Asia - The New Economic Competitor of Europe, Risks and Opportunities
Speech by
Philippe Benedic
Resident Director General,
European Representative Office
Asian Development Bank
At the Colloquium Humanum
Bonn, Germany
18 January 2006
Good evening, Ladies and Gentlemen,
Thank you for inviting me tonight to speak on behalf of the Asian Development Bank (ADB) about “ Asia – The New Economic Competitor of Europe – Risk and Opportunities”. The topic is a highly debated one and often Asia is seen as a threat to the European economy. I will try and demonstrate, however, that Asia’s economic strength is also a great opportunity for Europe.
Let me first introduce briefly the Asian Development Bank.
ADB is a regional multilateral development bank dedicated to reducing poverty in Asia and the Pacific. Indeed, two thirds of the world’s poor live in Asia, i.e. 620 million people living on less than a dollar a day. Despite impressive progress made over the last two decades, more still needs to be done to achieve the Millennium Development Goals (MDGs).
ADB provides about $6 billion a year of financial assistance to its developing member countries and supports them in many different ways such as loans and equity investments, technical assistance for projects and policy advice, public-private investments and knowledge sharing.
ADB assistance focuses mainly on economic growth, infrastructure, private sector development, environment, regional cooperation, governance, human and gender development.
Established in 1966, ADB is owned by 64 member countries including 45 from the region and 19 outside the region, Japan and the USA holding 12.9 percent of the voting power each and 17 European countries holding a cumulative voting power of 17.6 percent. So, in fact, the Asian Development Bank belongs to some extent to European countries.
European member countries also contributed up to 32, 5% to the recent replenishment of the Asian Development Fund (ADF), ADB´s concessional resources. Furthermore, ADB is a strategic partner for Europe when it comes to promoting trade, investment, partnership and regional integration.
At the recent European Banking Congress held in Frankfurt am Main under the motto “ Eurasia – Bull Meets Tiger”, ADB Vice President Liqun Jin described the ideal Euro-Asian relationship in a picture: “In wilderness, bulls rarely meet tigers. They hunt in different domains. The bull is known for its sheer force, the tiger for its speed and flexibility. Our task today is to bring them together to make them work together rather than make them fight, because together they can be very efficient.”
Let us first look at the history of the Asian boom.
Since the 1990s, Asian countries, despite their socio-economic disparities, did achieve robust and steady economic growth, particularly the People’s Republic of China, India and ASEAN countries. Their unprecedented average annual GDP growth of 7% - 9% has helped reduce poverty and expand economic opportunities both domestically and externally. Such an impressive growth was made possible through progressive economic reforms, liberalization programs and a combination of vibrant exports, growing domestic demand and impressive progress in intra-regional trade. These developments helped the region generate huge consumer demand and attract investments from within and outside the region.
Throughout the 1990s, the manufacturing ability and cheap labor markets in Asian developing countries allowed foreign companies to establish themselves in many manufacturing industries. Asia became one of the largest sources of automobiles, machinery, audio equipment and electronic products.
At the end of 1997, Thailand was hit by currency speculation, credit expansion combined with high currency and maturity mismatch, real estate bubble, and volatility of short term private capital flows. The Baht exchange rate fell dramatically and Thailand economic growth dropped sharply. Soon after, the crisis spread to Indonesia, Malaysia, South Korea, Singapore and many other Asian economies, and caused great economic damage. This was to be known as the Asian financial crisis.
By 1999, most countries had already recovered from the crisis, which shows another trait of Asian economies – their resilience. Asia’s resilience to shocks was demonstrated again after the recent tsunami disaster, earthquakes, floods, and communicable disease outbreaks. ADB is, therefore, helping Asia-Pacific countries foster regional cooperation and strengthen regional financial markets.
The Asian boom offers numerous opportunities for Europe.
Nowadays, Asia offers huge unsaturated export markets with over four billion consumers and growing income. At the same time, cheap labor calls for sourcing from and investment in the region with China leading the way in manufacturing and India in services, especially IT outsourcing. Manufacturing and services now represent over 50% of GDP in India and China.
In 2004, China alone attracted $61 billion in foreign direct investments (FDI), followed by Singapore and India with $5 billion each. Japan at the same time received $90 billion in FDI.
With rapid industrialization and rising middle class population in Asia, the demand for technology and know-how from Europe is tremendous. The competitiveness of European companies includes among others cutting edge in science and technology, infrastructure, energy, water, transport, environment, financial services and corporate strength.
Of course, one of the critical questions is whether the Asian boom also benefits the “man on the street” in Europe.
In particular, are jobs created in Asia jobs lost in Europe ?
This is not necessarily the case. Europeans may benefit from Asia not only as investors, but also as consumers and employees for a number of reasons:
First, European companies investing in Asia improve their global competitiveness and, therefore, contribute to save European jobs. Low costs also translate into lower prices which help keep inflation and interest rates moderate and boost demand in Europe.
Second, Asian countries not only sell goods and services, they also buy goods and services, especially high value added goods and services coming from Europe and the United States.
Third, many Asian companies are owned in whole or in part by European companies. They repatriate some of their earnings and invest them in Europe, which in turn supports economic growth.
Fourth, productivity gains may of course lead to a loss of jobs in some sectors, but new jobs with higher value added are often created when European companies take advantage of their comparative strengths.
Fifth, through joint ventures, European and Asian companies can step up exports to “third” countries in the region.
Sixth, with the standard of living and social safeguards improving over time in Asian countries, the cost of labor will adjust upward and reduce the gap compared to European labor cost.
However, Europe will need to maintain its competitive edge in research and development and, therefore, Europe has to invest heavily in education and research.
In any case, protectionism would not be the answer. It may save some jobs in the short term, but in the longer term would prevent innovation, economic growth and job creation.
Finally, let us also consider the political and strategic dimensions.
At the political and strategic level, Asia is interested in learning from and sharing with Europe.
Europe with its long industrial tradition has created a very efficient system for keeping free market economy under reasonable control and avoiding the pitfalls and unbalances of aggressive capitalism.
Over time, it has built a sound banking sector, a strong corporate governance system, legal stability and a welfare system allowing their population to benefit from economic success. All this is a necessary condition for stability and social peace.
Developing Asia, which is still at the beginning of its demographic transition and “market economy history”, can learn from European experience how to combine rapid economic growth with environmental protection, energy efficiency, balanced urban growth and sustainable rural development.
Asian countries may also learn from Europe how to strengthen resilience to external shocks and build up regional economic integration programs. From a financial and monetary point of view, the huge foreign exchange reserves and regional savings held in Asia are also expected to contribute to a smooth adjustment of global imbalances.
Last but not least, Europe and Asia cooperate in the field of international security and terrorism prevention for the sake of stability in Europe, Asia and the world.
Ladies and Gentlemen, we believe all these are very strong reasons for the European bull not to fight the Asian tiger. Rather, they should unite their forces for the benefit of both continents.
Thank you.
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