Savings and investment

The World Bank reports that higher investment and GDP growth in East Asia has been primarily domestically financed. Foreign Direct Investment (FDI) has been a complement to domestic savings and has tended to increase investment and reserves rather than consumption. World Bank (1995a) projections in 1995 were for 6% average annual growth in real gross domestic investment in Asia's developing countries in 1995-2004 with most of this, as in the past, to be financed by higher domestic savings. The high domestic savings of developing Asia may well become even more critical in future given that, according to the AsDB (1996), in the industrial countries outside Asia (sources of FDI), savings rates have been falling and will continue to do so with the ageing of their populations. This tendency is also emerging in Japan, a major source of external capital for developing Asia. East Asia has maintained and even increased its national saving and investment rates as foreign capital also increased.

It is private funding that is driving the region's economic development. In 1995, the World Bank estimated that total value of bonds, equity funding and other private foreign direct investment (FDI) to East Asia jumped from US$13 billion to US$66 billion between 1990 and 1993; FDI flows alone more than tripled to US$36 billion, much of the increase going to PR China. The share of investment in GDP rose by 3.5 percentage points. Table 14 gives summary information on funding flows to the region; table 15 focuses on the FDI element of it.

East and Southeast Asia account for a major share of the FDI going to the South. Edwards (1997) reports that five countries in Asia took 38% of all FDI going to least developed countries (LDCs) between 1980 and 1990, to an annual average of US$16,000m. Key beneficiaries (with % of the total) were Singapore (12%), PR China (10%), Hong Kong SAR, China (7%), Malaysia (6%) and Thailand (3%). In 1990, with only about 13% of LDCs' population, East and south-east Asia (excluding PR China) attracted one-third of all 1990 FDI while South Asia (30% of the developing countries' population), attracted only 3%. Major flows of private capital have been concentrated in East Asia where foreign direct investment (FDI) has supplemented already high local investment of domestic savings.

Secretariat estimates (1996) are that within ASEAN, the increase in overall FDI jumped by 13.1% in 1994, much of the increase going to Indonesia where approved foreign investment tripled to US$ 23.7 billion. Foreign investment approvals in Malaysia grew by 80%; in Thailand proposed investment projects grew 40%; and in Singapore foreign investment commitments increased by 54%.

Table 14 - Summary information on external funding flows in Asia and the Pacific (US$ millions)

Beneficiary			Private Funding				Official Funding
	Total	As a share of GDP (%)	Total	Net debt flows	FDI	Portfolio equity flows	Total	Official Development Assistance	Other
All developing countries	209,400	4.66	157,656	45,708	65,141	46,807	51,744	41,428	10,316
Asia	84,940	5.45	68,426	10,971	37,322	20,132	16,515	11,022	5,493
East Asia and Pacific	73,569	6.11	62,783	8,194	36,481	18,107	10,787	6,644	4,143
South Asia	11,371	3.14	5,643	2,777	841	2,025	5,728	4,378	1,350
PR China	41,235	10.54	36,261	8,183	25,800	2,278	4,975	1,977	2,998
Korea, Rep.	8,534	2.58	8,674	2,129	516	6,029	-140	-191	52
Malaysia	7,746	12.02	8,033	-18	4,351	3,700	-287	45	-332
India	6,567	2.62	4,559	2,446	273	1,840	2,008	1,237	771
Thailand	5,853	4.69	5,018	-499	2,400	3,117	835	624	212
Indonesia	4,932	3.41	2,337	-1,504	2,004	1,836	2,595	1,542	1,053
Philippines	3,347	6.19	2,143	298	763	1,082	1,204	934	270
Pakistan	2,275	4.39	988	457	347	185	1,287	697	590
Bangladesh	1,078	4.36	-14	-28	14	..	1,092	1,099	-7
Sri Lanka	513	4.90	109	-85	195	..	404	423	-19
Nepal	305	10.08	-6	-12	6	..	310	310	0
PNG	277	5.44	5	-445	450	..	272	291	-19
Myanmar	98	0.18	37	33	4	..	61	61	-1
Vietnam	82	0.64	83	-7	25	65	-1	57	-58

Source: Table 7, World Bank (1995a)

Table 15 - Foreign direct investment in selected developing Asia-Pacific countries and territories 1989-1994 ($ million)

