Asia Will Struggle to Escape Its Export Trap

Despite much talk of a rising middle class that can support domestic growth, Asia’s dependence on exports has increased, not fallen. Although interregional trade has risen, most of it is in components, with the finished goods destined for the US and Europe. And in China, personal consumption as a percentage of GDP has actually shrunk. Indeed, as one expert argues, export economies are set up to export. So transforming into a domestic demand driven economy would require a massive change in incentives. Improving social safety nets is one solution. This improvement would encourage Chinese consumers to spend more instead of saving, many argue. But one analyst claims that Chinese household savings are not especially high in the first place and that consumption remains low because few have benefited from China’s economic growth. One suggestion to spur domestic consumption is to free up lending in rural areas. But this sounds precisely like what got the world into the economic crisis in the first place: debt-fuelled consumption. – YaleGlobal