Stanley Fischer: Emerging Asia in transition
Speech by Mr Stanley Fischer, Vice Chair of the Board of Governors of the Federal Reserve
System, at the 2015 Asia Economic Policy Conference "Policy Challenges in a Diverging
Global Economy", sponsored by the Federal Reserve Bank of San Francisco, San Francisco,
California, 19 November 2015.
* * *
The charts can be found at the Federal Reserve System website.
The views expressed here are my own and not necessarily those of others at the Board, on the Federal Open
Market Committee, or in the Federal Reserve System. I am grateful to Joseph Gruber and Jasper Hoek for their
contributions to this speech. I also thank Ravi Menon of the Monetary Authority of Singapore and Changyong
Rhee, Ratna Sahay, and James Walsh of the International Monetary Fund for their assistance.
I am grateful for the opportunity to participate in the Federal Reserve Bank of San
Francisco's Asia Economic Policy Conference, and I thank the organizers for inviting me.
After a long period of rapid economic growth, Asia's emerging economies appear to have
entered a transitional phase. For decades, emerging Asian economies have been among the
fastest growing and most dynamic in the world. Supported by an export-oriented
development model, annual growth averaged 7-1/2 percent in the three decades leading up
to the global financial crisis. As shown in table 1, the fast pace of growth in emerging Asia
has also supported impressive gains in per capita income within the region.
As the economies of emerging Asia have developed, they have followed a similar growth
trajectory, also apparent in table 1. Along a path pioneered by Japan in the 1960s, initial
integration into the global economy has been followed by a period of rapid export-led
economic growth, which subsequently slows as the economy develops and incomes rise. In
a process that has been likened to the pattern of flying geese, development in Japan pushed
more labor-intensive production from Japan into the "Asian tigers" - that is, Hong Kong,
Korea, Singapore, and Taiwan - with that set of countries experiencing rapid growth in the
1970s and 1980s. As the tigers developed, low-value-added production was pushed further
on, into the group of countries known as the Association of Southeast Asian Nations
(ASEAN) - primarily Indonesia, Malaysia, Thailand, and, more recently, China, where growth
took off in the 1980s and accelerated through the 2000s.1 At each step in this process, the
slowing of growth in the relatively developed and globally integrated Asian economies was
matched by an acceleration of growth in the less developed and less integrated economies,
maintaining the overall rapid pace of growth in the region.2
Now, with China perhaps beginning to follow the same trajectory of slowing growth as has
been experienced by its predecessors in the East Asian growth model and without
economies of sufficient scale to fill the gap (with the notable exception of India, which I will
1
With some delay, the Philippines could be added to this group. As production of labor-intensive goods has
moved from one group of countries to the next, concerns have been raised about a decrease in
"competitiveness" in the relatively more developed Asian economies. These concerns have been
particularly pronounced in regard to China, where commentators have questioned whether China's rise
has come at the expense of growth in its neighbors or provided an extra impetus to growth. Research
studies (see Zheng, Wern, and You (2005) and Haltmaier and others (2007)) have generally found that
China's rise has been positive for regional growth, with China's development as an export platform
boosting the overall competitiveness of the region's exports.
2
In addition to integration with the global economy, a number of other factors have also contributed to the East
Asian growth miracle. With regard to China, Brandt and Rawski (2008) highlight the importance of incremental
reform focused on removing the most binding constraints on economic activity. Of course, reform is not
independent of global integration, as the heightened international competition associated with opening an
economy likely incentivizes increased reform.
discuss later), growth for the region as a whole is declining. As shown in table 2, taken from
the most recent International Monetary Fund (IMF) regional outlook for Asia, growth in
emerging Asia is set to decline in 2015 and 2016, with China's growth deceleratin.3
Furthermore, the IMF projections through 2020 call for almost no pickup from this slower
pace.
In my discussion, I will first address some of the factors behind slowing growth in emerging
Asia, importantly including demographics. I will then cover one of the global implications of
this deceleration, the effect on commodity markets, before looking at the prospects for India
to recharge the region's growth dynamic. I will end with some thoughts on Asia's place in the
global economy both now and in the years to come.
Why is growth in emerging Asia slowing?