	1989	1990	1991	1992	1993	1994	Total
NIEs
Korea Rep	1,118	788	1,180	727	588	809	5,210
Singapore	2,887	5,575	4,879	2,351	5,016	5,588	26,296
Taiwan Province of China	1,604	1,330	1,271	879	917	1,375	7,376
China, PR	3,393	3,487	4,366	11,156	27,515	33,787	83,704
South East Asia	4,688	6,399	8,038	9,304	9,499	8,223	46,151
Indonesia	682	1,093	1,482	1,777	2,004	2,109	9,147
Malaysia	1,668	2,332	3,998	5,183	5,006	4,348	22,535
Philippines*	563	530	544	228	763	1,126	3,754
Thailand	1,775	2,444	2,014	2,116	1,7226	640	10,715
South Asia	580	455	454	805	1,155	2,140	5,589
Bangladesh	-	3	1	4	14	11	33
India (Net FDI)	350	165	148	344	600	1,314	2,921
Pakistan	210	244	257	335	346	649	2,041
Sri Lanka	20	43	48	122	195	166	595
Pacific Islands	232	258	258	382	101	112	1,343
Fiji	8	80	15	50	49	69	272
Papua New Guinea	203	155	203	291	1	4	857
Solomon Islands	12	10	15	14	24	9	83
Vanuatu	9	13	25	27	27	30	131

* Philippines 1994 has FDI for the first half of year only. Source : Table 1.3 AsDB (1996)

The combination of high national savings and external inflows has turned the "four tigers" into capital-surplus countries some of which are exporting capital to neighbouring Asian countries and globally even after the 1997 financial turmoil. Edwards (1997) reports, for example, that Hong Kong SAR, China is the main source of external investment in PR China, accounting for more than two-thirds of an estimated US$52,000m of FDI in PR China between 1988 and 1993. The World Bank (1995a) reports that the largest inflow of 1994 FDI into ASEAN came from Hong Kong SAR, China (US$ 6.9 billion), closely followed by Japan (US$5.6 billion) then the United States (US$5.2 billion). Altogether, intra-ASEAN investments increased in 1994 by 49% to US$3.3 billion, of which Singapore alone provided US$2.5 billion (76%). Box 3 presents aspects of integration among developing economies of the region.

Until the crisis, the four "tigers" were investing heavily in economies such as Thailand, Malaysia and Indonesia focusing on export-oriented manufacturing and services, where more labour-intensive techniques can still be applied that are no longer feasible at home. Bernard (1996) reports that Taiwan Province of China's investment is aimed at shedding labour-intensive industries and maximizing cost-reduction; apparently its capital has over time sequentially shifted from Malaysia and Thailand to lower-wage locations such as Vietnam. Thailand and Malaysia are themselves reaching the stage where they must transfer labour-intensive industries to lower-income countries.

Box 4: Facets of intra-regional integration The following are recent observations on regional integration among developing countries in the Asia-Pacific region: · The Prime Minister of Malaysia, Dr. Mahathir Mohamed, said at the Pacific Dialogue held in Penang, Malaysia in November 1994 "It is time for us all to adopt a prosper-thy-neighbour policy...." · A willingness to cooperate and work together in Asia is emerging. Much of the integration in Asia today happened in the marketplace. The Economist reported that by 1993, 43% of East Asia's exports were traded to other East Asian countries, up from 32% in 1983, and this is expected to increase to 60% as further liberalization takes place. · The ASEAN encompasses a population of 359 million people and an import market of $226 billion. With the joining of Vietnam, ASEAN market reached almost 450 million people. Malaysian investment in Indonesia topped $603 million in 1994, more than 10 times the amount invested the year before. Thai companies are starting various projects in the Indochina states of Laos, Cambodia and Vietnam. Chinese companies have invested more than $200 million in Malaysia. Taiwan Province of China increased its investment in Malaysia by 215% to $1.02 billion in the first 10 months of 1994. During the next years 75% of new Japanese direct investment will be in Asia. In 1985 Japan exported a third more to the US than to Asia; now Asia buys one-third more than the US and almost three times as much as Europe. Japan now imports more from Asia than it does from the US or the European Union, $60 billion from Asia in 1993 compared to $50 billion from the US and $24 billion form the EU. Source: Naisbitt (1996)

In addition to having its own domestic investors, the Asia-Pacific region has till the crisis been very attractive to industrial country investors, largely because (in the case of East Asia at least) of its hitherto good record of growth and better profitability. The OECD (1996) reports that Japan's Asia investments were more profitable than those in the USA and Europe. For Japanese investors, Naisbitt reported: "Japan's shift to Asia is driven by the higher profits that the region's growth generates". According to Fernandez-Arias and Montiel (1996), the combination of low interest rates on assets and recession at home has led to low rates of return on investments in industrial countries, particularly in the United States. Estimated average returns on US FDI in East Asia in 1990-93 were more than twice the average world-wide return on US FDI. Such returns help to explain the willingness of foreign investors to have equity participation - thus equity flows accounted for about 55% of the total in East Asia compared to 45% in Latin America. This has provided an incentive for capital outflow in search of higher-yielding assets - many of which were found in high-growth developing countries of Asia which at that time had never suffered a debt crisis. It would appear that the full explanation for high capital flows is the combination of relatively poor prospects at home and greater profitability in developing economies of Asia.

