Speech by Mr Lim Hng Kiang, Minister for Trade & Industry and Deputy Chairman, Monetary Authority of Singapore, at Deutsche Bank's Emerging Markets Conference, 16 Sep 2006
Asia's Growth Strategy - Key Pillars
Ladies and Gentlemen,
Almost a decade after the Asian financial crisis, the region has moved ahead. Economies in Southeast Asia have recovered, exports are growing, and consumer and investor confidence have returned. Japan's recovery is continuing, and new powerhouses of growth are emerging in China and India. While the term "Asian Miracle" may sound old-fashioned today, Asian economies - led by China and India - continue to be among the fastest growing economies in the world.
A. Asian Miracle - on a larger scale
2 If we step back for a moment to the 1980s and the early 1990s, the emergence of the East Asian Tiger economies - South Korea, Taiwan, Hong Kong, Singapore, and later on the Southeast Asian economies-was hailed as the "Asian Miracle". There were many factors for their success, but I highlight three pillars of their growth strategy.
3 First, many of these economies had favourable resource endowments that could be mobilised for rapid industrialisation. These included a relatively young and well-educated workforce, high domestic savings and in some countries, abundant natural resources. For example, studies showed that by the 1960s, South Korea and Taiwan already had a skilled labour force relative to their physical capital stock and income levels. These initial endowments meant that the potential return to capital investment was high. Countries invested heavily in infrastructure and built up their industrial base. These investments were financed partially by the high domestic savings, supplemented by foreign savings in the form of foreign direct investment or FDI. FDI helped in the transfer of valuable technological know-how to the host country, and was particularly important for the ASEAN economies.
4 Second, the industries that developed in the Asian economies had a strong export orientation. This was a pragmatic solution to the constraints of relatively small domestic markets. For small open economies like Singapore and Hong Kong, it was simply not possible to grow the economy without growing the export sector at the same time. Export orientation helped to increase the demand for output and bring in export earnings. Moreover, the exposure to foreign competition increased the discipline and competitiveness of the export sector, and boosted the productivity of the economy as a whole.
5 Third, the Asian economies developed under conditions of relative macroeconomic and political stability, and more often than not, with judicious government intervention. Where financial markets were not well developed, the government stepped in to coordinate and facilitate large investments into targeted industries. In some strategic sectors, the government itself set up enterprises to undertake production. In many cases, government intervention was for the good, as the economy and enterprise could then work around the market failures. However, there were also casualties, such as inefficient state enterprises that were unresponsive to market signals. This was partially mitigated though, by the export orientation of the economies. Even though companies may have received fiscal incentives, they were subject to the discipline of global markets.
6 Today, the focus in Asia has moved from the smaller Tiger economies, to the emergence of China and India. We can however see strong similarities between the developmental trajectory of China and India, and the Tiger economies. In China, the economic reforms under Deng Xiaoping led to a rapid industrialisation of the economy. High domestic savings and investment rates, political stability, a strong export orientation starting with China's Special Economic Zones in the 1990s - these are familiar features. For India, the export orientation may be less pronounced than in China, although its business process outsourcing hubs in Bangalore are already international service centres. However, the political will in India to persevere with economic reform, and build up its infrastructure and industrial base, is strong.
7 The difference between China and India today, and the Asian Tigers two decades ago, is scale. China and India may therefore take longer to achieve the full transformation from an agrarian to an industrial economy, and from a rural to an urban society. For instance, China's current rate of urbanisation of 40% is only equivalent to the US in 1911 and Japan in 1950. However, the learning curve of China and India may also be shorter than that of the Asian Tigers. The emergence and integration of these two economic powerhouses into the regional and global economy will be of unprecedented significance, with the potential to create an upward lift to the prospects and livelihoods of millions.
8 While individually, no ASEAN country has the population or economic weight of China or India, taken as a whole, ASEAN still has a market of half a billion people. ASEAN countries have long traditions of cooperation and engagement with each other. The ASEAN Free Trade Area or AFTA was initiated in 1992, followed in short order by the ASEAN Framework Agreement on Services in 1995, and the Framework Agreement on the ASEAN Investment Area in 1998. The ASEAN region is well-endowed with diverse natural resources, and offers a full suite of labour force skill-sets and cost levels to suit the needs of investors. The emergence of China and India has given renewed impetus to ASEAN integration, and we can expect a more integrated ASEAN to offer a compelling value proposition, not only for investors outside Asia, but also for investors from Japan, and even China and India.
B. Building Strong Foundations for a Resilient Economy
9 The emergence of China and India, together with Japan's economic recovery, and rapid growth within the region, has generated optimism and growth momentum in Asia today. However, policymakers in Asia have to keep in mind the constant need to restructure the economy and strengthen the institutions to support and sustain this growth momentum.
