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.

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Taiwanese solution to soaring house prices: don't have kids

IN TAIPEI the other day, a crane drove up to the front of the Parliament building. It lowered a man sitting in a plastic container shaped like a house, and suspended him in the air in a protest against the high price of real estate. Through a microphone, he urged onlookers to rise up against high housing prices, declaring: ''People without homes, slaves to property, stand up!''

It is not only in Australia that young people have seen their dreams of home ownership evaporate as house prices boil. Throughout east Asia, a crisis is building as cashed-up investors who fled the sharemarket in 2008 moved their money into real estate, sending prices soaring.

This matters because housing is not just an asset like shares or bonds. It is where we live. It's natural for investors to prefer the security of bricks and mortar. But as governments throughout the region are discovering, it is also natural for people to want to own a home - and to turn against governments that allow prices to soar out of their reach. In Taiwan, the costs have become particularly serious, as we shall see. Their would-be home buyers - ''snails without shells'' as they call themselves - have reacted by scrapping the other big expense facing young couples: children.

At home, the Rudd government last week reversed its 2008 liberalisation of foreign investment rules on real estate, and set up a unit to ensure the rules are obeyed. It also set up a joint working party with the states to ask why housing prices have soared out of reach. But that will work only if it tackles the single biggest cause: the tax-driven growth of rental investors, whose borrowing has grown 30-fold in 20 years, squeezing out home owners.

China, in the midst of a full-scale housing bubble, has now done so. After real estate sales revenue jumped 75 per cent in a year, its state council last week hit investors with tighter rules. Banks are now forbidden to lend investors more than 50 per cent of the sale price (in Australia, 100 per cent is common). Investors must now pay a premium of at least 10 per cent above the normal interest rate, while first home buyers receive a discount. New loans are banned to investors who already have one property. And there is talk of a tax on rental property ownership.

China's goal is to deflate the housing bubble before it bursts, derailing the world's economic locomotive. Wish them luck.

But Chinese buyers are looking abroad, and so are their neighbours. In a bookshop in Taipei a few days ago, amid all the books and journals in Chinese, I spotted an Australian magazine on the shelves: Australian Property Investor. Clearly, people in Taipei are buying Australian real estate.

But Taiwan itself is the best example of what can go wrong if governments let housing investors and market anarchy push prices out of ordinary people's reach, leaving young snails without shells.

Taiwan has become rich very fast, largely by inching its way into a central role in global IT and communications manufacturing. This year, the International Monetary Fund estimates, its GDP per head will overtake that of its one-time colonial master, Japan. Its economy is almost as big as Australia's, and growing twice as fast. Yet its new wealth shows only fleetingly amid the grimy, cramped apartments built in earlier, poorer times.

Taiwan is in the grip of a housing crisis worse than ours. It is a rich country, but wages and most prices are roughly half the levels here - because the government, like China's, holds down the exchange rate to keep its manufacturing globally competitive.

Yet while wages remain low, apartment prices in Taipei are close to those in Melbourne, particularly for anything modern.

Why can't they build more apartments? Because ownership of those grimy old apartment blocks is fragmented among dozens of occupants and investors. To demolish, even to upgrade, a developer must buy them all out, which is prohibitively expensive in time and money. There are classy new apartments on the urban fringe, on greenfields sites, but too few to meet the demand from occupiers and investors. So prices have soared.

So the snails save hard to buy a shell, and do without other things. That means, above all, they do without children, or with just one child. By 2008, Taiwan's fertility rate was the lowest in the world. Its women bear on average just 1.05 children over their lifetimes. The cost of housing is not the only reason, but analysts say it is the main one.

But not having children creates even bigger costs ahead. Right now, Taiwan has 6.8 people of working age for every retiree. But preschools are already closing for lack of children, and the population is set to shrink dramatically. By 2032, demographers project, Taiwan will have just 2.5 potential workers for every retiree - and by 2056, just 1.4. If nothing changes, Taiwan - like China, Japan and Korea - will slowly become economically unviable.

So far, that hasn't happened here. But if governments keep subsidising investors to outbid first home buyers and low income earners, it will. Snails want shells. Taiwan - and soon, possibly China - are showing us what else can go wrong when the price of shells soars out of the snails' reach.

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