The first thing to say and think about Asian growth is that growth at a rate of above 6 percent
is not slow; it is slower than it has been, but it remains impressive. There are four factors
weighing on emerging Asian growth that I would like to highlight. First, emerging Asia
continues to be negatively affected by slow demand growth elsewhere, including in the
advanced economies. Second, economies generally decelerate as they develop, a pattern
that has already been evidenced in many of emerging Asia's growth pioneers. Third, the
tremendous growth of trade in the region, driven by the process of global integration and the
growth of production-sharing networks, may have plateaued. Lastly, demographic trends in a
number of emerging Asian countries are likely to affect growth in the coming years.4
Regarding the first of the factors that I just listed, contrary to often-repeated and
oftenresurrected stories of emerging market growth "decoupling" from that of the advanced
economies, the truth is that advanced-economy demand continues to play a key role in
emerging Asia's economic conditions.5 And, as we all know, advanced-economy demand for
imports in recent years has been lackluster. Real goods imports in the United States, Japan,
and the euro area have all increased at an average annual pace of about 3-1/2 percent over
the past three years, in all cases about half the average pace recorded in the two decades
leading up to the financial crisis.
Regarding the second factor, as is well established by theory and supported by empirical
experience, economic growth tends to decelerate as a country develops. In a capital-poor
developing economy, initial increases in investment generally have high returns, which then
decline as capital accumulates. Likewise, the initial phase of integration with the global
economy is typically marked by strong gains in productivity as methods and technologies are
adopted from more advanced economies. Over time, the boost to growth from this catch-up
in productivity fades. Also, as incomes rise and consumption grows, there is a tendency for a
relatively rapid increase in demand for services. The shift of domestic resources toward the
production of services, which are typically associated with lower productivity growth, tends to
further lower trend growth.
The factors that have tended to temper growth as economies develop appear to be at play in
China. Following years of exceptionally high investment, the return on capital appears to be
moderating, and the ratio of investment to gross domestic product (GDP), after peaking near
50 percent of GDP in 2011, has begun to edge down. As viewed in the context of the Lewis
model, China could be reaching the stage at which the supply of labor from the subsistence
agricultural sector becomes a constraint on growth. Further, productivity growth, though
robust by global standards, has been declining.
This decrease is likely due, at least in part, to the rapid growth of services consumption. One
of the most noteworthy aspects of China's recent GDP data has been the strength of
services, with services now accounting for half of the value added in GDP, up from just over
40 percent in 2008.
Next, I would like to discuss the third factor weighing on Asian growth - trade. Global
integration and trade growth have played a key role in the Asian economic success story,
and the recent slowdown in global trade, over and above what might be expected given the
weakness of advanced-economy demand discussed earlier, is likely to affect emerging Asian
growth prospects.
During the financial crisis, global trade collapsed. After the immediate crisis faded, trade
bounced back in many cases. But the bounceback was more limited than the decline, with
the increase in the volume of trade since 2012 only matching the pace of global output
growth, a considerable deceleration from the previous two decades, when trade increased at
twice the pace of global output. While the legacy of the crisis, particularly the continued
weakness of traded-good-intensive investment in many economies, has likely contributed to
the weakness of global trade, a slowdown in intra-Asian regional trade also appears to be a
factor. After increasing at an average rate of about 15 percent a year through the 2000s,
nominal intra-Asian trade flows have flattened out considerably over the past couple of years,
in part reflecting a slowdown in the growth of production sharing within the region.
The outlook for a renewed surge in intra-Asian trade does not appear to be promising. The
growth of production-sharing networks in Asia has been tied to the region's export-oriented
growth model. In particular, China's integration into the global economy as the hub of this
production network provided a significant boost to the development and growth of these
networks. As China and the region shift toward domestic demand and away from external
demand, it seems unlikely that trade growth in the region will return to its earlier exceptional
pace.
To the extent that the expansion of these networks was tied to export-led growth that
depended partly on preferential treatment of the export sector, more-balanced growth in
these economies may also result in a better allocation of production across countries. If
growth of trade is lower as a result, that is not necessarily a problem. However, there is a
well-established literature indicating that trade encourages greater efficiency, along with the
dissemination of technological innovation, and slower growth of trade could reduce this
effect.
It also bears noting that Asian trade growth has been accompanied by the creation of a
variety of intraregional and broader trade agreements - including the 10-nation ASEAN and
membership in the World Trade Organization, which China achieved in 2001 and Vietnam in
2007 - as well as a host of bilateral agreements, both within and outside the region. I will
return briefly to the Trans-Pacific Partnership (TPP) at the end of the talk.
Finally, demographics are an additional factor likely to lower growth in the region, particularly
in Hong Kong, Korea, Singapore, Thailand, and China, notwithstanding the recent relaxation
of the one-child policy. As shown in table 3, both China and Thailand have a median
population age of about 37 years, about the same as the median in the United States. The
median age is even higher in Hong Kong, Korea, and Singapore, all of which have medians
of 40 years or more. Relatedly, as shown in the second column of the table, China, Thailand,
and the relatively developed emerging Asian economies are expected to have a significant
percentage of their populations older than 65 years by 2030, with the proportion similar to
that in the United States, though still below those in Germany and Japan. In contrast,
demographics are less of an issue elsewhere in the region, particularly in India and most of
ASEAN, including Indonesia, Malaysia, the Philippines, and Vietnam, which have medians of
30 years or less. Just as slowing workforce growth is likely to be a drag on growth in many
developed countries, trend growth is likely to be held back by demographic developments in
relatively elderly emerging Asian economies as well.
