Asia Times: Global Economy


	June 29, 2002	atimes.com

Global Economy

The numbers game of economic indices
By Alan Boyd

SYDNEY - Singapore and Hong Kong are the only two Asian nations that compete on level terms with the world community, according to the latest global appraisal of relative economic performance.

Economic Freedom of the World, an index released this week by a group of free-market lobbyists, does not list any other Asian economies in its top 10, though neighboring New Zealand comes in third and Australia ninth.

Taiwan, one of the most successful growth centers of the past two decades, is a modest 29th, Thailand 32nd, Japan 35th and South Korea 38th. The Philippines is 70th and Malaysia a lowly 79th.

Why Hong Kong and Singapore? Because of their "strong correlation between economic freedom and per capita income, economic growth and life expectancy", stated the authors. In other words, they fulfill the index's requirements for a growth system that is determined by markets and personal choice rather than government and that is accommodating to foreign trade.

No real surprise there, given that the study was inspired by small-government guru Milton Friedman with the backing of conservative groups such as the US-based Heritage Foundation and Cato Institute. Nevertheless, the countries farther down the list might contend that rankings are determined more by the motivation of their sponsors, and the weightings they put on particular economic sectors, than actual economic performance.

Thus, Cambodia comes in at 42nd, an extraordinary result for one of the poorest and least-developed nations in Asia, because it meets the basic demand of having non-interventionist government. Conversely, Malaysia slips down the list, despite an impressive economic recovery in the past four years, due to a tendency by its political masters to tinker with exchange systems, protect local industry and favor domestic suppliers.

In part, this bizarre logic can be explained by the growth that competitiveness indices themselves have seen since the 1997-98 East Asian economic crisis began to throw up a whole new lexicon of perceived structural deficiencies. The financial meltdown that began in Thailand was blamed variously on regulatory defects, the inefficient use of resources, lack of policies transparency, cronyism and corruption - all heady topics for business lobbies with a political drum to beat.

If there is a common agenda, it is probably based on an objective of securing greater market access for Western goods as the globalization debate heats up and liberalization deadlines under the World Trade Organization creep steadily closer. Whether the indices influence trade and investment decisions is unclear, but they undoubtedly provide a useful platform for multinationals to advance their commercial objectives.

Take the World Competitiveness Index, the Swiss-based scoresheet that has become the leading indicator of global business practices since it was set up in 1989 by the IMD management school. Its two prime backers are Alcan and Nestle. Published in April, the 2002 index relegates Singapore to fifth and Hong Kong to ninth, though they are still the highest-ranking Asian nations. New Zealand drops to 19th place and Australia to 14th.

Mystifyingly, IMD credits the three-point declines by the two city-states to "a huge turnaround in economic performance" since 2001, thus overturning the accepted wisdom that improved efficiency equals better growth. The United States turned in its worst growth performance for six years in the same period, yet managed to retain the crown as IMD's healthiest economy ahead of a phalanx of European countries.

So just how does Asia measure up to the rest of the world? There is probably no sure way of finding out in the absence of an equation that can truly reflect the myriad social and economic systems in play across the globe.

Is a predominantly subsistence economy in Indochina any less efficient in terms of wealth distribution than a modern industrial society? Does a socialist state prolong the life expectancy of the population with generous welfare handouts, or take it away by discouraging initiative? And how much weighting should be given to the absorption of transplanted technologies, keeping in mind that most originate in the same European or North American systems that set the parameters for the competitiveness indices?

Using the IMD formula, a successful economy is one that returns consistently high growth, has efficient government and business sectors and meets the essential infrastructure requirements of foreign corporations. Business efficiency is defined as "the extent to which enterprises are performing in an innovative, profitable and responsible manner", offering a battery of convenient interpretations.

Economic Freedom looks for market openness and countries that stick to (its) rules. A premium is put on the protection of intellectual property rights, favorable regulatory environments and sound monetary policies.

A third index, operated by the World Bank, combines these two concepts in four groups of criteria: macro and market dynamism; financial dynamism; infrastructure and investment climate; and human and intellectual capital. There is common ground among the three: essential ingredients are a productive labor force, high levels of gross domestic investment, sufficient labor skills to meet growth objectives and a healthy regulatory framework.

Asia fared relatively well in productivity terms until the mid-1990s, when it began to lose ground because of inflexible exchange systems, which made much of the region pay for its reliance on imported inputs.

Based on World Bank data, South Korea, Hong Kong, Singapore, Thailand and Indonesia filled five of the top 10 places for average annual growth in real gross domestic product (GDP) per worker in 1980-90. Close behind were India, Japan, Myanmar, Sri Lanka, Malaysia, China, Bangladesh and Pakistan. The average annual growth of the five leading Asian economies in GDP per worker was 5.1 percent, compared with 2.7 percent for Ireland and 2.4 percent for Britain, the two leading developed nations on the list.

More recent productivity data are incomplete. However, GDP per hours worked in East Asia (including Singapore but not Japan) during 1998 amounted to 42.7 percent as a ratio of US output; Japan recorded 65.6 percent, Southeast Asia 12 percent, South Asia 7.2 percent and China 8.6 percent.

Of course, these figures do not take into account the more labor-dependent structure of Asian production. It is no great surprise that China's labor input as a ratio of total population in the same year was 114.6 percent of the US level and East Asia's 126.1 percent.

Most countries in this region also compete surprisingly well for capital investment, despite smaller stock markets and a more limited range of financial instruments - even though banks have tightened credit lines since 1998 in response to rising debts. Data for the preceding decade show that China had the fourth-highest gross domestic investment in the world. Malaysia was in fifth position, Thailand sixth, South Korea eighth, Singapore 11th and Indonesia 14th.

Asia's biggest failings, not surprisingly, have been its neglect of regulatory supervision and a miserly investment in the skills that will be needed to propel the regional economy to the next level of production. Both are emotive issues in investment circles, and provide a useful outlet for prejudicial judgments by Western competitiveness indices. No matter that the supposedly reckless banks get the bulk of their cash from European and North American lenders.

Investment in information technology (IT) in Asia averages only 2-6 percent of GDP and 3-10 percent of all investment according to the World Bank, though this picture is distorted by the wide variations in development status. Japan, Singapore and Hong Kong all exceed the IT investment levels by France, Germany and Belgium, and are not far behind the US, Britain and the Netherlands. But at the other end of the table, India and Indonesia spend only 1.9 percent of GDP.

Similarly, industrialized Asia is almost matching graduate numbers for scientists and technicians in the more advanced countries, but most of Southeast and South Asia is at least a generation behind. Heading the global chart is Japan, with seven graduates per 1,000 people. South Korea comes in at No 15, Singapore 24th, Malaysia 28th, India 42nd and Thailand 52nd.

And the final scorecard for economic efficiency? Somewhere in between Latin America and Western Europe, but with plenty of ground still to make up on North America.

Give it another 15 years and the European Union will be doing most of the chasing. Unless the index jockeys come up with a new strategy for holding Asia back.

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