Future likelihood of sustained flows will therefore partly depend on how long lower interest rates and other factors affecting returns on investment in the United States and other G-7 countries will last. Furthermore, the region is known to have low inflation, real exchange rates, and reliable policy, legal and institutional environments with demonstrated ability to manage large capital inflows, and resilience to external shocks.

Even though in value it is less than investment from local savings, foreign capital has the vital role of also bringing with it new technologies.

Official foreign aid plays relatively little part in Asia-Pacific development, except in a few countries or territories with small economies. According to Edwards (1997), official aid to East Asia and the Pacific and to South Asia amounts to only US$6 per head, compared with US$36 and US$9 per head in Sub-Saharan Africa and Latin America respectively. In 1993, aid to less-developed Asia and the Pacific was 33% of the total aid to all less developed countries although the region has half of the population of all such countries.

Supportive policies and institutions

In its 1993 research publication⁸, the World Bank arrived at a compromise formulation to `explain' the rapid and sustained economic growth in the region over the past four decades. Policies feature high among the positive factors, including those which make possible an enabling and stable macro-economic environment, encouragement of saving, open trading regimes, attention to human capital development, and intervention to support high-potential areas for investment. Bernard (1996) explores the idea of a model to explain the Asian growth phenomenon and rejects the search for "the model"; he favours instead focusing on analysing the processes of change.

Before the post 1997 economic turmoil struck, reading the literature on Asian development gave the feeling that because many countries there had succeeded so well, whatever they did was correct and that their success had legitimised whatever policies and interventions were adopted. Thus, although current orthodoxy favours non-interventionist policies and market supremacy, Bernard (1996) appears to suggest that the World Bank's research seems to endorse in retrospect even some strong government interventions in Japan and later in the "tiger" economies to guide industry and trade into specific areas. It also appears to endorse infant-industry and similar arguments for protection of local investments behind tariff barriers until domestic comparative advantage was artificially created for selected industries. Most interventions were assessed to have been "judicious".

Aggressive export thrust has in the past often been accompanied by import-substitution and infant industry protection policy⁹. For example, according to Bernard (1996), Taiwan Province of China resorted to state restrictions on imports of manufactures, a practice adopted also by post-war Thailand where, according to the World Bank (1995a), Japanese industry reportedly sought to take advantage of the protected home market by getting inside the high tariff walls in the 1970s. In future, circumstances will have changed so much that countries will no longer have recourse to the near-protectionist interventions available to the current successful countries. The post-Uruguay Round era and emergence of tariff-reducing regional agreements cannot easily permit protectionism justified on the basis of infant-industry and import-substitution arguments.

Ranis (1995) appears to feel that the central area of controversy in explaining Asian successes is on the relative importance of government industrial policy, such as directed credit and other "markets versus governments" issues. He reports that in the 1950s, East Asia initially chose import substitution but only in a mild and brief version. Agricultural development, for example, achieved enormous factor productivity gains mostly from rural infrastructure and government-supported research and technology diffusion. On the whole, Ranis gives greatest importance not to any one policy but to the combination and, especially, to maintaining stability while being flexible in response to new opportunities.

Projections

General

In 1995, the overall GDP of Asia and the Pacific in 1987 prices is estimated to have been approximately US$5370 billions. No comparable world GDP estimate exists for that year in the World Bank's World Tables. A world total of around $20000 billions is reasonable, in which case the Asia-Pacific region accounted for about a quarter of world economic product. Orders of magnitude for the Asia-Pacific sub-regions were shown in Figure 17.

Until recently, expectations ran high for developing Asia's future development; for example, Edwards (1997) reports that the World Bank considered prospects for the next century to be "excellent" and suggests that over the decade to 2005, developing Asia could grow almost three times the world average.

Li (1997) reports that Singapore's Senior Minister Lee Kuan Yew had stated that East Asia, adjusted for purchasing power parity, would account for half of the world's economy in 20 years, up from 25% today. The World Bank predicted a continued growth rate of 8-9% per annum for the same period. It may be noted that a prosperous future was most easily foreseen for countries and territories which would have the capacity to effectively integrate into the global system of trade, manufacturing and services. Thus the future would tend to favour those countries which were already ahead, were willing to aggressively reform and to open up to the global system.

Table 16 gives presents for each country in the Asia-Pacific region, the economic growth projection to 2010 presented in the "Compendium of demographic and macro-economic assumptions" (FAO, 1997b). These were used in the base-case modelling along with a more pessimistic assumption about future economic growth, reflecting the recent economic turmoil in the region.

