the asian growth models and asia’s challenges - · pdf filethe asian growth models and...

Copyrights Bernard Yeung 2012

The Asian Growth Models and Asia’s ChallengesBernard Yeung

DeanStephen Riady Distinguished Professor

NUS Business School

2nd Annual OECD WPC World Pensions & Investments ForumFeb 2012


Global Growth Trends favor emerging markets


Asian countries grow fastest (Q4 07 to Q2 11)


China and India lead the growth outlook


Asia trends?

• Huge growth potentials• Grow internal consumption• Talent, capabilities, and

resources constraints • Rising costs

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Can Asia get there and how it solves the growth bottleneck?

• Stylized taking stock of the Asian growth models

• Consequences and challenges


The generic of Asian growth models• “Big push” (Rosenstein-Rodan 1943 and Murphy et al. 1989)

– Growth needs finance and the right ecology– Individual firms underinvest

• Not internalizing pecuniary spillovers• Transaction difficulties among vertically related firms

– Government needs to do the financing, pushing and coordinating

• Asian practice– Implement Big Push through result oriented business

groups• Government and SOEs – e.g., China• Government and big business groups – e.g., Korea

(Japan too) Rosenstein-Rodan


China’s growth• Initial stage – a mechanical growth story

– Outsourcing (ICT) brought manufacturing to China’s underemployed labor

• Then, save to invest

• But, why not other countries?– The Chinese Communist Party’s command and control

scheme


CCP’s governing scheme for growth

• CCP system:– A pyramidal hierarchy:

• Central provinces cities counties …

• Promotion by tangible economic growth– National wide, city by city, and province by province,

growth tournament

– State-owned banks and corporations are direct economic vehicles for growth


How significant?

• SOEs – 116 Centrally owned SOEs own

• More than 35% of corporate assets• more than 20,000 subsidiaries

– 147,476 lower level governments’ SOEs– More than 70% of total corporate assets

• State owned banks– Non state owned banks’ assets < 5%

• CCP has a firm “command and control” grip– Control the appointment and promotion of executives in

SOEs, state controlled banks, and in all of their regulatory bodies


The expedient result of China’s monetary stimulation illustrate CCP’s command and control big push model

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Joint-StockCommercialBanksState-OwnedCommercialBanksPolicy Banks

Bankers'ConfidenceIndex

Loan Balance Increment (trillion yuan RMB)


Banks lend to large SOEs (low political risk)

Distribution of Loans to Companies in 2009Sources: Genius Finance Database.

C_SOE59.68%

L_SOE25.49%

NON_SOE14.82%


Annualized Real Growth Rate of Fixed Asset Investment

Source: National Bureau of Statistics, China.

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China’s stimulus has achieved extraordinarily large and quick responses.

Sources: National Bureau of Statistics, China; OECD; Ministry of Statistics and Programme Implementing, India.


Distortionary?

• SOEs did not really invest, bought land,– 94 (jumped from 16 previously) of the 129

central SOEs invest in housing development in 2009• They bid up land and house prices


Central SOEs’ bidding premium surged with the stimulation package

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• Stimulations hot housing markets

Sources: Institute of Real Estate Studies, Tsinghua, China.

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Constant Quality Housing Price Index in 35 Major Cities, China


Government “big push” created distortions• Created high land and house prices

– Painfully high cost of living for many– Empty houses = costly piggy banks

• Create a local government debt problem?– Local governments use expected land leases revenues to

support loans • “China said local governments owe debt equal to more than a

fourth of the country's economic output”• Some analysts say that the actual total could be even higher –

WSJ Jun 27 2011 Tom Orlik.• Chinese provincial debt reaching crisis point CNN Jan 6th 2012

(exaggerated)


The case of Korea – 1961 to 1979• US political & economic unreliability

– Collapse of US action in Vietnam– US military downsizing in Asia– Oil price shocks & perceived US weakness– Textiles trade barriers in US– Need arms build-up, domestic suppliers

• Heavy & chemical industries drive– National Investment Fund (NIF) loans

• For heavy & chemical industries capex• Direct loans to selected firms at subsidized rates• Government – business-family cooperation• Financed by printing money

• HCI policies inflation, debt/economic crisis

Park Chung Hee


Aug. 3rd 1972 Measure (post1969 crisis)

• Aug. 3rd 1972 Emergency Decree = bail out– Moratorium (3 years) on all debts to curb lenders, rates rewritten

down– SOE loans revised terms

• Industrialists– Publicly accept blame– But, bailed out, produced jobs

• Yet, the administration lost its power grips over time

• A new era of “deep” government-business cooperation


After the crisis, Park exhorted firm owners to list

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Rights Offerings as % of GDP

Initial Public Offerings as % of GDP

Market Capitalization as % of GDP (rightaxis)


Pressure to List• Chaebol assume pyramidal structure

• Allows massive leveraging of a respectable family fortune, sufficient to control the “family firm” at the apex, into indisputable control over a constellation of firms that collectively contain assets worth many times more


Gathering Concentration of Corporate Control

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Samsung ExpansionsRetail & Service Food & Beverage Textiles Finance Media Industry Electronics

61 Ulsan Fertilizer63 Shinsegae Dept.

StoreHanl Nilon Dongbang Life

Donnam Securities Dongyang Fire &

Marine Ins.

