Asia: it's not just intensive growth, but inclusive growth that's required

Banyan piece in The Economist.

Nice start:

SHINY Asia’s rapid economic growth over the past two decades, driven by cheap land and labour, technological change and the play of globalisation, has had a spectacularly improving effect on the lives of hundreds of millions. Since 1990 the number of those in extreme poverty, defined as earning less than $1 a day, has been halved, to under a fifth of developing Asia’s people.

So far so miraculous. Yet the shiny face has a tarnished flip side. Poverty and the vulnerabilities associated with it remain entrenched. Further, inequalities are rising fast. The realisation is spurring a rethink among development experts. Until recently, economic growth and social policy were thought of separately. Inequalities and social exclusion, as Sarah Cook of the United Nations Research Institute for Social Development puts it, were viewed as a residual outcome of necessary market-led growth. The development response was to get markets right first and then deal with any remaining pockets of the poor. Persistent poverty and growing social exclusion call the approach into question.

When you move up to the $2-day threshold, about half of Asia is still impoverished.

As for villains, many in the region still point fingers at the IMF for its harsh adjustment programs after the "flu" of 1998.  China here is given high marks for expanding its healthcare and low marks for treating as invisible the illegal rural folk now living in cities.

Most crucially, the advice is to "get your political house in order":

In China, with mounting inequalities and disparate interests that need accommodating, it is not clear that the country’s political system, top-heavy and authoritarian, is up to the task. Not that democracies have fared much better: witness India, Indonesia and the Philippines, where the presidential election this week underscored how power and wealth lie in the hands of a few families.

They do, however, offer the poor a better chance of genuine electoral retribution; unlike, for example, most Central Asian countries. Until April’s coup in abject Kyrgyzstan, the ruling clan attempted to commandeer almost the entire state economy. 

In short, Banyan is not buying any inherent superiority of the Chinese model.  The easy growth is done.  Now comes the hard part.

The Kevin Bacons of emerging markets: still HK and Singapore

chart from here

Played this game in one of my NewRuleSets.Project "economic security exercises" (sorry, but I haven't yet reconstructed those pages on the new site--soon!) atop World Trade Center 1 back in 2001 with Asia, using the example of the Kevin Bacon game.   The KBG says you can link anyone in the world to Kevin Bacon in six steps or less (six degrees of separation notion I demonstrated in Great Powers (between me and John Adams--as in me to my grandpa to TR to John Hay to Abe Lincoln to John Quincy Adams to John Adams).  The chart above links Indiana U alumni to Bacon in five steps.  

We presented all the players with a list of every emerging market in Asia and then had them rank-order their top picks for desirable free-trade agreement groupings from the perspective of the US, EU and Japan.  The winner, or most often top ranked, was Singapore.  All three sides wanted it in any FTA they could access.  On that basis, we dubbed Singapore the Kevin Bacon of foreign direct investment in Asia, meaning you wanted to put your money there because it presented the tightest possible financial connectivity to the most amount of regional emerging markets.

Now, in our exercise, we didn't break HK out from China, something we skipped in deference to several prospective Chinese guests at the request of Cantor Fitzgerald.  In the end, they didn't show up anyway because their visas were rejected (right after the EP-3 spy plane incident).  It was a bad choice on my part to give in on that, because virtually all of our players told me later that Hong Kong would have been right up their with Singapore for the same reasons--a highly desirable third-party on any investment deal because they brought local knowledge and the best local rules.

Anyway, check out the tables from a recent FT full-pager on emerging markets:

China is clearly the biggest overall magnet/deal-maker, but note the high numbers of deals for HK and Singapore--way out of proportion to their size.  That's because they're supreme pass-through FDI conduits, both into and out of Asia.

That's why, whenever I hear of small states in the PG or around Africa (like Mauritius) expressing the ambition to position themselves as the next Singapore or Hong Kong, I spot a player that's looking to get in front of a big money flow--like Asia into Africa.

In fact, that's one of my mantras shared with Steve DeAngelis:  whatever the globalization trend, you want to "get in front of the money"!

The magnificence and limits of China/Asia's ascent

Residential housing going up in Shanghai.

Three FTs, one WSJ and a Bloomberg BW.

Here's my linking:

The FT op-ed from David Pilling celebrates "unruffled Asia" and its economic ascent, the big danger being overheating.  Still largely export-driven growth, hot money flows in from the West.  Everybody is bullish on Chinese growth.  These flows put pressure on China's central bank, which holds the money because of China's controls on currency exchange (the yuan is not convertible).

