource-rich region of 584 million people, with a combined gross domestic product of $2.7 trillion, is stitching together an economic community, even if their political and security harmony is more of a pipe dream at the moment. ASEAN leaders have already agreed to coordinate policies, including rate cuts, credit support and government spending after their export-orientated economies fell into a sharp but short recession during the global financial crisis. Maintaining a positive economic relationship with Myanmar, however, is an obvious challenge that will test ASEAN's political cohesiveness. The nation’s military rulers face criticism from some members over its new election laws because of its treatment of political detainees, notably democracy icon Aung San Suu Kyi.

The Shift

Given all of the above, it is evident that, as a whole, Asian economic growth will continue to outpace that of the West. Led by the sheer scale of growth in India and China, but also influenced heavily by the likes of Japan, South Korea, Indonesia, and Vietnam, the centre of wealth generation is clearly shifting eastwards. The point at which the China’s economy eclipses that of the US in absolute terms is, according to varied forecasts, just a few years out beyond 2020, but there is little doubt that, given the importance of the GDP PPP view, China itself will already be the centre of gravity for the future world economy at the end of the decade. Add in the rest of the ASEAN countries and it is clear why our third certainty looking forward is that there will be a steady and increasing shift of wealth to Asia from Europe and the US. The shift of economic power to Asia is pretty much a safe bet for 2020.

asian wealth shift

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Anonymous says
“As a sign of how fast this is shifting, in 2005 Goldman Sachs predicted that China GDP would be equal to that of Japan’s in 2016 and that of the US in 2042. With China passing Japan this year and now set to eclipse US around 2020, pace of change is clearly accelerating.”
3499 days ago

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