Up to this point, I have discussed a number of factors that are likely to lower emerging Asia's
growth trajectory in the coming years. However, the overall message is not a pessimistic
one; rather, for the most part, the slowing of growth is a natural transition and an outcome of
Asia's remarkable economic success.
As many have noted over the years, maintaining growth sufficiently rapid to meet the
development aspirations of the region will require a transition toward an economic paradigm
more rooted in domestic demand, particularly consumption. The need for this transition, or
rebalancing, is most apparent and also widely acknowledged in China, the current hub of
emerging Asia's export-led model. The need for these economies - primarily China, but also
those economies that export through China - to switch toward domestic demand largely
reflects their having become too big and too important to rely to the extent they have on the
export-led models of the past.
On growth, the bottom line that should be emphasized is that even with a diminished pace of
growth, the region is still expected to significantly outpace the global economy and make by
far the largest contribution to global growth in the years ahead.
Spillovers from Asia's economic transition: commodity markets
I will now focus on an area where the spillovers of Asia' economic transition are likely to be
substantial - global commodity markets.
Emerging Asia has played an outsized role in commodity markets for some time now.
Specifically, China, with its investment-heavy growth model, has accounted for a substantial
amount of incremental commodity demand over the past two decades. Since 2000, China
has accounted for roughly 40 percent of the increase in global demand for oil and 80 percent
of the growth in demand for steel. For copper, all of the incremental rise in global demand
has come from China, with demand excluding China falling over the period.
The strength of emerging Asian demand growth pushed commodity prices up sharply over
most of the past decade, at least temporarily reversing what seemed to be an inexorable
decline in both commodity prices and the terms of trade of commodity producers in the
preceding two decades. Higher prices were a tremendous boon to commodity producers and
supported a decade of strong growth in a number of emerging market economies, as well as
commodity sectors in certain advanced economies, including Australia and the United
States.
Since mid-2014, commodity prices have plummeted, with oil prices falling almost 60 percent
and a broad index of metals prices losing about one-third of its value, dragging down growth
in many commodity producers. Although rapid commodity output growth in recent years,
which has reflected in part the response of producers to previous price increases, has
certainly contributed to the fall in commodity prices, the slowing of demand growth from
China and emerging Asia has also been an important factor.
While the path ahead for commodity prices is, as always, uncertain, declining investment
rates in emerging Asia, particularly China, present the prospect of a prolonged decline in the
growth rate of commodity demand. And prices could remain low for quite some time, which
seems particularly true for metals, such as copper and steel, used heavily in construction and
investment. However, for oil, the implications of a shift from investment-led growth to a
consumption-led model are less certain. On a per capita basis, China's consumption of oil
remains far below that of advanced economies, in line with China's lower rate of car
ownership. Per capita oil consumption tends to increase with wealth, such that further
income growth in China has the potential to provide strong support for the oil market in the
coming years.
Indeed, more generally, the world stands to benefit from a transition to more consumption-led
growth in emerging Asia. Under a successful transition toward more-balanced growth,
emerging Asia can be expected to import a broader array of goods and services both from
within the region and globally. Whether a country benefits from or is harmed by emerging
Asia's transition is likely to be determined by the flexibility of that country's economy in
adapting to shifts in Asian demand away from commodities and inputs for assembly into the
region's exports and toward services and goods to meet Asian final demand.
To recap, the transition to slower growth in the emerging Asian economies, as well as a shift
toward domestic demand and consumption and away from external demand and investment
in the region, is likely to have profound implications for the global economy. For one, trade
growth is unlikely to resume its rapid pace of recent decades, and the long climb in
commodity prices, which has benefited commodity producers, appears to have come to an
end.
Can India recharge growth in emerging Asia?
One source of uncertainty in this outlook, as alluded to earlier, is the prospect for India to
provide a new growth engine for Asian development. In principle, India has enormous
potential to recharge the Asian growth engine. For one, India is relatively unintegrated into
global production-sharing networks. For example, machinery and electrical products, which
feature heavily in production-sharing and which make up about half of exports in other
emerging Asian economies, account for only 15 percent of India's exports. Foreign direct
investment into India is about half the size of similar flows into China as a percentage of
GDP, and GDP per capita, at $1,600 in 2014, remains considerably below emerging Asia's
average.
