Analysis - Economic trends - Asia's rising power

David Kern of Kern Consulting argues that the growing economic power of a China-driven Asia will have far-reaching repercussions - as both a threat and an opportunity.

A widely-used cliche is that America represents the present, Europe symbolises the past, while the future belongs to Asia. In 2003, the growing power of Asia has become an important reality, moving beyond traditional areas such as manufacturing and trade. Asia is now a dominant global player, with growing muscle power in finance, forex, and international investment.

Fears that the SARS epidemic will damage Asia seriously have proved groundless.

While not yet challenging the US' supremacy, Asia is an increasingly powerful rival for Europe. Asia's forex reserves have registered spectacular growth, and the two largest Asian currencies (the yen and the renminbi) are now critically important.

Asia has always been the most populous global region. But while other areas with large and fast-growing populations (e.g. Africa, the Middle East, or Latin America) have either stagnated or faced recurring crises, the emerging economies of East and South Asia have secured and sustained rapid expansion in output (GDP), trade, and investment. This remarkable success was based on a strong work ethic, high levels of savings and investment, and willingness to open key sectors to international competition. There are huge diversities within Asia - in terms of wealth, living standards, and performance. Japan, the world's second largest world economy, has experienced low growth and recurring crises since the bubble of the late 1980s. However, the transformation in Asia's fortunes has been driven by China's spectacular growth; by the dramatic expansion of economies such as South Korea, Taiwan, Hong Kong, Singapore, and Thailand; and by the slower but impressive emergence of India as a major player.

The economic size of Asia's two emerging giants is already larger than most people realise, with China's share of world GDP at 3.9% in 2002, and India's at 1.5%. This compares with global shares of 4.9% for the UK, 4.5% for France, 6.2% for Germany, and a massive 32.5% for the US.

However, the above calculations, which are based on market exchange rates, understate the true size of relatively poor economies such as India or China, where numerous services that are not traded internationally are much cheaper. If one adjusts for purchasing power, China is already the second largest economy, with a global share of 12.7%, while India's share jumps to almost 5%. More importantly, even on the conventional comparison, China will overtake Britain and France within the next 2-3 years, and we will no longer be the world's fourth largest economy. On conservative assumptions, China will overtake the US, and become the world's largest economy, by 2035.

One should neither dismiss, nor exaggerate, the fear that China's immense manufacturing power, and India's increasing effectiveness in IT and other services, will dislocate our economy and threaten our jobs. As long as we maintain a competitive, productive, and low-tax economy, we will retain comparative advantage in key areas, and preserve our living standards.

But the Euro-area's economic model, with its high costs and high taxes, will find it difficult to adjust to Asia's challenge, and we must not follow it.

VALUE OF STERLING 27.06.2003 31.07.2003 29.08.2003 30.09.2003 Euro 1.4448 1.4200 1.4470 1.4392 Japanese yen 197.387 194.982 185.363 184.517 Swiss franc 2.2331 2.2017 2.2277 2.2109 US dollar 1.6506 1.6171 1.5783 1.6603 Sterling index 100.7 99 98.7 99.9 % increase in annual earnings June 4.8 July 4.4 August 4.3 September 4.3 October 4.3 November 3.6 December 2.3 January 2002 3.0 February 3.1 March 2.9 April 4.1 May 4.0 June 3.8 July 4.1 August 3.6 September 3.7 October 3.7 November 4.0 December 3.4 January 2003 3.3 February 2.5 March 4.4 April 2.6 May 3.5 June 3.2 July 3.4 Source: National Statistics BANK BASE RATES Date Rate % 13.01.2000 5.75 10.02.2000 6.00 08.02.2001 5.75 05.04.2001 5.50 10.05.2001 5.25 03.08.2001 5.00 18.09.2001 4.75 04.10.2001 4.50 08.11.2001 4.00 06.02.2003 3.75 10.07.2003 3.50 Source: NatWest Bank
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