As a result, inflation is growing inside China, with housing prices leading the way in the 12-13% range.  The same is happening, to a lesser but still significant extent, on food.  As one Credit Suisse banker puts it, "Virtually everything is on the rise in China."

Meanwhile the Chinese consumer continues to spend more, as do Asian ones in general.  Since the 3Q 2008, total cumulative consumption growth in Asia sits at 7%.  In the West, it's been negative.  And that's with private consumption still under 40% of GDP in China, compared to 71% in the US.

As this "rising" means wages have gone up, resulting in a labor shortage that is "trimming margins for exporters," according to Bloomberg.  As one factory manager notes, "Wal-Mart won't raise what they pay us."

Welcome to globalization, my friend.

Workers are getting uppity allright:

As costs climbed in Taiwan two decades ago, Ben Fan moved his lighting factory to take advantage of China's cheap labor. Now, with Chinese wages on the rise, he's moving again. "It's just like what happened in Taiwan," says Fan, chairman of Neo-Neon Holdings, which sells lamps and lighting fixtures to big retailers including Home Depot (HD), Target (TGT), and Wal-Mart (WMT). "Chinese don't want to work in factories anymore."

Ah, but Chinese state capitalism is so different, yes?  It can ignore these market realities and command where jobs appear and who fills them?

The yin and the yang:

Over the past two years, millions of jobs have moved to China's interior [yang!] or elsewhere in Asia [yin] as factory owners try to cut costs. In Guangdong, the mainland's top exporting province, wages have almost doubled in the past three years, and more than half the factories can't find enough workers. The number of migrants who traveled to coastal provinces for work fell by 9 percent last year, to 91 million. "This lack of labor will only get worse," says Willy Lin, chairman of the Textile Council of Hong Kong, a trade association.

Factory owners complain that the higher wages are devastating profits, especially as their customers continue to squeeze them for lower prices. 

That's the globalization price, as I noted in Great Powers.

You can say this is a problem of success, and it is.  Lotsa growth = labor shortages, and so does success in the one-child policy.

Already, many corporations are talking about keeping certain, more sophisticated production in eastern China while peddling the lower ends of the chain elsewhere.  That means China is ascending all right--up the production chain, and the further it goes, the less it controls--and the less labor advantage it holds.

Economic isolation is no choice, says Taiwan's Ma

NYT and WAPO, plus the Japan Times via WPR's Media Roundup.

Taiwan's President Ma is pushing hard for the FTA framework agreement with China, his culminating dream of deep economic integration with China.  

Per the NYT story:

“We can handle diplomatic isolation,” Mr. Ma said last month, “but economic isolation is fatal.”

The Economic Cooperation Framework Agreement, the Ma administration says, would be a prelude to similar deals with Malaysia, Singapore and, eventually, Japan or the United States. “Once E.C.F.A. is signed, we want to sign other free trade agreements and try to use mainland China to link with international markets,” a trade official involved in the negotiations, Hsu Chun-fang, said.

In recent years, Taiwan has watched as rivals like South Korea have signed free-trade deals throughout Asia, becoming more competitive in industries like machinery making and pushing their per capita gross domestic product ahead of the island’s.

Taiwan has been hampered in negotiating similar agreements because Beijing views the island as a part of China and objects to other countries’ signing formal treaties that could strengthen Taiwan’s claims to independence. The island has trade deals only with five Latin American countries, which buy a tiny slice of its exports.

The economies of Taiwan and China are already connected. Taiwan has invested $150 billion in China since the early 1990s, according to a Taiwan government estimate. About 40 percent of Taiwan’s exports already go to China, where they face average tariffs of 9 percent. Half of those exports are semifinished goods that are shipped to factories for assembly and other value-added services and then re-exported, according to Mr. Ma.

Yet many of the details remain vague, and that has fueled economic as well as political worries.

For example, Taiwanese business leaders fear a lot of small manufacturing industries, like the show industry, will get wiped out by Chinese competition.

Given his low approval ratings (20s-30s), Ma has felt the need to engage in televised political debate with his primary opponent, as if he were still running for president, according to the Japan Times story.  A lot of experts predict he may be a one-term president whose primary achievement is all his economic accords with China (12 in total) , with the framework agreement hanging in the balance.

My sense:  Ma's fears are well-grounded.  The Asian economic integration process is well underway and only gaining steam. Taiwan can either get in early or be left behind.