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Home > Macroeconomic Issues Viewpoints > Why Turning Growth into Profit Is Challenging for Asian Economies

Macroeconomic Issues Viewpoints

Why Turning Growth into Profit Is Challenging for Asian Economies

by Peter Elston


Peter Elston is head of Asia-Pacific Strategy and Asset Allocation, responsible for Aberdeen’s multi-asset business in the region as well as articulating and communicating investment strategy. He has lived in Asia since 1988, joined Aberdeen in 2008, and is based in Singapore. Peter began his career at UK pension fund manager Mercury Asset Management, where he spent 11 years. For most of this time he managed Asian equity funds from Tokyo, Hong Kong, and Singapore. Peter appears regularly on TV, and has had numerous articles published. He graduated with a BA in mathematics and Oriental studies from Cambridge University.

You are based in Singapore and specialize in Asian economies. How much of a slowdown in growth is Asia experiencing now, and what are the impediments to regional growth?

As might be expected, Asia presents a very complex, mixed picture. Asian local currency bond markets performed well through the end of 2011 despite concerns over a sharper slowdown in the region and despite the shadow cast by credit downgrades in the Eurozone. Asian equities saw double-digit losses through 2011, but most stock markets in the region saw stocks rising by the end of the year.

Singapore itself is an interesting case. It has massive government debt, but this debt has been generated in the process of managing its exchange rate. It mops up a lot of current account liquidity by issuing government bonds, which are almost all held by local investors. For much of the time debt issuance in Singapore is not about the government’s funding requirements but has to do with managing foreign reserves. Singapore’s trade profile is distorted, in a sense, by the fact that the country has a massive refinery capacity. It imports oil to process in its refineries and exports the finished fuel. This is a very deliberate value-added play by the Singapore government. The refinery capacity provides an engine of growth for the economy and helps the country to get round the fact that it is 100% reliant on imported oil for all its energy requirements.

However, because the revenues from refining are very substantial, as are the costs of oil imports to feed the refineries, they distort the picture one gets of the Singapore economy. So the export figures for Singapore are always broken down into oil and nonoil exports, which provides a much better picture of how the economy generally is working.

What we see when we look at the nonoil figures for the economy is that Singapore put in some stunning growth in the initial stages of the recovery after the 2008 crash. In 2009, for example, the economy grew by 20% on an annualized basis. However, by mid-2010 this had started to weaken markedly. More recently, weaknesses in the economy have become more pronounced across Asia, not just in Singapore. Korea released fourth-quarter 2011 numbers in January 2012, and they were pretty weak. China, too, continues to slow, and its growth now looks likely to be just over the 8% mark, well down from the 10–11% growth it posted in 2010.

Is the decoupling of emerging economies a myth then?

The point is that all the major Asian economies are exposed to the advanced economies. There is a long-term decoupling trend, with domestic Asian demand taking over from external demand, but that is a very long-term phenomenon. Medium-term trends in Asia will remain heavily affected by what goes on in advanced economies.

There is a very substantial volume of intra-Asian trade, but what is key is the location of the final demand. If it is all intra-Asian trade making subassemblies for final export to the United States or Europe, then everything fails if Europe and the United States fail. Basically, you export to pay for the imports that you need to develop your own economy. It follows, then, that naturally—over time—you get a deemphasizing of exports.

The world economy has progressed over the last decade or so through globalization. In broad terms, the whole process of globalization so far has been one in which the developed world outsourced a lot of its manufacturing of lower-value goods to emerging countries. That was very advantageous for developed markets. It enabled them to keep their inflation in check and to move their economies in other directions in terms of technologies and services.

The big issue with outsourced manufacturing, however, concerns the consequences of developing a reliance on other countries to do your manufacturing for you. Unemployment in the West did not rise substantially following the start of the process of globalization. It is only in the last four years or so that the cracks have really begun to show. They are visible over the last decade, however, if you look at factors such as wage growth. Wages in the United States, for example, have been flat for a decade or more. The debate now in advanced markets is whether manufacturing jobs should be repatriated—and whether in fact it is possible to reverse the trend. In effect, we are moving into an era when the debate is between globalization and a return to protectionism.

However, trade is very different now to what it was in the 1930s when you had the Smoot–Hawley Tariff Act as a reactive protectionist measure to the Great Depression in the United States. In the 1930s all countries produced pretty much the same kinds of goods, and what was exported was the surplus. Now that is not the case. China specializes in some things, such as low-value manufacturing, Japan does other things, such as auto manufacture, the United States does technology, and so on. Subassemblies and components for these specialisms are sourced globally. So when you start introducing protectionism into this complex web of trade relationships, you really shoot your own feet off. This goes a long way toward explaining why the knee-jerk protectionism that came somewhat to the surface after the 2008 crash failed to gather the momentum that it did in the 1930s. Multiple specialisms keep everyone at the table, playing nicely together.

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Further reading


  • Kahneman, Daniel. Thinking, Fast and Slow. New York: Farrar, Straus and Giroux, 2011.
  • Latané, Henry A., Donald L. Tuttle, and Charles Parker Jones. Security Analysis and Portfolio Management. 2nd ed. New York: Ronald Press, 1975.
  • Mandelbrot, Benoit B., and Richard L. Hudson. The (Mis)behavior of Markets: A Fractal View of Risk, Ruin, and Reward. New York: Basic Books, 2004.
  • Poundstone, William. Fortune’s Formula: The Untold Story of the Scientific Betting System that Beat the Casinos and Wall Street. New York: Hill and Wang, 2005.
  • Smithers, Andrew. Wall Street Revalued: Imperfect Markets and Inept Central Bankers. Chichester, UK: Wiley, 2009.

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