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CAN ASIA'S SAVINGS MINDSET BE CHANGED?
Florence Chong*
01-12-2009
ATI ASIA2010 Magazine
THE strength in the recovery of the global economy, and, particularly Asian economies, hinges on a US$6 trillion question — the consumption gap between the United States and China, sometimes referred to as G-2.
Economic activity is all about consumption — private or public. The world staved off a Great Depression this time around because of the weight of stimulus programmes in generating consumption. Stimulus worked. The key reason for the recovery of the global economy, including the US economy, has been restocking of inventories.
On average, according to the IMF, the Group of 20 (G-20) countries budgetted two per cent of their GDP for stimulus spending in 2009. Stimulus budgets this year — just for Japan, China and the US — have totalled more than US$555 billion.
The stimulus programmes began last year, and are budgetted to run out in 2010 — athough some infrastructure projects will take longer to complete.
If global recovery gains traction in coming months, some politicians are bound to step up their campaign to wind back what is extraordinarily expensive spending, on the grounds that public debt is growing rapidly.
The IMF's Head of Fiscal Affairs, Carlo Cottarelli, is forecasting that public debt in advanced countries will go up by 40 per cent of GDP between 2007 and 2014 — hitting an average of 120 per cent of GDP. By implication, consumption is, therefore, not likely to hit levels seen over the past decade. Indeed, with ageing populations, the pattern of consumption itself could be different.
Will there be the same demand for cars, plasma tv sets, mobile phone handsets and so on, now being churned out mostly from the export power houses of Asia?
Certainly, Asia has the disposable cash — with collective foreign reserves of more than US$4.2 trillion (half of that belonging to China alone), money is not in short supply.
The issue is how to parlay such massive savings into consumption so that Asia can consume the bulk of what its factories now churn out for exports to the West each year. Transformation will not be easy, for a myriad of reasons.
The first is the different stages of development in Asia societies. The bulk of people in China and India subsist on low incomes from farming. Their needs are different to suburban, working-class Americans, Europeans or Australians, who have been fuelling the demand for high-end consumer goods.
Chinese or Indian farmers have different aspirations.
Consumption in developed countries took off primarily because of readily available credit — through credit cards. Use of the credit card and other forms of personal finance is not yet widespread in developing Asia.
Then there is the so-called Asian mindset. The saving mentality is no different to that of Depression mentality or migrant mentality. A sense of deprivation has bred life-long habits of thrift. This is where governments come in. They can "consume" by continuing to improve infrastructure and education, and developing social safety nets.
The standard argument for Asia's high savings rate is the need of its citizens to provide for rainy days. That need would lessen if the State took a bigger role in the provision of education, healthcare and pensions.
Indeed, governments can generate an immediate pick-up in consumption. China's retail sales of consumer goods totalled a hefty 570 billion yuan (about US$83.5 billion) during the week-long October 1 national day holiday this year, with average daily sales up 18 per cent compared with the same period of 2008. The Chinese Ministry of Commerce, which released the sales figures, credits Government policy to stimulate the economy for the spending spree on home appliances and cars.
The bulk of that spending would be on Chinese-made products. Indeed, except for the most wealthy — who have developed a penchant for imported goods — the masses will buy Chinese brands.
This is why some economists are increasingly convinced that Asia is decoupling from the West. China will import from its neighbours in Asia to produce products for home consumption, and eventually reduce its dependence on exports. Time will tell whether the Chinese are able to truly reduce their reliance on exports.
* Florence Chong is Editor of ATI Magazine. |
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