ASIA’S RAPID ECONOMIC RISE: POSSIBLE EFFECTS ON US AND EUROPEAN ECONOMIC POLICIES – November 26, 2006

The rapid economic growth of China, India and much of the rest of the most populous continent is causing leaders and the voting public in the US and Europe to sit up and take notice. The repercussions of Asia’s increasing economic power are frequent topics of discussion in government offices, boardrooms and factory lunchrooms across the Western world. The decisions made in the West whether to embrace the opportunities that come from an additional driver of the global economy or to attempt to prevent a shifting of relative economic power will have a major impact on the lives of the people of Asia as well as the populations of the US and Europe.

ASIA’S ECONOMIC RISE

The latest numbers published by the Asian Development Bank show economic growth rates across Asia (with the exception of Japan) are far higher than in the US or Europe. While the living standards of people in China or Southeast are still on average far lower than those found in the USA or Europe, the gap is narrowing. Both "Developing Asia" and "East Asia" are projected to continue to grow at over 7% rates in the near future while the USA is forecasted to grow at around 3% while Europe's expected growth is slightly lower in the 2% range. The 21st century may not be the century where Asia replaces the US and Europe as the region of the world with the highest standards of living, however, people in Western countries are going to have to come to grips with a world where the balance of political and economic power is more evenly spread across the globe.

IS ECONOMIC GROWTH A COMPETITION?

While Asia's economic rise is a threat to the West's relative economic position, the overwhelming majority of research indicates it is not a threat to the standards of living of people in the USA and Europe, in fact research indicates the opposite is true. Overholt in his 2005 report for the Rand Corporation astutely identified the benefits to America of an economically growing China. Likewise Carla Hill in her 2005 report in the Asian Development Bank Review made a very strong case about the win-win nature of international trade. Openness to foreign investment and trade is a proven method to improve the quality of lives of everyone, while protectionism and isolation is a proven method of slowing growth and lessening prosperity. However, Carla Hill also warns that an understanding of economics and the part that international trade plays in promoting economic growth is not widespread throughout societies. It is a bit ironic that the citizens of China, after experiencing the pain from poor economic performance coming from decades of isolationism are now some of the most ardent supporters of free trade while in the US and Europe, areas which have benefited and prospered from more open trade, the support for free trade is diminishing and calls for protectionism and isolationism are increasing.

While economic theory and nearly all credible empirical evidence supports the concept that free trade benefits societies as a whole, it does not automatically benefit all members of a society. In competitions, there are winners and losers. Opening borders to increased international trade and investment will inevitably result in the need for readjustments by the economic players and these adjustments can be quite painful for individuals involved. Furthermore, special interests are unlikely to quietly accept economic policies that hurt them personally, regardless of overall effect on the nation's economy. Special interest groups who lose out in the international competition can be counted on to make emotional and often nationalistic pleas for protection against "unfair" practices of others. Adding strength to these calls for protectionism is the fact that in most cases, jobs lost to competitors from overseas can be directly attributed to foreign competition; while jobs gained from free trade quite often are the indirect result of increased overall efficiencies in the economy and it is often difficult to attribute the creation of specific jobs to free trade across borders. In the United States, there is no shortage of claims that American jobs are being sent abroad. While it is true, open borders have created millions of manufacturing jobs in China, Asia and other developing countries; it is also true that the American economy has been simultaneously enjoying strong economic performance and the recent report of unemployment under 5% shows joblessness is at a historically very low level for the country.

A case could be made the economic relationship between Asia and the West is more complementary than competitive. The average age and educational levels in Western countries are rapidly rising, and when mixed with manufacturing capabilities and exploding consumers markets throughout Asia a “Yin-Yang” effect can be created resulting in a balance in the world's economy that benefits all.

ASIA’S INDIRECT THREAT TO THE WEST

While the evidence does not suggest Asia's economic rise poses a direct threat to the wellbeing of the citizens of the US and Europe, the perception of Asia's new found economic clout being a direct threat poses an indirect threat. The indirect threat comes from the possible responses of Western governments, most likely due to public demands, to the (re)emergence of Asia. Five scenarios on the impact of the rise of Asia will have on the West have been identified. 

Scenario 1

A united Western World will attempt to isolate itself from competition from Asia to a significant extent. This scenario would slow growth throughout the US and Europe while Asian nations would most likely respond by integrating regionally, most likely centered around the huge economy of China, and continue to grow, but most probably at a slightly lesser pace. This scenario could also result in an economic “Cold War” where the West and Asia would be struggling to get aligned with the rest of the world, in particular the resource rich areas of the Middle East and Africa. This scenario would appear to be the most unlikely. Acquiring and maintaining Western solidarity against the “Yellow Peril” does not appear to a very likely possibility.

