Thursday, June 17, 2010

Eastern economies will decelerate

THIS is the Asian century. Since 2007, the continent with most of the world's people has generated most of its growth. And despite the question marks over China, the odds are that it will keep doing so.

We knew that. On the International Monetary Fund's figures, the 2000-01 tech wreck saw the world's engine of growth shift from the G7 countries to the developing economies of Asia, mainly China and India. In the past decade, gross domestic product (GDP) in the G7 increased by 16 per cent. But developing Asia — China, India, Indonesia and so on — more than doubled its GDP, up 116 per cent.

In the past five years, say the IMF figures, developing Asia generated half the growth in the world's output. The rich countries generated 18 per cent, and the G7 just 9 per cent.

The baton was passed long ago. Why does the IMF proclaim it as something new?

It reflects a confusion between two ways of measuring countries' output. The easy way — widely used because it's so easy — is to translate each country's output into US dollars using today's exchange rate. But on that measure, output rises and falls whenever markets or governments change the exchange rates.

A more realistic measure comes from comparing prices in each country to calculate its purchasing power parity (PPP). In 2006-07, a World Bank team led by former Australian Statistician Dennis Trewin carried out rigorous worldwide price comparisons to do that. The IMF figures quoted here are based on its work.

A simple example: suppose it costs $20 to see a film in Japan but $1 to see it in India. On the exchange rate measure, the value produced in Japan is 20 times as much as in India. On the PPP measure, the value is the same whichever country you see it in.

The differences are huge. On the exchange rate measure, India and Australia have roughly similar levels of GDP. But on a PPP basis, India produces more than four times as many goods and services as we do.

But the exchange rate measure does allow us to measure the size of countries' markets in a common currency. That matters for exporters. And reducing the disparity between the two measures matters if we want to rebalance the world's economy and reduce the risks raised by large sustained current account imbalances — especially in the US.

But you can only predict future GDP levels on the exchange rate measure if you can predict exchange rates. Even the IMF can't do that, which makes yesterday's forecasts by its Asia director, Anoop Singh, pointless.

One of the odd things in his paper is a graph predicting that Asia's share of the world economy will shrink between 2000 and 2030. That's probably an error, but it reminds us that demographics will be working against east Asia, not for it.

The population of Japan is falling already. By 2030, the populations of China, Korea and Taiwan will all start shrinking. As the century goes on, these proud economic powerhouses will have to accept migrants or shrink relative to the rest of the world.

Africa, the Middle East and Latin America have begun to apply the secrets of growth. That, and their growing populations, means they will grow faster in the long term, as Asia slows.