Rebalancing growth

I MENTIONED LAST WEEK how various East Asian scholars, in a recent forum in Tokyo, affirmed the need for East Asia to rethink and rework the export-driven growth model that had propelled the region’s economies in recent decades.

Is this to say that we should stop relying on exports and become inward-looking in our economic development strategy once again? Can Asian economies regain and sustain the brisk growth they had been enjoying in recent decades without relying on external demand? Can the critics of past policies meant to spur producers to build inherent strength to face competitors in both domestic and overseas markets now gloat and say that favoring export competitiveness over import substitution was wrong all along?

New realities

Well, not quite. What prompts the current call for “rebalancing growth,” the new buzz phrase used to describe the prescribed change, is the dramatic slowdown in export demand, particularly from the large US and European markets that have been hit hardest by the financial meltdown and economic downturn. It is a natural and logical response to current realities, especially with the widely held belief that consumer spending in Western markets will probably never be the same again.

There are at least three reasons supporting this belief. One, a fundamental restructuring in the global financial system is likely to come out of the current debacle. This will usher the end of the era of high-flying consumption by Americans, whose excessive consumption of past decades was ultimately financed by what Federal Reserve Chair Ben Bernanke audaciously blames as “excessive saving” by Asians. Two, with falling house prices along with the failed subprime loans, Americans will no longer be able to fund their profligate consumption that used to be supported by lucrative mortgages, made lucrative by constantly rising home prices. Three, there are already clear signs of a resurgence of protectionism, with the “Buy America” provision in the US stimulus program being but one indication.

In other words, there is likely to be slower consumer demand from the world’s biggest economy even after it recovers from the current slump. On top of that, US demand for Asia’s (and others’) exports will be further impeded by deliberate moves by the US government to tighten their doors.

Internal, regional demand

And so, East Asia, whose economies had been propelled by double-digit export growth rates, are unlikely to be able to continue selling their goods and services as briskly to the West as in the past two decades, especially because of the weakening and tightening US market. What would be East Asia’s recourse, then?

The alternative to external demand is internal demand that comes from spending by domestic consumers, by government, and by business investors. There is much scope for growth in business investment, in particular, especially if the all-too-common financing hurdles faced by small and medium enterprises can be lowered, if not removed. A key challenge, then, is how to reform the financial system in a way that not only promotes greater responsibility and stability, but also fosters broad-based growth by easing the flow of financing to SMEs.

But there are more options. Note that in the context of rebalancing Asian growth, internal demand need not only mean demand within countries. “Internal” here could be interpreted more widely to also mean regional demand, i.e., demand within East Asia, where the scope for continued consumption and investment growth remains wide and robust. While the problem now lies in markets outside of East Asia, exports can very well continue growing within and across East Asia. We saw this happen when the Asean Free Trade Area (Afta) was established in the early 1990s: Intra-Asean trade grew very quickly, which, by the way, helped reduce the dominance of the US in the individual members’ export markets. With stronger regional economic integration that taps complementarities and synergies beyond Asean and within the wider East Asian region, the gap in exports left by weakened US and European demand could very well be filled by growth in trade among the East Asian countries themselves.

Non-traditional markets

But even beyond East Asia, our export markets need not be confined to the US and Europe, particularly Western Europe. There are many other countries, notably in Central and Eastern Europe, in the Middle East, and in Latin America, which hold much scope for further export expansion, especially for Philippine exporters. We just didn’t look enough in their direction before, as it was too easy to focus on the traditional dominant trading partners. I have repeatedly lamented how we have such weak trade links with the big markets in Latin America, failing to capitalize on our shared Hispanic colonial history. The current difficulties provide impetus for us to finally spread our eggs among more baskets, and diversify our export destinations both within and beyond East Asia. It is, indeed, a rebalancing that we need: that is, finding a more appropriate balance between exports and domestic demand, on one hand, and across our various trading partners within and outside the region on the other, as basis for our future economic growth. In the end, such rebalancing would make us far less vulnerable to a US-led downturn such as the world is witnessing now.–Cielito Habito, Philippine Daily Inquirer

Comments welcome at chabito@ateneo.edu.