All told, while the export-led growth model that propelled growth in China and other
economies in emerging Asia has matured, pushing down growth rates, India remains at a
relatively early stage of its development trajectory. Further capital deepening and the
potential for further productivity gains suggest that India could maintain rapid economic
growth for a number of years. As mentioned previously, India is also a young country, with a
relatively low dependency ratio and a growing workforce. By United Nations estimates, India
is set to overtake China during the next decade as the world's most populous nation.
In the 1960s and 1970s, the Indian economy grew at around 3 to 4 percent. In subsequent
decades the growth rate averaged close to 6 percent, and in the early years of this century it
rose further, as can be seen in Table 1. In 2015, growth in India is expected to be
7-1/4 percent, the fastest among large economies, and the IMF expects growth to pick up
from this already rapid pace through the end of the decade. Growth has been supported by
an improved macroeconomic policy framework, including a strengthening of the framework
for conducting monetary policy, as well as legal and regulatory reform. And the authorities
have embarked on an ambitious program to improve the business environment.
That said, significant roadblocks need to be overcome for India to reach its full potential. The
economy continues to suffer from a number of infrastructure bottlenecks that will be
alleviated only through a pronounced increase in investment rates, a process that would
likely be helped by a relaxation of restrictions on foreign direct investment. Likewise, efforts
at difficult reform will have to be sustained. There is much hard work ahead if India is to
come closer to fulfilling the potential that it so manifestly has.
Concluding remarks
The performance of the Asian economies - notably those of East Asia, particularly China,
Japan, and Korea - especially in the past six or seven decades, is an outstanding, if not
unique, episode in the history of the global economy.
What lies ahead? In the relatively near future probably some major central banks will begin
gradually moving away from near-zero interest rates. The question here is whether the
emerging market countries of Asia - and, indeed, of the world - are sufficiently prepared for
these decisions, to the extent that potential capital flows and market adjustments can take
place without major macroeconomic consequences. While we continue to scrutinize
incoming data, and no final decisions have been made, we have done everything we can to
avoid surprising the markets and governments when we move, to the extent that several
emerging market (and other) central bankers have, for some time, been telling the Fed to
"just do it."
Further ahead lies the answer to the question of whether developments in the global
economy will permit the continuation of the export-centered growth strategy that underlies
the Asian miracle or whether we will later conclude that this period, the period after the Great
Recession and the global financial crisis, marked the beginning of a new phase in the
economic history of the modern global economy.6 Either way, the question of the economic
future of India is of major importance not only to the 18 percent of the world's population that
lives in India, but also to the other 82 percent of the global population.
At a more structural level are three recent developments whose potential importance is
currently difficult to assess: the setting up of the Asian Infrastructure Investment Bank; the
likely inclusion of the Chinese yuan in the Special Drawing Rights basket; and the possible
establishment of the TPP, a partnership in which China is not expected to be a founding
member.7
These are interesting and potentially important developments. Underlying the answer to the
questions of what they portend, is the answer to the basic question of whether the economic
center of gravity of the world will continue its shift of recent decades toward Asia - in
particular, to China or, perhaps, to China and India. This shift would represent a return in
some key respects to the global order of two centuries ago and earlier, before the economic
rise of the West.
A partial answer to that question is that China is for some time likely to continue to grow
faster than the rest of the world and thus to produce an increasing share of global output. Its
importance in the global economy is likely to increase, and it is probable that, one way or
another, its growth will result in its playing a more decisive role in the international economy
and in international economic institutions.
Finally, we need to remind ourselves that geopolitical factors will play a critical role in the
unfolding of that process.
References
Brandt, Loren, and Thomas G. Rawski (2008). "China's Great Economic Transformation," in
Loren Brandt and Thomas G. Rawski, eds., China's Great Economic Transformation. New
York: Cambridge University Press.
Haltmaier, Jane T., Shaghil Ahmed, Brahima Coulibaly, Ross Knippenberg, Sylvain Leduc,
Mario Marazzi, and Beth Anne Wilson (2007). "The Role of China in Asia: Engine, Conduit,
or Steamroller? (PDF)" International Finance Discussion Papers 904. Washington: Board of
Governors of the Federal Reserve System, September.
Monetary Authority of Singapore (2007). "Revisiting the US-Asia Decoupling Hypothesis,"
special feature B, Macroeconomic Review, vol. 6 (October), pp. 72-80.
World Bank (1993). The East Asian Miracle: Economic Growth and Public Policy.
Washington: WB, September.
Zheng, Kit Wei, Ong Jia Wern, and Kevin Kwan Tai You (2005). "China's Rise as a
Manufacturing Powerhouse: Implications for Asia (PDF)," MAS Staff Paper 42. Singapore:
Monetary Authority of Singapore, December.