One Trick Pony
Asia has become an indispensable part of a complex global economy. It satisfies the world financial system’s demand for a source of cheap labor for the developed economies. This is the basis of the East Asia Economic Model (EAEM) that has created huge surpluses in Asian countries while suppressing demand and limiting domestic growth to the amount of foreign direct investment (FDI) it receives and exports. As the Western economies condition themselves to low-priced products, Asia’s role in this system is becoming more important by the day.
Both parties—Asian producers and Western consumers—have accepted their respective roles. The EAEM is based on export volume (that is, no pricing power) and depends on foreign demand and foreign direct investment by multinational corporations. This giant export machine helps the Asian countries grow, while the accumulation of savings by the Asian people (and their conversion to U.S. Treasuries and other foreign assets) allows consumers in the developed countries (particularly the U.S.) to expand their seemingly insatiable consumerism to unprecedented levels.
One school of thought characterizes this dynamic as a mutually beneficial arrangement and the result of the superb returns the U.S. and other Western economies offer the world. Asia will always remain on the giving end of the equation, this school maintains, because of its inability to develop the necessary conditions for a consumer-based economy. Although such an observation might seem outrageous to some, Asian governments have failed to foster consumption as a way of economic growth. Even after the crisis of 1997, the region’s leaders refused to facilitate domestic demand as a means of reviving the respective economies. Growth became the first priority and, conveniently, the easy path—exports—was chosen again. The opportunity to balance investment and consumption was once again lost. Worse, many of the Asian countries neglected the non-mass manufacturing parts of their economies, although these sectors remain extremely vital to the long-term well being of their economic development and social balance.
On the other hand, there is no concrete proof that the great U.S. consumption machine would have been able to reach such high levels (72 percent of gross domestic product (GDP) in 2005) if Wal-Mart, which has turned benefiting from low-cost Chinese production into an art form, had not entered the picture. In other words, it is easier to consume more if one can buy a shirt for $10 when, without Asian production, the same shirt would cost $30. At $30, consuming becomes more difficult, especially during times of economic weakness.
For the time being, Asia gladly serves as the facilitator of Western economic growth. Its economies are growing and modernizing. Yet, the moment will arrive when average Asians will demand more for themselves and governments will be forced to spend more resources supporting their own domestic economies as opposed to buying U.S. Treasuries.
Early indications of this change can also be found within the circles of Asian monetary policy making. Rakesh Mohan, deputy governor of the Reserve Bank of India, has noted: "The central banks of Asia are financing roughly 3 to 3.5 percent of the current account deficit of the U.S. and most of its fiscal deficit, as compared to the earlier situation where it was private sector flows that were funding these deficits. In view of the difficulties in monetary management that the situation entails, this situation is clearly not sustainable indefinitely."6