Monday, August 25, 2008

EMERGING’ ASIA’S GROWTH SEEN HOLDING FIRM

August 25, 2008

ALAN M. FIELD

During the last four decades, growth rates of Asia’s “emerging nations” have exceeded those in industrialized nations by an average of 4 to 5 percent. But as economic growth rates deteriorate in the U.S. and Europe, multinational companies can’t help wondering if China, India, Cambodia and Vietnam can escape the contagion — and prop up the global economy in the process.

Last year was no exception, with developing East Asian countries recording their highest growth rate (10.2 percent) in more than a decade, according to the World Bank.

Growth rates in emerging Asian countries have traditionally tended to slow whenever the U.S. economy slows, but this time the impact may be less severe. The current downturn is expected to shave only 1 to 2 percentage points off the region’s growth rate, which is still expected to be about 8.5 percent in 2008, according to forecasts by the World Bank and national governments.

Growth in China, the largest of the emerging economies, will likely slow from 11.4 percent last year to “only” 9.4 percent this year and to

9.2 percent in 2009, according to the World Bank. Todd Lee, managing director of Global Insight’s Greater China group, agreed that China’s slowdown will continue. Lee estimated second-quarter growth in China at 10.1 percent, down from 10.6 percent in the first quarter. But conditions are hardly bleak. Foreign direct investment in China increased 26.3 percent in the second quarter (year-to-year), compared with 24.6 percent growth in the first quarter of this year. That’s way down from 40 percent growth in 2005, but nothing to sneeze at.

India’s gross domestic product growth rate dropped only slightly to 8.8 percent during the first quarter of this year, from an average rate of 8.9 percent over the last five years. Jyoti Narasimhan, research director of India at Global Insight, said economic growth in India remains “very robust,” despite the slight decline.

Vietnam and Cambodia also are slowing, but not at alarming rates. World Bank economists forecast Vietnam will grow 8 percent this year, only a slight drop from 8.5 percent in 2007. Foreign direct investment in Vietnam is increasing at an exponential rate, according to Simona Mocuta, senior economist at Global Insight’s Asian group.

Last year, economists were pleased to see Vietnam reach $10 billion in foreign direct investment approvals, Mocuta said, but this year’s figure for FDI is projected at $30 billion. “This is just the initial wave,” he said. “Vietnam is the third emerging player.” Vietnam will invest in infrastructure improvements, and on importing huge volumes of intermediate goods, such as manufacturing machinery.

Cambodia, like Vietnam, depends heavily on exports of textiles and apparel for its growth, but it is diversifying slowly into heavy industry. Foreign investment in Cambodia is modest, but an investment boom may be around the corner.

“There is a lot of interest in Cambodia,” Mocuta said. “Companies are prospecting, but they are only now just starting to commit.” Multinationals are encouraged by the discovery of oil deposits off Cambodia’s coast, by the country’s current political stability and by growing consensus that local contract manufacturers now meet global labor standards.

Although rising prices for fuel and food are hurting some of these nations, others are enjoying a windfall as a result of the higher prices of oil, rice, coconut oil, iron ore, copper and rubber. Indonesia, Malaysia and Vietnam are the big winners, boosting their GDPs by an extra 1 to 2 percent a year, according to the World Bank. (In contrast, commodity price inflation will cut the GDP growth rate in China, Thailand, Laos and Cambodia by 1 to 2 percent.)

Economists believe that emerging Asia will continue to do well, barring a total meltdown in the global economy. The key reason, the World Bank said, is that the region’s strong long-term growth trend is not driven by year-to-year fluctuations in world demand but by “improvements in productivity, innovation, quality control, education and skills.” These trends are fueling the emergence of an ever-larger middle class that has the buying power to purchase a growing share of the products made in Asia by global corporations.

Where does this leave trade? Emerging Asian exports are growing at a slower pace, in part because they are expanding from a much higher base. China’s exports grew 30 percent from third quarter of 2006, but that rate dropped to less than 10 percent in the first quarter of 2008. Likewise, India’s exports are growing at an annual rate of 22 percent this year, down from an annual rate of 24 percent rate a year earlier.

For emerging Asia, markets in the U.S. and other industrialized countries are becoming less vital. According to a recent report by the Asian Development Bank, Asian countries now direct about the same percentage of their trade (combined imports and exports) to other countries within Asia as the countries of Europe and North America do within their own regions.

“As Asia’s economies have grown larger and more complex, they also have become more integrated — through trade, financial flows, direct investment and other forms of economic and social exchange,” the bank’s report said. Another key factor: The 1997-98 financial crisis dramatically underscored emerging Asia’s vulnerability to market conditions in industrialized countries. A decade later, growing economic integration has made emerging Asian nations less vulnerable.

Several intraregional free-trade agreements are in various stages of negotiation. These include agreements that would link India and the Association of Southeast Asian Nations, one between China and ASEAN, and one between China and India. After several years of negotiating with ASEAN, India is reportedly close to working out a compromise with Indonesia, a member of ASEAN, regarding palm oil trade, which would be the last obstacle to a bilateral agreement.

India and China have created a joint study group to weigh the feasibility of a bilateral free-trade agreement now that China has become India’s No. 1 trading partner.

For all their similarities, there are significant contrasts among emerging Asian nations. China, Vietnam and Cambodia depend on trade for a larger share of their economic growth than India does. Last year, the value of Chinese exports equaled 41 percent of the country’s GDP, while India’s exports were worth only 21 percent of its GDP. Conversely, only 38 percent of China’s GDP came from domestic consumption, compared with 55 percent in India.

Unlike China, Vietnam and Cambodia, India rarely serves as an overseas manufacturing platform for multinationals. Building on its strength in information technology services and outsourced business process, India is attempting to become a major source of R&D, biotechnology and generic pharmaceuticals.

And while China’s domestic market is growing rapidly, manufacturers in India more often focus on their huge domestic market, not on exports. “A lot more of the U.S. players view India as a place to produce and sell for the local market,” Narasimhan said.

Even Indian manufacturers are concerned about China’s lust for foreign markets. Some Indian manufacturers have complained that a free-trade agreement with China could wind up flooding the Indian market with cheap Chinese imports.

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