Wisdom of an Asia rising

by Brad Glosserman

SEOUL — According to conventional wisdom, the global economic crisis is accelerating the transfer of power and influence from the West to Asia. The United States has been particularly hard hit by the downturn and America’s loss is China’s gain.

The Group of Eight industrialized nations, the traditional locus of power, has been fatally wounded. In the future, goes the argument, the most important forum will be the Group of 20.

If this analysis is correct, it suggests that another fundamental shift in global economic activity is due. Western demand will no longer serve as the primary engine of growth. Instead, Asian nations will abandon export-oriented economic models and embrace domestic consumption to generate growth. That will put in train another set of “knock-on effects,” the most important being the development of social safety nets that no longer oblige their citizens to save so much of their income and instead encourage them to consume.

As usual, the conventional wisdom blurs hope and reality. The ultimate impact of the economic crisis is far from certain and the future contours of the global economy remain unclear. Trends have emerged, but their trajectories can change.

Start with the assumption that the West has been harder hit by the crisis than the rest of the world. That is true: The West has lost more wealth, but it had more wealth to lose. And the gap between Asia and the West had been narrowing for over a decade as a result of Asia’s growth. The most important question is which economic model will facilitate a faster, more resilient and more durable recovery. Will the American-British model — hopefully modified to trim its excesses — beat the state-centered approach that prevails in Asia?

There is a hint of smugness these days among Asians when conversation turns to the impact of the downturn on the U.S. Since the U.S is the final market for many Asian products and many Asian governments hold considerable amounts of dollar-denominated assets, schadenfreude is a mistake. The much-talked about “decoupling” of the trans-Pacific economies hasn’t happened. As long as the U.S. economy stumbles, Asia is unlikely to experience sustained growth.

All recognize that this relationship has to change. The massive imbalances — the U.S. with its trade and current account deficits, Asia with its surpluses — are unsustainable. But recalibration will take time and will require Asian governments to reverse long-standing attitudes.

First, those governments have to stimulate domestic demand. One option is infrastructure development. Asia’s needs are conservatively estimated at hundreds of billions of dollars. But while those projects are needed to spur regional development, they do nothing to absorb the billions of dollars of products produced in Asia. Ultimately, a consumer market is needed to replace U.S. demand.

To do that, governments must develop welfare systems so that their citizens don’t feel compelled to save so much. Savings rates throughout the region are high because citizens worry about having enough money when they retire.

Equally important, Asian governments must create new relationships with their citizens. Historically those governments have kept a tight grip on capital to direct funds to targets deemed worthy, whether for favored enterprises or “strategic” sectors of the economy. Consumption-led economies require greater consumer autonomy, a fundamentally alien mind-set for most Asian governments and their powerful bureaucracies.

Asian governments are deeply engaged in social engineering, whether for nation-building and economic development or as a result of just plain authoritarianism. Control of the purse strings is the easiest way to create and shape desired outcomes. Loosening this grip is critical to the creation of domestic demand-driven economies, and is a step that goes against the instincts of virtually every Asian government.

This mind-set will influence the utility of the G20, the other “beneficiary” of the current crisis. There is little doubt that the G8, “the rich man’s club” of nations, is past its prime. The annual summits have become little more than photo ops that produce largely empty declarations.

The G20, which represents some 80 percent of the world’s wealth, is a far more representative group: Its members come from all over the world, and they represent a wider range of political, economic and social models. That diversity has its drawbacks, though: Reaching consensus is difficult and agreements are largely rhetorical.

It should come as no surprise, for example, that despite the group’s pledge in November 2008 to avoid protectionism, a World Bank study found that 17 members had adopted new trade-restricting measures by the following April.

The leadership needed from groups like the G20 requires governments to put global interests before narrow parochial ones. This entails the assumption of responsibilities and costs that may go against a narrowly defined national interest. Asian governments have shown little inclination to take up those burdens. They demand a seat at the table — which they have earned — but are reluctant to assume the costs of real leadership.

Instead, leadership has looked a lot like mediation: providing a forum for discussion and looking for lowest common denominator solutions. That is acceptable in many cases, but it is unlikely to work when dealing with tough international issues. The desire to engage in social engineering is problematic for economic leadership. In this arena, rules are made to maximize the group’s welfare, not just that of an individual nation.

Yet, a government’s pursuit of particular social outcomes means that economic rationality isn’t necessarily guiding its decision-making; politics usually is. And that narrow conception of national interest means that it is less likely to press for solutions that fit other countries’ needs.

The most important factor shaping the global economy will be the spread of a “Green mentality.” While human dignity and equality demand that hundreds of millions more individuals should enjoy future prosperity, transplanting the Western model of consumption to Asia would be a disaster. “A chicken in every pot” and “a car in every garage” would exact an extraordinary toll on the planet.

Asia’s growing middle class should not be deprived of the hard-won fruits of their success, but those societies should not emulate the West, especially if that means repeating its mistakes. They need to develop notions of “the good life” and “success” that better coexist with an increasingly burdened planet.

A key component of this mind-set, and one that will have a powerful impact on future growth and economic potential, is green production. Manufacturers need to develop production models that use resources more efficiently: This will include leaner production methods, generation of less waste, use of recyclable materials, and consumption of less energy. Countries that recognize this model and shift to green production will be tomorrow’s “winners.”

Critical to this process are consumers who demand greener products. This may well determine Asia’s future. If the ordinary citizen’s consciousness is “green,” then industry will follow suit. If this occurs, then one of the most powerful emerging forces in the global economy will be driving real and substantive change. Then the conventional wisdom may prove accurate after all.

Brad Glosserman is executive director of the Pacific Forum CSIS and a Japan Times contributing editor.