Table 16 - Alternative scenarios of GDP growth rate to 2010 (% pa)

	GDP forecasts (in billion US$ at 1994 prices)				GDP Growth rate forecasts (annual percentage growth)
	Base year	FAO (1997b)			FAO (1997b)			APFSOS downturn scenario (1998)
	1994	2000	2005	2010	1994-2000	2001-2005	2006-2010	1994-2000	2001-2005	2006-2010
North Asia
Japan	4,222,622	5,071,474	5,879,228	6,815,637	3.10	3.00	3.00	2.10	2.50	2.90
Korea DPR	11,257	12,677	13,996	15,453	2.00	2.00	2.00	1.40	1.60	1.80
Mongolia	732	824	955	1,107	2.00	3.00	3.00	1.90	2.70	3.00
The People's Republic of China	540,492	862,469	1,226,710	1,744,780	8.10	7.30	7.30	7.00	6.80	7.10
- Hong Kong SAR, China	130,580	176,999	231,330	302,339	5.20	5.50	5.50	3.20	4.40	5.00
- Taiwan Province of China	241,014	241,014	241,014	241,014
The Republic of Korea	380,825	549,445	745,746	1,012,179	6.30	6.30	6.30	2.50	4.00	5.70
Southeast Asia
Brunei	4,495	5,062	5,588	6,170	2.00	2.00	2.00	1.50	1.60	2.00
Cambodia	2,376	3,371	4,511	6,036	6.00	6.00	6.00	3.80	4.80	5.70
Indonesia	175,500	275,417	395,396	567,642	7.80	7.50	7.50	2.50	3.80	5.80
Malaysia	74,146	117,661	170,495	247,052	8.00	7.70	7.70	4.40	5.90	7.30
Myanmar	74,005	105,572	130,934	162,389	6.10	4.40	4.40	4.10	4.40	4.20
Laos	1,515	2,030	2,717	3,635	5.00	6.00	6.00	3.30	4.50	5.50
Philippines	64,114	87,403	113,153	146,490	5.30	5.30	5.30	3.10	4.10	5.20
Viet Nam	15,478	21,956	30,081	41,214	6.00	6.50	6.50	4.50	5.20	6.30
Singapore	69,516	103,741	141,468	192,915	6.90	6.40	6.40	4.70	5.50	6.20
Thailand	143,177	205,410	288,098	404,072	6.20	7.00	7.00	1.70	3.30	5.20
South Asia
Bangladesh	26,034	34,888	47,352	64,269	5.00	6.30	6.30	3.60	5.10	5.60
Bhutan	255	342	437	557	5.00	5.00	5.00	3.60	4.30	4.50
India	272,527	390,982	523,222	700,189	6.20	6.00	6.00	4.80	5.20	5.20
Maldives	241	342	457	612	6.00	6.00	6.00	4.70	5.20	5.20
Nepal	3,786	5,103	6,670	8,717	5.10	5.50	5.50	3.90	4.60	4.70
Pakistan	46,955	65,113	85,100	111,222	5.60	5.50	5.50	4.40	4.70	4.70
Sri Lanka	11,719	16,436	22,519	30,854	5.80	6.50	6.50	4.40	5.50	5.80
Oceania
Australia	288,934	357,237	424,286	503,919	3.60	3.50	3.50	2.90	3.20	3.40
Cook Islands	87	98	114	132	2.00	3.00	3.00	1.90	2.70	3.00
Fiji	1,597	1,799	2,055	2,348	2.00	2.70	2.70	1.70	2.40	2.60
Kiribati	38	43	47	52	2.00	2.00	2.00	3.20	3.60	4.00
New Caledonia	894	949	1,022	1,101	1.00	1.50	1.50	1.0	1.40	1.50
New Zealand	44,290	51,967	59,662	68,495	2.70	2.80	2.80	2.00	2.40	2.80
Papua New Guinea	6,994	7,830	8,773	9,830	1.90	2.30	2.30	1.30	2.00	2.10
Samoa	127	139	149	161	1.50	1.50	1.50	1.50	1.50	1.50
Solomon Islands	186	249	326	426	5.00	5.50	5.50	3.90	4.80	5.30
Tonga	135	161	192	227	3.00	3.50	3.50	2.90	3.30	3.50
Vanuatu	193	211	233	258	1.50	2.00	2.00	1.20	1.80	2.00

8 World bank (1993). The East Asia Miracle - economic growth and public policy. Oxford University Press, New York.

9 Hout (1996) has attempted quantitative analysis of effectiveness of import substitution, export orientation, FDI, social equality and other policy-measures on economic growth. In general many results were inconclusive or slowed only weak links. Simple causal relationships could not be demonstrated between many policy measures and successful growth.