Sluggish domestic demand adds warning to outlook for Asia-Pacific region
Credit shortage to blame
Bangkok – Overcoming sluggish domestic demand in East Asian economies is needed to reduce their reliance on exports as a main driver of economic growth, the United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP), says in its latest Survey.
The Economic and Social Survey for Asia and the Pacific 2007 said that the contribution of domestic demand to economic growth has fallen in all countries in East Asia, apart from China, since Asia's financial crisis a decade ago.
"The relatively low domestic demand in East Asian economies...is a source of widening global imbalances and these economies have increased their reliance on exports, ...exposing them to significant declines in external demand," the Survey said.
Private investment's decline was the main reason for a fall in domestic demand. In Indonesia, private investment's share in gross domestic product, GDP, fell by nearly 50%, followed by Thailand and Malaysia. Private investment "has not yet recovered to its pre-crisis level" in all crisis-affected East Asian economies.
A recovery in private investment should be a priority. "A decisive policy response is needed to promote private investment in East Asian economies," it said.
The construction sector was a prime contributor to the falling investment share. Across East Asia construction accounted for over half of total investment, more than a third of which was in residential investment.
But while the construction sector's decline could be seen as an adjustment after the highs of the pre-crisis years, investment in machinery and equipment had also declined.
"The decline of construction investment could represent a healthy adjustment to the boom of the early 1990s, especially in residential investment. But the decline in machinery and equipment raises concerns about growth's sustainability, since this investment component is tied to an economy's production capacity," the Survey added.
The Survey says capital shortages are hindering East Asia's recovery in private investment in East Asia.
"The stock of private domestic credit as a percentage of GDP declined after the crisis. Credit shortages were even more pronounced in Thailand and Indonesia because loans were allocated more for consumption."
"The share of individual consumption loans to total loans in Thailand reached 24% in the first half of 2006, up from 12% between 2000 and 2005, and reached 33% in Indonesia, up from 26%," it said.
China is the exception to this picture. Domestic demand has taken a lion's share of national output at 92% of GDP in 1990-1996, climbing to 96% in 2000-2005 due to the "tremendous increase in investment."
The investment share in China has risen from 31% in 1990-1996 to a high of 42% in 2005. But a decline in private consumption in turn led to the share of consumption declining from 60% in 1990-1996 to 52% in 2005.
China needs to lift private consumption's share by increased spending on education, health care and pensions, while local governments should improve household access to publicly delivered social services. Financial market reform would also facilitate consumer borrowing.
In East Asia, the Survey called for "decisive responses." East Asian banks remained "excessively cautious" over lending and needed to improve risk management systems, and adopt practical steps to curb growth in consumer credit.
"Further financial reforms are needed to promote private investment in East Asian economies…. more can be done to ensure that prudent investors have access to credit," it said.
Capital markets needed to be developed as alternative sources of funds especially by boosting the equities and debt securities markets over that of direct bank lending.
The Survey said Governments could also make a contribution by improving the investment climate for private investment by ensuring macroeconomic stability, providing adequate infrastructure as well as good governance, and political stability.
"Governance is emerging as a major consideration in private investment decisions," the Survey said.
As the region's oldest and most comprehensive annual review of economic and social developments, UNESCAP's Economic and Social Survey of Asia and the Pacific provides the only independent source of analysis covering all countries in this vast and diverse region, and considers both the social and economic spheres of development. The 2007 Survey, entitled "Surging Ahead in Uncertain Times," looks at the most critical issues, challenges and risks our region faces in the months ahead.
Headquartered in Bangkok, Thailand, UNESCAP is the largest of the UN's five Regional Commissions in terms of membership, population served and area covered. The only inter-governmental forum covering the entire Asia-Pacific region, it aims to promote economic and social progress.