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The Asian Growth Models and Asia's Challenges

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The Asian Growth Models and Asia's Challenges The Asian Growth Models and Asia’s Challenges Bernard Yeung Dean Stephen Riady Distinguished Professor NUS Business School 2nd Annual OECD WPC World Pensions & Investments Forum Feb 2012 Copyrights Bernard Yeung 2012 Global Growth Trends favor emerging markets Copyrights Bernard Yeung 2012 Asian countries grow fastest (Q4 07 to Q2 11) Copyrights Bernard Yeung 2012 China and India lead the growth outlook Copyrights Bernard Yeung 2012 Asia trends? 45000 40000 35000 • Huge growth potentials • Grow internal consumption China India 30000 • Talent, capabilities, and 25000 resources constraints Indonesia Japan 20000 • Rising costs GDP per capita GDP per 15000 United States 10000 5000 0 Copyrights Bernard Yeung 2012 Can Asia get there and how it solves the growth bottleneck? • Stylized taking stock of the Asian growth models • Consequences and challenges Copyrights Bernard Yeung 2012 The generic of Asian growth models • “Big push” (Rosenstein-Rodan 1943 and Murphy et al. 1989) – Growth needs finance and the right ecology – Individual firms underinvest • Not internalizing pecuniary spillovers • Transaction difficulties among vertically related firms – Government needs to do the financing, pushing and coordinating • Asian practice – Implement Big Push through result oriented business groups • Government and SOEs – e.g., China • Government and big business groups – e.g., Korea (Japan too) Rosenstein- Rodan Copyrights Bernard Yeung 2012 China’s growth • Initial stage – a mechanical growth story – Outsourcing (ICT) brought manufacturing to China’s underemployed labor • Then, save to invest • But, why not other countries? – The Chinese Communist Party’s command and control scheme Copyrights Bernard Yeung 2012 CCP’s governing scheme for growth • CCP system: – A pyramidal hierarchy: • Central provinces cities counties … • Promotion by tangible economic growth – National wide, city by city, and province by province, growth tournament – State-owned banks and corporations are direct economic vehicles for growth Copyrights Bernard Yeung 2012 How significant? • SOEs – 116 Centrally owned SOEs own • More than 35% of corporate assets • more than 20,000 subsidiaries – 147,476 lower level governments’ SOEs – More than 70% of total corporate assets • State owned banks – Non state owned banks’ assets < 5% • CCP has a firm “command and control” grip – Control the appointment and promotion of executives in SOEs, state controlled banks, and in all of their regulatory bodies Copyrights Bernard Yeung 2012 The expedient result of China’s monetary stimulation illustrate CCP’s command and control big push model 5.0 80 Others 4.5 70 4.0 60 Joint-Stock 3.5 Commercial 3.0 50 Banks State-Owned 2.5 40 Commercial 2.0 30 Banks 1.5 Policy Banks 20 1.0 10 0.5 Bankers' 0.0 0 Confidence Index 2007… 2007… 2007… 2007… 2008… 2008… 2008… 2008… 2009… 2009… 2009… 2009… Loan Balance Increment (trillion yuan RMB) Copyrights Bernard Yeung 2012 Banks lend to large SOEs (low political risk) NON_SOE 14.82% L_SOE C_SOE 25.49% 59.68% Distribution of Loans to Companies in 2009 Sources: Genius Finance Database. Copyrights Bernard Yeung 2012 Annualized Real Growth Rate of Fixed Asset Investment 60% 50% 40% 30% 20% 10% 0% 05Q1 05Q3 06Q1 06Q3 07Q1 07Q3 08Q1 08Q3 09Q1 09Q3 SOE Non-SOE Source: National Bureau of Statistics, China. Copyrights Bernard Yeung 2012 China’s stimulus has achieved extraordinarily large and quick responses. Annualized Growth Rate (%) 15.0 China 10.0 US 5.0 EU 0.0 Japan OECD -5.0 India -10.0 2007Q1 2007Q3 2008Q1 2008Q3 2009Q1 2009Q3 2010Q1 Sources: National Bureau of Statistics, China; OECD; Ministry of Statistics and Programme Implementing, India. Copyrights Bernard Yeung 2012 Distortionary? • SOEs did not really invest, bought land, – 94 (jumped from 16 previously) of the 129 central SOEs invest in housing development in 2009 • They bid up land and house prices Copyrights Bernard Yeung 2012 stimulation package Central SOEs’ biddingpremiumsurged with the Constant Quality Price in RMB / m2 10000 12000 2000 4000 6000 8000 Copyrights Bernard Yeung 2012 0 2003Q1 2003Q2 2003Q3 2003Q4 N-SOE L-SOE C-SOE 2004Q1 2004Q2 2004Q3 2004Q4 2005Q1 2005Q2 2005Q3 2005Q4 2006Q1 2006Q2 2006Q3 2006Q4 2007Q1 2007Q2 2007Q3 2007Q4 2008Q1 2008Q2 2008Q3 2008Q4 2009Q1 2009Q2 2009Q3 2009Q4 2010Q1 Sources Constant Quality Housing Price Index in 35 Major Cities, China Index in35 Major Constant Quality HousingPrice • : Institute of Real Estate Studies, Tsinghua, China. Tsinghua, : Institute ofReal Estate Studies, Stimulations 2000Q1 = 100 100 150 200 250 300 Copyrights Bernard Yeung 2012 2000Q1 2000Q3 2001Q1 2001Q3 2002Q1 2002Q3 2003Q1 hot housing markets 2003Q3 2004Q1 2004Q3 2005Q1 2005Q3 2006Q1 2006Q3 2007Q1 