Economic reform has been imposed out of turmoil. Many Asian countries have struggled to reform their economies. However, those that have persevered have broadly emerged stronger and better. Despite Japan being the world’s second largest economy behind the US, it has struggled for nearly two decades to reform its economy. Elsewhere in Asia, the financial crisis of 10 years ago proved a huge catalyst for change and improvement. Currencies in the region have moved away from the then typically fixed regimes, to more market-driven regimes, although they can probably be considered more managed than free-floating. With over a third of the world’s foreign exchange reserves, currency vulnerability in Asia is dramatically reduced. Further reform might be needed, such as improving corporate governance; however, the path to progress is heading in the right direction.
Trade openness and foreign direct investment (FDI) can leapfrog progress. Satisfying local demand is one way for local companies to evolve and learn to compete in a global marketplace. Another way is to enter into strategic alliances or joint ventures with other companies, and learn to produce better products. FDI from non-local companies is a mechanism that promotes such ventures but depends on a country’s openness to such investment. The more open an economy is to trade with outside parties, the greater its ability to make economic progress and attract foreign companies to use its often-cheaper labour force. China has been one of the biggest recipients of FDI, hence the label “Made in China” has become ubiquitous.
Large populations and urbanisation boost growth and Asia accounts for more than half the world’s population. China and India each have more than one billion people; Japan, Indonesia, Pakistan, Vietnam and Bangladesh all have populations of 87 to 200 million. Urbanisation leads to companies often agglomerating around cities to tap into the large potential workforce, and provides a consumer base into which products can be sold. According to the United Nations, Asia’s urban population will double by 2030 to more than 2.5 billion people. Urban economies tend to grow much faster than rural ones, which might explain why average GDP growth rates in Asia are much higher than elsewhere in the world.
John Cleary, chief investment officer, Focus Capital.