Joon‐Ang Dev. Dongyang Broadcasting

Jong‐Ang TV

Taehan Oil

64 Hankook Fertilizer65 Jopong‐Ang Daily News Junju Paper66 Seoul FM

Korea Hungjin68 Samyoung Inc.69 Cheil Sugar S. Electronics

S. Sanyo70 S. Display Devices71 Hankuk Computer72 Sunil Dextrose Cheil Synthetics73 Shilla Hotel Samri Textiles S. Electric Parts

Electro‐MechanicsS. Corning

74 Shinsegae Store Cheil Comm. S. Heavy Ind. S. Petroleum

75 Joong‐Ang Engineering77 Kyungju Hotel

ShillaS. Precision

S. Shipbuilding S. Aerospace Taisung Heavy Ind.

S. Eng. & Construction

S. GTES. Semiconductor

78 Donglip Ind.

79 Yunpo Leisure Dev. Joon‐Ang SVP


Illustrate: Business group and big push• A business group “Big Push” across multiple sectors• Koo Cha-Kyung, Chairman of Korea’s LG

– “My father and I started a cosmetic cream factory in the late 1940s. At the time, no company could supply us with plastic caps of adequate quality for cream jars, so we had to start a plastics business. Plastic caps alone were not sufficient to run the plastic molding plant, so we added combs, toothbrushes, and soap boxes. This plastic business also led us to manufacture electric fan blades and telephone cases, which in turn led us to manufacture electrical and electronic products and telecommunications equipment. The plastics business also took us into oil refining, which needed a tanker shipping company. The oil refining company alone was paying an insurance premium amounting to more than half the total revenue of the largest insurance company in Korea. Thus, an insurance company was started. This natural step-by-step evolution through related businesses resulted in the Lucky-Goldstar (LG) group as we see it today.”


Park’s Legacy led to a Chaebol big push

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Chun’s Legacy

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Legacy of the First Democratic Decade


India?

• Low growth because of – Bureaucracy, poor infrastructure, etc– Poor education– Restrictive Labor laws

• Business groups (Birla, Tata) overcome the institutional challenges– E.g., Internal financial and human capital markets

• Growth because of – Less regulated sectors, e.g., IT and services– Diasporas

– Groups


Asia’s growth model

• Many governments actively seek tangible growth

• Economies dominated by hugely diversified “groups” controlled by elites

• Concentrated economic decision making– Big push led by government and economic elites

• Perhaps the right model in an early stage of growth


The scheme can generate high “corporate and government” savings and “investment driven growth”– China is a case in point

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Result of concentrated decision making: Income disparity

e.g., China’s labor income/GDP tumbles [Global Times May 13 2010]


• Migrant workers in Zhengzhou, Central China's Henan Province, beg for money to get medical treatment for injured coworkers May 9, after failing to receive wages overdue by a year.


Challenges in moving forward?

• Asia wants a more balanced growth– Develop internal consumption markets

• If successful, will face resources and talent constraints and rising costs

• Can the current system solve the growth bottle-neck?– Key issues

• Sensitivity to real opportunity costs• Generate productivity growth via creative destruction


Not quite attend to future externalities


Beijing on Jan 19 2012, a clear day!


Under invest in intangible development


Challenge: institutional development for economic democracy – raise the sensitive to real opportunity costs and prodcutivity

• Problems of concentrated decision (Nobel laureate FredrichHayek)

– Privileged and powerful are not sensitive to social opportunity costs

– As “scales” grow, get information, identifying and capturing new opportunities in a timely manner becomes overwhelming

• Creative destruction = outsiders create and the established face destruction– Big business groups face creative self-destruction


As growth continues

• Government and big business – more temptations and opportunities to pursue “self-interest”– corruption and cronyism

• Not guiding development as effectively (more costly distortions)

• Preserve status quo, hinders further growth


No changes? development is always bumpy• Kindleberger, Charles. 1978. Manias, Panics &

Crashes. MIT Press• Historical regularities in all major crises

1. Genuine profit opportunities due to technological change, institutional improvement, …

2. Genuine high returns induce investment boom3. Mania: investors used to high return, but highly

profitable growth opportunities exhausted4. Investment boom persists, bubble expands5. Day of recogning, panic, & crash6. Readjust

• Crises 1929, …, 1997, 2008, …, • Japan was in 5 in 1992, Korea in 5 in 1997? • Is concentrated economic decision helpful?• Where is China? ….


Government has to become the nurturer of economic democracy• Ascertain open economic access

– Reduce entry barriers, up openness

• Develop and enforce regulations that – generate transparency and – establish fiduciary responsibilities

• When individuals know reasonably well what they are getting into– firms have to compete by giving consumers and investors

what they want• Sensitive to real opportunity costs• Creative destruction


We are optimistic

• Governments are aware of and discussing the problems

• The debate is on the “growth focus” vs. “institutional development”– Can be complementary

• Have savings to cushion the adjustment costs


No matter what, growth will go on in Asia for a while

Challenges you face:

• Rising labor cost and high turnover• Talent constraints

– Consequence of fast growth (e.g., private consumption goes up by double in 5 years in Chins)

• Difficult logistics

• Government has the power and control– Institutional instability (from regulatory organizations)– Confusing legal system

• Corporate governance

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