East Asia’s excessive dependence on exports

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Due to the global crisis, China and other East Asian nations have to rethink their economic strategy, writes Martin Khor.

 

 

As the global economic crisis evolves, China and other East Asian developing countries will be  profoundly affected as their old growth strategies will no longer be able to serve them as before.  Changes in economic policies and strategies that rely less on exports to the West will thus be required in China — and even more so in the other Asian countries.

This is the conclusion of a new research paper by the South Centre, “Export Dependence and Sustainability of Growth in China and the east Asian Production  Network”. It is authored by the Centre’s Special Economic Advisor and Chief Economist, Yilmaz Akyüz.

According to the  paper, the global crisis exposed the high degree of dependence of China  and  other  East  Asian  developing countries on exports for their growth. This makes these countries economically vulnerable as prospects for global economic recovery have become more gloomy recently, with growth likely to weaken considerably in Europe and with American consumers reducing their high spending.

Using new methods of calculation, the paper shows that China has been much more deeply dependent on exports for its growth than previously estimated. The Centre estimates that exports contributed about 50 per cent of China’s recent pre-crisis growth.

This high export dependency makes China more vulnerable than was normally perceived to the slowdown in the US and Europe. In the medium term, China will not be able to return to reliance  on exports to maintain its pre-crisis growth of 10 per cent or more.

If its exports expand at the moderate rate of 10 per cent a year (instead of the 24-30 per cent in 2002-2006) China’s growth may barely reach 7 per cent. Returning to a path of 10 per cent growth requires raising domestic consumption much faster.

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In recent years the share of consumption in GDP has decreased from 55 per cent in the late 1990s  to 36 per cent in  2008.  The  paper found  that a major cause of under-consumption in China is the low share of household income in GDP, as wage increases lagged behind productivity increases. As a result the share of wages in GDP has fallen to about 40 per cent at present from 50-55 per cent in the 1990s.

The paper makes the following suggestions for the way forward for China:

• In view of bleak export prospects, a return to trend growth in  China crucially depends on a sizeable increase in the share of household income in GDP and a corresponding decline in corporate profits, savings and investment.

• This calls for a higher share of wages in value-added and significantly greater government transfers to households, particularly in rural areas where income remain depressed.

• There should be greater public spending on social infrastructure  in health, housing and education. These can be financed by dividend payments by state-owned enterprises.

• A shift from export-led to consumption-led growth would also  require significant industrial restructuring.

Little of China’s exports to the US is retained as income in China

China  has  come  under  criticism  in the United States for having a large trade surplus with the US.  However, the South Centre paper points out that in reality, little of the gross surplus is retained in China.

In  2005, China’s gross trade surplus with the US was $172 billion but in value added terms (what is earned by the respective countries after deducting the import content of their exports) it was only $40 billion.

Further, a large part of the the Chinese trade surplus in value-added terms was earned by foreign  firms in China as profits of foreign  firms. As a result, income left in China was no more than 30 per cent of total value of exports to the US.

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Therefore the criticism that China enjoys extraordinarily high trade surpluses with the US is misplaced.

Other Asian countries face deeper problems

According to the paper, the slowdown in global growth may impact other East Asian developing countries more seriously than China.  This is because they are even more export dependent, and their exports not only to the West but also to China will be affected, even if China continues its high growth.

In Indonesia, Korea, Taiwan and Thailand, exports contributed over 60 per cent to growth,  compared  to  40-50 per cent in China. The export dependency of Malaysia, Singapore and Vietnam is even higher.

The indirect exposure of these countries through China to a slowdown in exports to the US and the EU can be as important as or even more important than their direct exposure.

China’s assembly-manufactured exports depend a lot on inputs from other Asian countries. For  every $100 worth of processing exports of China to the US and EU, about $35-$40 goes to East Asian developing countries and $20-$25 to China. Thus a slowdown of Chinese exports to the US and EU can have a strong impact on these countries.

This means that the other Asian  countries are more vulnerable to a sustained slowdown of Asian exports to the US and the EU than China.

Further, while China is a major importer from these countries, it is not a major market for them  since an important  part of Chinese imports are destined to be exported to advanced economies rather than used internally.

The  paper shows that domestic consumption and investment in China generate proportionately  much less demand for imports from East Asian developing and emerging economies than its exports to the US and the EU.

Consequently,  a shift by China from export-led to a consumption-led growth and a shift  by  the  US in the opposite direction would result in a significant slowdown of their combined imports from East Asian developing countries.

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A $100 increase in Chinese consumption increases imports by less than $10 while a $100  decline  in US consumption reduces imports by some $25.  In other  words, at its current level of domestic spending, the Chinese market is not a good substitute for the US and the EU markets for East Asian countries.

To become a regional locomotive, China would need to raise not only its domestic consumption  as  a proportion of GDP, but also its import content and, in particular, its imports of final goods from the region.

Restructuring needed

Moreover, the other Asian countries will need industrial restructuring even if there is a rapid increase in domestic consumption and its import content in China. The same problem would also be encountered in reducing their dependence on exports by shifting to domestic markets.

The  paper  also notes that a main reason for excessive reliance on exports is under-investment. In several economies including Malaysia, Singapore, Philippines, Taiwan and Indonesia, investment  rates have been hovering at around 20 per cent of GDP in recent years, less than half the rate in China.

In none of these economies has the investment rate recovered to the level attained before the 1997 crisis.  Recent investment rates are too low to generate a rapid growth of either productive capacity or effective demand.

Private consumption has also been weak in most East Asian countries, barely reaching 55 per cent  of GDP in Korea, Malaysia, Taiwan and Thailand and below 40 per cent in Singapore.

There is thus a great deal of re-thinking of future growth strategies needed – both for China and the  other East Asian countries — as the uncertainty of a global recovery continues.

Martin Khor is the Executive Director of the South Centre based in Geneva.

Source: southcentre.org

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