East Asia Congress, Kuala Lumpur, December 4, 2008

1. Views expressed in this presentation do not necessarily represent Khazanah’s and should solely be attributed to the author. The Growing Economic Weight of East Asia: Causes and Consequences Dr. Albert G. Zeufack Director Khazanah Research and Investment Strategy East Asia Congress, Kuala Lumpur, December 4, 2008

2. Key points • East Asia has achieved an exceptional economic performance since World War II, shifting the Industrial Center to East Asia and the USA and Europe to the Periphery; to use Raul Prebish, 1959 terminology. • How this has happened is through: • Trade (Integration to International Trade, and Densification of Regional Trade) • Better Integration to International Production Networks • Densification of Regional Investment Flows • Human Capital and Technology • Finance • A combination of sound economic reforms in a favourable international environment. • Is East Asia domination of the World Economy the “Inevitable Consequence” of this situation? I argue that: • It’s not Inevitable; And if it does happen, may not happen that soon!

3. Outline • 1. East Asia’s Impressive Economic Performance Since World War II • 2. How has East Asia Become the Center? • 3. Can East Asia Lead the World Economy? Not So Soon!

4. GDP and its Growth as the Measure of Economic Might/Weight • “A growing GDP is evidence of a society getting its collective act together. As its economy grows, a society becomes more tightly organized, more densely interwoven. A growing economy is one in which energies are better directed; resources better deployed; techniques mastered, then advanced. It is not just about making money.” • … • The Growth Commission Report, 2008

5. 1. East Asia’s Impressive Economic Performance Since World War II Source: The World Bank, The East Asia Renaissance, 2007

6. Trends in world GDP and East Asia contribution Increasing role in driving world growth.. Source: OECD, IMF

7. East Asia is Home to Most Economic Growth Super-Stars! • Nine out of the Thirteen growth success stories in the postwar period are in East Asia. These are countries that have grown by more than 8.5% in average for more than 25 years. These are: • China;Hong Kong (China); Indonesia; Japan; the Republic of Korea; Malaysia;Singapore; Taiwan (China); and Thailand. • Non Asian are: • Botswana; Brazil;Malta; Oman. • More remarkable: • Five out of the Six economies which continued to grow all the way to HIGH-INCOME levels are in East Asia: Hong Kong (China); Japan; Korea; Singapore; and Taiwan (China).

8. 2. Why Has East Asia Become “The Center”? • “Economists account for growth with the triple formula of technology, capital, and human capital. But these are only the proximate causes of growth. • Its deeper roots draw on advances in science,finance, trade, education, medicine, public health, and government, to name but a few of the factors in play.” • The Growth Commission report, 2008

9. East Asia’s Contribution to Global Trade

10. A Densification in Regional Trade Source: The World Bank, The East Asia Renaissance, 2007

11. Better Integration in International Production Networks

12. A Densification in Regional Investment Flows Source: The World Bank, The East Asia Renaissance, 2007

13. Human Capital

14. Science and Technology

15. Finance: East Asia as a region now accounts for greater proportion of World FX reserves

16. Finance: China has bypassed Japan as the largest holder of US Treasuries End-3Q 08 End-2000

17. Sound Economic Reforms and A Favorable International Environment! • Sound Economic Reforms Matter: the Chinese Example. • China’s Market-Socialism (an oxymoron?) since 1978 under Deng Xiaoping has led to : • Land reforms, • Free Economic Zones, • Freeing up small enterprises in manufacturing, • Town and village enterprises (TVEs)… • China’s exchange rate consolidation in 1994-1997 definitely made the RB cheaper than the USD. • Organized Migration from rural to urban areas to keep low labor costs. Chinese Labor costs were 1/40 of US costs in 1995-99, but 1/20th around 2005. • International Trade Openness/Market Access • Permanent Normal Trade Relationship (PNTR) status with the USA; • The permanent status of the MFN Clause with the USA.

18. 3. IS EAST ASIA DOMINATION OF THE WORLD ECONOMY THE INEVITABLE CONSEQUENCE? • Can China overtake the USA as the world largest economy in the world? Or rather by When? • It may not happen! • Dreams of decoupling are long gone! • The internal integration remains work in progress in East Asia (Growing inequality, regional and ). • China as most of the East Asian MICs may have to change Development paradigm. The China that is driving the rest of the country is already having middle-income country problems as Malaysia, Thailand and Indonesia have! • Asian savings is not financing domestic investment. Asian FX reserves are mainly channelled to US Treasuries.

19. If It Does Happen, It May Take Longer Than Anticipated! • In 1979, Professor Kravis (UPenn), in a pioneering effort, put China’s real per capita GDP for 1975 at 12.3% of the US value; just below the Philippines at 13.2% and nearly double India’s position at 6.6%. Resident Chinese economists protested that his estimate for China was too high! • PPP estimates for economic size and living standards for several developing countries including China have been revised downwards. • The International Comparison of Prices (ICP) project recently released improved estimates of different countries’ GDP and per capita GDP calculated on a purchasing power parity (PPP) basis. These new estimates show the Chinese economy to be about 40 percent smaller in PPP terms than previously thought. • World Bank’s real growth projections suggest that it would take around 20 years with Japan-style real exchange rate (RER) appreciation, and almost 40 years with Thai-style RER appreciation.

20. Thank you