Asia's hurdles to regional prosperity

The world is expecting a lot from Asia, and Asia is preening itself on its success in keeping up growth whilst the formerly self-important West is stuck in a rut of debt. But Asia has a long way to go before that advantage becomes self-sustaining and it can decouple from an increasingly geriatric Europe and a US desperately needing to cut consumption and increase investment in infrastructure and innovation.

There are some hurdles Asia has to jump. The first is the currency issue. A modest recovery of US demand is already translating into a rebound to unhealthy levels of the US trade deficit, and hence of the surpluses of East Asia. The South Korean, Taiwanese, Malaysian and other surpluses have become just as much an issue as China's. South Korea's won, which fell from 9.5 to 13.5 to the yen in the past two years, is at least as undervalued as China's renminbi.

In short, the global imbalances that were a root cause of the pre-2008 debt and derivative excesses have not been eliminated, merely cut back temporarily. So either East Asia must face up to currency undervaluation or global financial turmoil will resume.

The only other way out is domestic consumption growth in Asia, but that can only come about and be sustaining if there are big increases in wages to raise purchasing power - and reduce company profits. Maybe China, thanks to its worker unrest, is taking a lead. Even in 'yellow shirt'-run Thailand, Finance Minister Korn Chatikavanij noted last week that unrest is partly linked to the fact that corporate profits have been rising but real wages falling for almost a decade. But it remains an open question whether the needed changes in income distribution in the region will happen fast enough and go far enough to sustain the growth of gross domestic products.

There is a widespread assumption that, in addition to domestic demand, Asian leaders can expect rising demand elsewhere in the region and from developing countries outside it. They can all find new, niche markets in China, India, Brazil and other nations, and see more trade within the Asean group thanks to its free-trade agreement.

In theory that is correct. But in practice there are three problems. The first is that hidden and non-tariff barriers in these countries are often much higher than in the West, so penetrating fast-growing new markets is easier said than done. The second is that Asian production systems, which feed Western demand for goods, are complex and aimed to take advantage of specific manufacturing, tariff, quota and end-user factors. They cannot necessarily be adapted to markets within the region.