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Tuesday, October 11, 2005

Guy de Jonquières: Asia's Missing Investment

Asia has plenty of saving. So why is investment so low?   For Guy de Jonquirères, the answer lies with excessive regulation and weak competition:

Asia’s missing investment, by Guy de Jonquières, Financial Times: International investors ... cannot get enough of the great Asian growth story. ... Yet Asian companies appear curiously reticent about joining the party. Eight years after Asia’s financial crisis and with solid growth forecast ... one would expect businesses to be making big capital outlays ... However, with the exception of China, they have not done so. ... Whatever the reason for the caution, it is not lack of funds. ... private sector saving..., according to the latest available data, is higher than before the crisis. ... Some critics blame Asia for generating excessive current account surpluses by saving too much. However, the International Monetary Fund argues in a recent report that the real culprit is an “investment drought”(Asia Pacific Regional Outlook, September 2005). ...[Why have] they ... held back. ... One reason could be the shift of manufacturing to China ... However, studies have found little evidence that China has diverted foreign direct investment away from its neighbours. Another theory is that official data exaggerate companies’ financial strength by ignoring many smaller ones that are still struggling ... Equally, an overhang of unsold property, built before the crisis, may have delayed a recovery in construction. But not all countries experienced property bubbles during the 1990s. Finally, business confidence may have been dampened since the crisis by setbacks such as the severe acute respiratory syndrome scare, the 2001 US growth slowdown and cyclical downturns in the global electronics industry. But all this is conjecture. The IMF confesses it is puzzled. Private economists are also stumped.

Most, nonetheless, still believe investment will recover. There are some positive signs. ... But more investment is not necessarily better: witness China’s vast glut of manufacturing capacity. If the rest of Asia simply reverts to its old habit of investing for export-led growth, it will further depress product prices and fuel western protectionism. To be sustainable, its growth must be based on stronger domestic demand. But ... except in China and India, households are already saving less and borrowing more, so cannot be expected to boost consumption much further. As for governments, ... their finances allow only limited room prudently to increase spending. There is another option. Much of Asia is crying out for better transport, healthcare, education, power and water. The World Bank and the Asian Development Bank say $1,000bn needs to be spent on infrastructure. Governments cannot provide it all. But more imaginative approaches to privatisation could help fill the gap and create new opportunities for private investment. They might also reduce scope for corruption ... Second, there is huge untapped potential to boost wealth creation by stimulating domestic markets. The prime candidates are services, which in much of Asia are shackled by weak competition and over-regulation. Setting them free would yield big productivity and efficiency gains....[S]uch reforms will be essential ... if Asia is to keep growing. Its past development has relied heavily on harnessing abundant cheap labour and capital to producing for export markets. ... How Asia solves its investment puzzle will be critical to shaping its future development. When the region’s next investment wave arrives, it should be judged not just by its weight but by its quality.

While excessive government regulation and intervention is certainly to be avoided, I think there is more to recovery from the investment drought than "imaginative approaches to privatisation" and "Setting them free." For those interested in more on this issue, see [1], [2], [3], [4], [5], and [6].

    Posted by on Tuesday, October 11, 2005 at 12:17 AM in China, Economics, Saving | Permalink  TrackBack (0)  Comments (5)

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