March 2, 2017
In this year’s regional study on Asia-Pacific (APAC) we put an emphasis on two major economic topics. First, we assess the potential impact of Trump on Asia. Second, we have conducted an economic and institutional comparison between the two Asian giants: China and India. In our view, Trump’s policies present a downside risk for Asia. However, China and India have the capacity to become the world’s new global growth catalysts, which is welcome in a time when the US is more and more reluctant to fulfil its role as global leader (see the column (in Dutch): Confucius de topcoach). Especially China seems to have the potential to step up as global economic leader of the pack in the medium term, but the government will have to tackle major unbalances and risks within and outside its economy .
The (potential) impact of Trump on Asia-Pacific
President Trump’s policy regarding Asia presents a downside risk for APAC’s economy and security situation. Trump’s first moves in the geopolitical arena were met with much apprehension by Asian countries, but he has softened his political stance on US foreign policy, compared to his campaigning rhetoric. Trump still has to unfold his global trade plans, but if the US raises trade barriers,this is expected to have major implications for the APAC region. Even more so if there would be protectionist retaliation (for example by China), as this could, in a bleak scenario, lead to a trade war.US security actions in the South China Sea or increased military presence in South Korea/towards North Korea could trigger a hard line response from China, possibly resulting in a greater level of militarization. Another concern for some Asian countries would be further tightening of US monetary policy by the Federal Reserve, as it could lead to increased capital outflows.
Will China be the world’s new growth catalyst?
Rising US protectionism creates opportunities for Asian countries to fill the void. China can move up to the center stage, but the government will have to tackle major unbalances and risks within and outside its economy. Authorities face a major challenge to meet desired reduction of excess production capacity in heavy industries, scale down on its corporate and local government debt pile and address unhealthy developments in the housing market. On the external environment, political tensions have to be relaxed, capital markets liberalization has to speed up and trade barriers lowered. In this respect, the so-called ‘One Belt, One Road ’ (OB OR) initiative could cement China at the centre of a hub-and-spokes trading network. Addressing internal and external imbalances would allow China to take up a credible leadership role in the global economy.
Unleashing China and India’s growth potential (1): productivity growth
China and India are the largest contributors to global growth, but have to foster productivity growth in order to avoid the so-called middle income trap. Currently, both countries perform poorly on innovation and human capital. If China and India would be able to implement an ambitious innovation and education agenda in combination with an improvement of their institutional context, they could reap substantial economic gains. These gains could be as high as USD 9.6trn of additional value added in China and India by 2025, which is equivalent to 50% of US GDP today. For more technical information on this calculation: see Why emerging economies are (un)successful in avoiding the middle income trap.
Unleashing China and India’s growth potential (2): institutional quality
Next to productivity, institutional quality is a key element for supporting economic growth. India and China generally differ in terms of institutional quality, though they share some comparisons historically. By looking at seven institutional indicators for measuring differences across both countries, one can state in a simple manner that India only outpaces China on areas of world governance because of a substantially higher score on voice and accountability. On the ease of doing business index China performs better on every aspect.