10 There has been much progress in the decade after the Asian financial crisis. Corporate and banking sector balance sheets have strengthened, and governance and disclosure standards have been raised. However, one worry for policymakers in Asia is the decline in domestic investment after the Asian crisis. Although domestic consumption spending has picked up, investment is taking longer to recover. Indeed, apart from China, investment in most parts of Asia is still much lower - as a percentage of GDP - than levels before the crisis. While it is not desirable to return to the overbuilding and unproductive investments that contributed to the Asian crisis, productive investment is a crucial ingredient in an economy's growth and development and should be encouraged. Here, I would like to suggest three measures that are important to promote investment.
11 As the bankers, investors and businessmen among you will appreciate, the first is to improve the investment environment. This means clear and fair rules and regulations governing business and commerce, an efficient legal system, strong corporate governance, protection of intellectual property rights. Policymakers in the region know this, and the experience of the Asian financial crisis has strengthened the political will to reform.
12 The second is to increase the return on investment. One way to achieve this is to improve the quality of complementary factors of production, especially labour. This means investing in human capital, starting from primary education upwards, vocational training, and continuous upgrading of the workforce.
13 Another way of increasing the return on investment is to remove the inefficiencies in the use of capital and labour. We need to push towards the production possibility frontier, so that valuable investment is not compromised by inefficiency. This means improvements in infrastructure: not only physical infrastructure such as transport networks and telecommunications, but also services infrastructure such as banking systems and retail distribution. The government has an important role in facilitating this infrastructural development. In the 1950s, for example, the US government encouraged the development of the interstate highway system that has changed the landscape of interstate commerce, including how people live and work.
14 In this regard, financial services - under proper prudential oversight - can be an important facilitator and a source of growth in its own right. An underdeveloped financial sector can be a significant liability in times of stress, a lesson well-taught by the experience of the Asian crisis. A robust financial sector not only intermediates savings and investment, it also allocates resources efficiently to innovative but potentially risky projects. Financial markets of sufficient liquidity and depth will allow these risks to be spread among a large number of investors, who are best placed to manage the risks. By financing innovation and entrepreneurship in the economy, the financial sector facilitates technological advancement and economic growth. Many Asian economies have started or accelerated reform in their financial sectors after the crisis, and the larger economies of China and India are already seeing the emergence of financial centres in Shanghai and Mumbai.
15 The third is to accelerate economic integration. For Southeast Asia and ASEAN, China and India are both competitors and growth partners. To meet the competitive challenge, ASEAN has redoubled efforts to create the ASEAN Economic Community by 2015. The aim is to create an integrated region where goods, services, investment and skilled labour can flow freely. To do this, we will have to lower the cost of doing business in ASEAN through harmonising customs procedures, putting in place mutual recognition arrangements, and developing a rules-based trading environment.
16 China and India are also our prime growth partners. Their emergence has given renewed impetus to the development of production networks in Asia. Intra-Asian trade has grown faster than intra-NAFTA or intra-EU trade, with much of this increase driven by demand from China. In recent years, China has emerged as a significant importer of intermediate components from the rest of Asia, mainly to support its export-oriented industries but increasingly to feed its domestic demand for consumer goods. In 1991, 8% of East Asia ex-Japan's exports went to China. By 2005, China's share had risen to 21%. Over this same period, the share of intermediate goods in East Asia ex-Japan's exports to China rose steadily from about 60% to nearly three-quarters.
17 What more can policymakers in Asia do? We can facilitate and strengthen intra-regional trade and investment by removing barriers and roadblocks along the production chain as far as possible. As intermediate goods advance along the regional production chain, the multiple tariffs and non-tariff barriers levied by different Asian economies at each processing stage will cascade, adding significantly to the overall cost of production. Removing these barriers will have a multiplier effect on trade by lowering the cost of intermediate goods, and therefore final exports, from Asia. This will make Asian products more competitive in the world market, and Asia a more attractive location for foreign direct investment.
18 In this regard, bilateral free-trade-agreements or FTAs play a useful role in extending trade linkages. Bilateral FTAs can move comparatively faster, and countries can make deeper commitments that can be extended to other countries in subsequent regional or multilateral negotiations. For instance, India is now negotiating an ASEAN-Indian FTA following the conclusion of the Comprehensive Economic Cooperation Agreement or CECA with Singapore. Bilateral FTAs can also be a stepping stone to multi-party FTAs, extending the benefits of free trade to larger groupings of countries. For example, ASEAN is also pursuing an FTA with China.
19 I have outlined some of the challenges facing policymakers in Asia today. Let me conclude with a short Chinese fable. There was once a farmer, who had a rice paddy field. He was an impatient man. He thought his crop grew too slowly, and one day decided to help the seedlings grow by pulling on them! Needless to say, the seedlings died and he lost his harvest.
20 The moral of the story: sustainable growth, not fast growth, is what matters. And this is what policymakers in China, India and the other Asian economies are grappling with, putting in firm foundations and pillars of growth in their economies.
21 With these remarks, I wish participants at this Conference a fruitful and interesting discussion. Thank you.