Bernardo M. Villegas
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Asia to Lead Global Growth

          It is a foregone conclusion that Asia will lead the much-awaited global economic recovery in 2010. Among the emerging markets referred to as BRIC and the Next-11, eight of the fifteen economies are in Asia: China, India, Pakistan, Bangladesh, Indonesia, the Philippines, South Korea and Vietnam. With China leading them at a forecasted GDP growth rate of 9.5 percent in 2010, Asian economies will average about 7 percent growth for 2010 in contrast with less than 2.0 percent for the developed economies. Except for Japan, the driving force for the stronger recovery in Asian economies is domestic consumption. The much-awaited rebalancing of the global economy is happening: Asians, formerly the highest savers in the world, are now discovering the pleasures of splurging on consumer goods, including discretionary items, while Americans are reacquiring their old virtue of thrift.

          The emerging markets of Asia passed the test of the Great Recession of 2008-2009. With the exception of South Korea, all of them avoided a recession in 2009 and are in a position to rebound strongly in 2010. Two of them, Indonesia and the Philippines will get a special boost from the establishment of the world's biggest free trade area (FTA) starting January 1, 2010 on which date Indonesia, Malaysia, the Philippines, Singapore, Thailand and China agreed to eliminate barriers to investments and tariffs on 90 percent of products. The other ASEAN members (Vietnam, Cambodia, Laos, and Burma) will follow suit in 2015. The total consumer market of AFTA+China FTA is 1.7 billion with per capita incomes averaging $2,000 to $5,000 annually. This is the range of incomes in which demand for consumer products and services tends to increase at double-digit rates, as experienced in China during the last twenty years.

          Intraregional trade in the AFTA-China region has been expanding at 20 percent annually over the last ten years. China has overtaken the U.S. to become ASEAN's third largest trading partner. In the next three to five years, China will surpass Japan and Europe to be the Number One partner. In the AFTA-China FTA, average tariff rate China will be charging on ASEAN goods will be cut to 0.1 percent from 9.8 percent. Average tariffs imposed on Chinese goods by ASEAN states will fall to 0.6 percent from 12.8 percent. The sectors that will most benefit from this FTA are services, construction, infrastructure and manufacturing.

          The Asian emerging markets will join the other emerging markets in the world like Brazil, Russia, Mexico, Nigeria, Egypt, Turkey, and Iran in building on their relatively strong performances in the crisis year of 2009. In 2009, the MSCI emerging markets index increased 65 percent, compared with a 25 percent jump in the Standard & Poor's 500-stock index. Merrill Lynch predicts that emerging market economies in general will grow 6.3 percent in 2010, while the global economy will expand 4.4 percent. Imports to the BRIC countries were expected   to surpass imports to the U.S. for the first time ever in 2009. Even if developed countries recover completely in 2010, emerging markets will account for 70 to 75 percent of the growth in global output in the next three to five years.

          Funds focused on equities in emerging markets attracted a record of US $75.4 billion in 2009, far surpassing their previous high of US $54 billion in 2007. Much room for growth is expected because only 3 percent of assets managed by U.S. fund managers are invested in emerging markets. Goldman Sachs economists expect consumer spending in emerging markets to grow at 6.5 percent in 2010 after growth of 2.8 percent in 2009. The equivalent figures for advanced economies in 2010 will be 0.2 percent. This high growth of consumption spending is mainly attributed by these economists to a rapidly expanding middle class in emerging markets. In a report dated November 2009, Goldman Sachs makes it clear that the consumer boom is not just a short-term opportunity but rather a prolonged and sustainable theme. 

          Long-term investors should remember these words from the Goldman Sachs report: "This growth of the middle class in emerging economies (defined as those with incomes between $6,000 and $30,000 in PPP terms) is set to continue, if not accelerate, over the next two decades and is likely to be critical to how the world is changing . . . the pace of expansion in the emerging middle class is likely to continue growing until a peak in about a decade. As a result, two billion people could join the global middle class by 2030, or around 30 percent of the world's population."

       This statistically well-supported assertion should remove the mystique from the phrase "emerging markets."   In the last century, there was much exaggerated talk about the East Asian economic miracle, referring to the explosive growth of the so-called "tiger economies" such as Singapore, Hong Kong, South Korea and Taiwan. Nobel laureate Paul Krugman brought everyone back to planet earth by pointing out that the spectacular growth among these Newly Industrializing Economies (NIEs) could be entirely explained by the way their leaders intelligently mobilized the demographic dividend that resulted from the baby boom after the Second World War. Much of the growth could be explained by the harnessing of the abundant manpower they then had, as they encouraged export-oriented, labor-intensive industries.

          In an analogous way, the emerging markets of today will lead the world in growth by capitalizing on their huge domestic markets, thanks to their big populations. All of the BRIC and Next-11 emerging markets (with the exception of South Korea) have the additional advantage of being rich, not only in human resources, but in natural resources such as agricultural lands, forests, mineral deposits, petroleum or aquatic resources. These natural resources will attract substantial domestic and foreign investments, which will reinforce the consumption-led growth that they will experience in the next three to five years. At least for the foreseeable future, most countries in the world will experience a significant slowdown in government spending, after the aggressive pump priming of the last two years. Huge government deficits will have to be brought down to more reasonable levels. Thus, consumption and private investment will have to be the engines of growth.

        The importance of large populations for both a consumption-led growth and a labor-intensive approach to sustainable development should act as an antidote to the recent surge in neo-Malthusian theories which consider population as a liability rather than as an asset. It is not a coincidence that all the emerging markets included in the list of Goldman Sachs have at least a population of 50 million. For comments, my email address is