2007Q3 2008Q1 2008Q3 2009Q1 2009Q3 2010Q1 Government “big push” created distortions • Created high land and house prices – Painfully high cost of living for many – Empty houses = costly piggy banks • Create a local government debt problem? – Local governments use expected land leases revenues to support loans • “China said local governments owe debt equal to more than a fourth of the country's economic output” • Some analysts say that the actual total could be even higher – WSJ Jun 27 2011 Tom Orlik. • Chinese provincial debt reaching crisis point CNN Jan 6th 2012 (exaggerated) Copyrights Bernard Yeung 2012 The case of Korea – 1961 to 1979 • US political & economic unreliability – Collapse of US action in Vietnam – US military downsizing in Asia – Oil price shocks & perceived US weakness – Textiles trade barriers in US – Need arms build-up, domestic suppliers • Heavy & chemical industries drive – National Investment Fund (NIF) loans Park Chung Hee • For heavy & chemical industries capex • Direct loans to selected firms at subsidized rates • Government – business-family cooperation • Financed by printing money • HCI policies inflation, debt/economic crisis Copyrights Bernard Yeung 2012 Aug. 3rd 1972 Measure (post1969 crisis) • Aug. 3rd 1972 Emergency Decree = bail out – Moratorium (3 years) on all debts to curb lenders, rates rewritten down – SOE loans revised terms • Industrialists – Publicly accept blame – But, bailed out, produced jobs • Yet, the administration lost its power grips over time • A new era of “deep” government-business cooperation Copyrights Bernard Yeung 2012 After the crisis, Park exhorted firm owners to list 7% 14% Other Issues as % of GDP 6% Rights Offerings as % of GDP 12% Initial Public Offerings as % of GDP 5% 10% Market Capitalization as % of GDP (right axis) 4% 8% 3% 6% 2% 4% 1% 2% 0% 0% Copyrights Bernard Yeung 2012 Pressure to List • Chaebol assume pyramidal structure • Allows massive leveraging of a respectable family fortune, sufficient to control the “family firm” at the apex, into indisputable control over a constellation of firms that collectively contain assets worth many times more Copyrights Bernard Yeung 2012 Gathering Concentration of Corporate Control 18 Top 5 16 Top 10 14 Top 20 12 Top 46 10 8 6 4 2 Value Added as Percent of GDP Added as Percent Value 0 1973 1974 1975 1976 1977 1978 Copyrights Bernard Yeung 2012 Samsung Expansions Retail & Service Food & Beverage Textiles Finance Media Industry Electronics 61 Ulsan Fertilizer 63 Shinsegae Dept. Hanl Nilon Dongbang Life Joon‐Ang Dev. Taehan Oil Store Donnam Securities Dongyang Broadcasting Dongyang Fire & Jong‐Ang TV Marine Ins. 64 Hankook Fertilizer 65 Jopong‐Ang Daily News Junju Paper 66 Seoul FM Korea Hungjin 68 Samyoung Inc. 69 Cheil Sugar S. Electronics S. Sanyo 70 S. Display Devices 71 Hankuk Computer 72 Sunil Dextrose Cheil Synthetics 73 Shilla Hotel Samri Textiles S. Electric Parts Electro‐Mechanics S. Corning 74 Shinsegae Store Cheil Comm. S. Heavy Ind. S. Petroleum 75 Joong‐Ang Engineering 77 Kyungju Hotel S. Precision S. GTE Shilla S. Shipbuilding S. Semiconductor S. Aerospace Taisung Heavy Ind. S. Eng. & Construction 78 Donglip Ind. 79 Yunpo Leisure Dev. Joon‐Ang SVP Copyrights Bernard Yeung 2012 Illustrate: Business group and big push • A business group “Big Push” across multiple sectors • Koo Cha-Kyung, Chairman of Korea’s LG – “My father and I started a cosmetic cream factory in the late 1940s. At the time, no company could supply us with plastic caps of adequate quality for cream jars, so we had to start a plastics business. Plastic caps alone were not sufficient to run the plastic molding plant, so we added combs, toothbrushes, and soap boxes. This plastic business also led us to manufacture electric fan blades and telephone cases, which in turn led us to manufacture electrical and electronic products and telecommunications equipment. The plastics business also took us into oil refining, which needed a tanker shipping company. The oil refining company alone was paying an insurance premium amounting to more than half the total revenue of the largest insurance company in Korea. Thus, an insurance company was started. This natural step-by-step evolution through related businesses resulted in the Lucky-Goldstar (LG) group as we see it today.” Copyrights Bernard Yeung 2012 Park’s Legacy led to a Chaebol big push $3,500 Korea, Rep. $3,000 $2,500 Malaysia $2,000 $1,500 Philippines $1,000 $500 Copyrights Bernard Yeung 2012 1960 1965 1970 1975 1980 Chun’s Legacy 8000 7000 Portugal 6000 Argentina 5000 South Korea 4000 3000 2000 1000 0 1980Copyrights Bernard Yeung 1982 2012 1984 1986 Legacy of the First Democratic Decade 13000 12000 11000 Korea, Rep. 10000 Portugal 9000 Argentina 8000 7000 6000 5000 4000 1988Copyrights Bernard 1990 Yeung 2012 1992 1994 1996 India? • Low growth because
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