Scenario 2

Both the US (North America) and Europe isolate themselves from international trade to a significant extent. Numerous researches projects lead by Indiana University’s Alan Rugman have already demonstrated that most international trade is regional in nature and not global. Therefore one could claim that this scenario is already taking place to some extent. Even without protectionism and isolation, geographical location and cultural distance seem to limit the level of trade over large physical distances. However, increased protectionism and isolationism within the US and Europe would most likely result in expediting the development of Asian political and economic regionalism. In fact, Asian regional integration is already happening to some degree. According to a recent United Nations’ report, Asia is the area where the most activity in creating regional and bilateral trading agreements is taking place.

Under this scenario, three powerful trading blocs are likely to emerge. The European Union, North America (NAFTA) which would possibly incorporate Central and South American to a limited extent, and Asia, possibly bound together under ASEAN plus three or a similar type of regional trade agreement. This scenario would lessen the access Western consumers have to inexpensive goods manufactured in Asia and therefore their standards of living would be lowered, while Asian firms would have limited access to Western capital, technology and consumer markets. A lose-lose-lose scenario, however Asia may be the region that would be harmed the least in this scenario. The fact is, investment into China and the rest of Asia for the most part comes from Asia itself and the importance of Western capital is usually overstated. Also, in Asia, the number of students studying engineering and technology far outnumbers those found in the West and the technology gap is narrowing fast. Moreover, the exploding purchasing power of Asian consumers could make up for the lack of access to markets in the West. The USA could minimize the damage of this scenario by integrating more with the nations of Central and South America to gain access to relatively lower labor costs and growing markets. Likewise Europe could integrate the more developed Western areas of Europe with the lesser developed and faster growing parts of Eastern Europe. This scenario would appear to be far from improbable.

Scenario 3

Europe becomes more isolated and the US becomes more economically and politically integrated with Asia. To some extent, this trend is being seen to a very limited degree. The percent of the US’s foreign trade that is conducted with Europe is declining while the percentage with Asia is rising. To make a sweeping imperfect generalization, Europeans are more leery of allowing the market to do its work and prefer government interventions than Americans. Furthermore, in Asia, central planning of economies is declining rapidly but it is not being replaced by great public outcries for extensive indirect government rules and regulations. In fact, many pundits have predicted the more market based economies of Asia will give them a competitive advantage over the welfare state structures found in Western countries in the upcoming years. Under this scenario, the current situation of fast growth in Asia, moderate growth in North America, and slower average growth in Europe would probably continue and the differences could even grow. This scenario is definitely in the realm of possibilities and is the worst possible scenario for Europe.

Scenario 4

America becomes more isolated and Europe and Asia join forces. For the USA, this would be the worst possible scenario. This scenario could be the result of home-grown support for isolationism and protectionism within the USA or could be the result of fervent anti-Americanism in the rest of the world pushing America away. While not impossible, this scenario seems fairly unlikely as historically, protectionists and isolationists in the US have won a number of battles, and are likely to do so again in the future, but the proponents of market forces have nearly always won the wars. Even when the more “socialistic” Democratic Party wins power it usually actually implements economic policies which are very similar to those of the more “free-market” oriented Republican Party. While anti-American sentiment is not uncommon in Asia, it has not reached the fever pitch it has in Europe and the coming end of the Bush administration in a few years will result in the removal of the symbol and target of so much of the anti-American rhetoric in Europe. This may allow for new cross-Atlantic perceptions and relationships that are less antagonistic and emotional, however it should be remembered the recent US-Europe divide was not solely about George W. Bush and the Iraq War and the divide will remain to some extent after both of these factors are no longer part of the scene. Therefore, it would seem unlikely that there will be powerful political pressures exerted on European and Asian countries to join together and shun America.   

Scenario 5

The world moves towards “globalization” where market conditions primarily decide trade patterns rather than political decisions. Research overwhelming indicates that the world we live in is not in a global state and national and other political boundaries remain important diving lines of economic activities despite the rhetoric about globalization. Economic theory would appear to indicate that this scenario would create the most benefits for the most people on the planet, but political history also indicates that special interests that would not benefit from this scenario will fight fiercely to prevent this scenario from becoming a reality.

WHO DECIDES?

It will not be the economists and academics who will ultimately dictate the policies of Western government in response to the economic growth seen in Asia. The decisions will be made by politicians implementing the will of the people. Will the more “rational” arguments based on empirical evidence sway the people or will the more emotional and nationalistic arguments carry the day? It would appear very probable that a combination scenario could also occur. A combination of the emergence of three strong trading blocks (Scenario 2) occurring while in some areas of trade the world becomes more global (Scenario 5) can not be discounted, in fact a strong case could be made this is a very likely situation that may be seen in the future. This combination global-regional economic system may not be the optimal choice for economic growth and poverty reduction; but it may be the best choice available considering the current political realities of the world.

Dr. Scott A. Hipsher

-------------------------------

The Author of the article holds a Ph. D. in Management Science from Capella University, MBA degree from Bangkok University and B. Sc. from the University of Maryland. He is presently a lecturer at Bangkok University, Webster University and Mahidol University in Thailand. He is a member of the International Academy of Business. Mr. Hipsher is the co-author of the forthcoming book "The Nature of Asian Firms: An evolutionary perspective" (2007).

-------------------------------

This article is

also available in

Polish translation at