06/12/2015
Global / Economics
Asia’s investment growth has slowed to a crawl. Investments at home must be raised to turn this trend around or the Asia growth story ends.
Asia’s investment growth has slowed to a crawl. That’s bad because saving and investing is what gives you – anyone – faster growth and higher incomes. Double-digit savings and investment rates underwrote 7% per-capita income growth in Asia for decades. At that rate, wages and salaries double every ten years.
It ought to be a huge concern that real investment growth in Asia has slowed from an 11% pace in 2008 to 6.5% on average in 2009/10, 5% in 2012, 4% in 2013, and below 3% in 2014. Either this gets turned around or the Asia growth story ends.
For most Asian countries, including China and Singapore, the issue isn’t how to guard against “over-investment”. It’s how to arrest its slide. Sub-3% growth in real fixed capital formation won’t deliver the GDP growth Asia needs to lift incomes and keep populations employed. What to do?
The real problem isn’t a lack of funds, but precisely the opposite. All Asian countries, save for India and Indonesia, run current account surpluses and have done so since 1998. Surpluses mean you’re lending to the rest of the world (or paying down old debts). If you’re lending to the rest of the world, you don’t need to borrow funds from anyone.
But if Asia is lending to the rest of the world, it’s immediately clear how to raise investment at home: stop lending, start borrowing. Stop running surpluses, start running deficits. Stop investing in US Treasurys and start investing at home, where the income-lifting capital equipment and infrastructure is desperately needed.
Run deficits? Sounds a bit heretical. Foreign lenders, rating agencies, and local officials would all object. But it’s not heresy, it’s Finance 101. Higher income, capital abundant countries are supposed to lend to lower income / capital scarce countries, not vice versa. Foreign lenders earn a higher return than what’s available at home; local borrowers can invest more than local savings otherwise allow. Everyone wins.
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