Endogenous Economic Growth in Asia

                          Mr. Zheng Xinli, CCIEE Permanent Vice Chairman

The 21st Century has seen Asian economic prosperity and cultural renaissance. In this century Asian countries would catch up with developed world and realize modernization. Asian countries boast large population, abundant natural resources, cultural and geographic diversity. The rise of Asian economies will not only create huge consumption market for the Asian people, but also boost economic development in Europe and other parts of the world.

Since the financial crisis of 2008, domestic consumption in the developed world has shrunk drastically, which poses vital challenges to the export-led economic growth model in the East Asia.

In the history of Asian industrialization and modernization, Japan reached her goal of modernization by making full use of European and American technologies and their markets. The "Four Asian Dragons" also took advantage of industrialized world's (including Japan) capital, technologies, and markets, to create Asian miracles. The so called "four tigers of Asia" then followed suit in their development path, but their development was hampered by the Asian financial crisis in the mid 90's, leaving us a lot to learn.

Since the 1980s, China has embarked on fast development due to the "reform and opening up" policy. To use a metaophor, Japan, the "four dragons" and "four tigers" merely opened the curtain of Asian economic development, while China, with 1.3 billion of population and in the process of modernization, actually started the show of Asian renaissance. With rapid development in the past three decades, China's total economy and its export have greatly increased. In 2009, despite 16% drop in exports, China nevertheless achieved a growth rate of 8.7%, by increasing domestic consumption (especially investment). This is a landmark change, signifying a shift from export-led growth to domestic consumption in China's economic development.  

This is a fundamental change in the growth model of East Asian countries as well. As a result of this change, Chinese economy will depend more on domestic consumption, investment, and exports, rather than investment and export only. And the role of domestic consumption will become more significant in economic growth. This means that China will significantly increase imports for domestic consumption, which will in turn serve as an engine driving world economy. Whoever has a bigger share in the China market will have a better chance to develop its own economy. Development belongs not only to China, but also to other Asian countries and the world, especially to those countries that are willing to have trade and investment relations with China on the basis of equality of mutual benefit, and to companies willing to invest in and develop the China market.

The successful expansion of China's domestic consumption not only ensures sustainable development of Chinese economy, but also paves the way for a model of endogenous growth for Asia. In order for most Asian countries to achieve their development goals in the first half of the 21st century, they should pay more attention to  domestic consumption expansion within Asia and depend less on European and American markets. At the moment, there are several favorable conditions for the development of an Asian endogenous growth model.

First, there are considerable variations in the development of Asian countries: highly developed countries like Japan, newly industrialized countries like the "four dragons," and many developing countries like China whose per capita GDP are well below USD3000. Such variations are conducive to vertical division of labor in terms of trade and investment.

Second, some Asian countries, such as China and Japan, have enormous cash reserve. These two countries' foreign reserves are ranked first and second in the world. Together, they have invested a trillion dollars in U.S. treasury bonds, but such investments have low returns and run the risk of dollar depreciation. If so, why not divert a portion of such investments for infrastructure and urban development in Asian countries? Such kind of investments will not only speed up Asian economic development, but also yield higher returns.

Third, the diligent and intelligent Asian people yearn for faster economic development and higher living standards. They will certainly welcome and support expanding economic cooperation among Asian countries, which will speed up Asian modernization.

Fourth, sustainable growth of Asian economies hinges on building up a stable financial system through joint efforts. Both the Asian financial crisis in the 1990's and the current financial crisis originating from the US have resulted in major setbacks to the modernization process in Asia. Experience has told us that financial cooperation in Asia will enable us to better cope with economic risks. Progress has been made in this area, but much more needs to be done.

Promoting Asian endogenous growth should go hand in hand with enhancing investment and trade relations with developed countries. These two policies do not conflict with each other; they are complementary. The vast market, advanced technologies, and managerial know-how of developed countries are indispensable to Asian economic prosperity. While promoting endogenous growth, we should also expand cooperation between Asian countries and developed countries, attracting more investment from the latter.

Empty talk will never make endogenous growth happen. We must take actions. Therefore, I propose the following five recommendations:

First, Accelerate integration of Asian markets. We should accelerate negotiations among Asian countries about agreements to liberalize trade and investment. We should learn from the EU, NAFTA, and other economic communities, accelerating the integration of Asian markets, realizing free movement of production resources among Asian countries, and expanding the flow of human resources, logistics, capital, and information. Increased flow of production resources, in terms of both speed and volume, will contribute to integration of Asian markets. These are the top priorities for endogenous growth in Asia. Toward this goal, all laws and policies that impede the free movement of production resources should be abolished, and obsolete ideas and narrow-mindedness that hamper market integration should be abandoned. Harmonious development and peace in Asia can only be realized when market integration is achieved. When trade and investment between countries increase to such a point where these countries become interdependent, they will gradually bury past resentment and suspicion and work toward a harmonious political environment.

Second, Expand financial cooperation among Asian countries so as to strengthen collective capacity to cope with financial risks. The financial mutual stabilization fund set up by the Chiang Mai Initiative is an important step in this direction. However, the size of the fund should be enlarged, to expand the proportion of Asian currencies and increase their weights in SDR of IMF. In order to establish a diversified international reserve system and to strengthen international financial regulation, any sovereign currency which is used as an international reserve currency should be subject to effective supervision of international financial institutions, for the purpose of preventing the spread of any financial bubble and eliminating the root cause of international financial crisis.

Third, an "Asian infrastructure investment bank "should be set up. Poor infrastructure in most Asian countries is a major barrier to market integration. Therefore, an "Asian infrastructure investment bank" should be set up to facilitate the construction of railway, highway, aviation and water transport channels, eventually forming a fast and convenient integrated transport system covering entire Asia. The Asian infrastructure investment bank may take the form of joint stock system so as to attract governments and business investors.

Fourth, Establish an Asian Agricultural Investment Bank. Asian countries are blessed with sufficient sunlight, abundant rainfall and fertile land, especially in South Asia and Southeast Asia. Nonetheless, the potential of agricultural production has not been fully exploited. The Asian Agricultural Investment Bank's support for modern agriculture in Asian countries will not only meet the needs of Asian people, but also export products to the rest of the world, Competition and cooperation among the Asian Agricultural Investment Bank, the Asian Infrastructure Investment Bank, and Asian Development Bank will be conducive to improving financial services and reducing investment costs, which will provide strong financial backup for the rise of Asian economies.

Last but not least, jointly cope with climate change and develop green economy. The climate change agreement passed at the Copenhagen conference sets forth the principle of "common but differentiated" responsibilities. Since economic development varies significantly among Asian countries, we need to consider both total emission and per capita emission, as well as current amount of emission and cumulative amount of emission. This should be a reasonable and common position in line with Asian people's interests. Furthermore, Asian countries should have more cooperation in R & D and technological transfer with regard to green economy, energy conservation, green urbanization, and other fields, so that Asian people can freely or cheaply use green technology.

Asian people have created splendid cultures and made outstanding contributions to the progress of human society. The rise of Asian economies depends on the renaissance of Asian culture. We firmly believe that the 21st century will be Asia's century.