UK: THE PACIFIC RIM SETS THE PACE - ECONOMIC GROWTH. - The Asia-Pacific region has much to teach Britain about economic growth.

by David Smith.
Last Updated: 31 Aug 2010

The Asia-Pacific region has much to teach Britain about economic growth.

John Major's second trip to Japan in the space of three months (his first was for the world economic summit in July) will have a more straightforward aim than the first - that of increasing British exports. Whether he succeeds on his September visit or not, the intention is a good one.

Britain's on-off romance with Europe finally began to take on a look of permanence in the late '80s. It was consummated, unsuccessfully, in membership of the European exchange rate mechanism and, messily, in the signing of the Maastricht treaty. But it seemed, after years of operating on the fringes of Europe, to be the right thing to do. Now, however, the attempt to tilt Britain towards Europe appears to be a classic case of jumping on the boat when it is sinking.

Free trade in Europe was going to bring greater prosperity by means of faster growth and low unemployment. Instead, the EC, with 17 million people out of work, an inability to generate rapid rates of growth on a sustainable basis and a declining share of world trade, has become the world's least dynamic economic region. There are, of course, some difficulties which are temporary, high on the list of which would be the after-effects of German unification. But it would be wrong to blame all Europe's problems on Germany and the Bundesbank.

So the Prime Minister is right to head for the Far East. Japan, of course, is not without her problems, caused by the bursting of the 'bubble' economy of the late 1980s. But Japan has an advantage not enjoyed by any European country - she is surrounded by the fastest-growing, most enterprising economies in the world. In the 20 years, l970-90, South Korea grew by an average of 8.2% a year, Taiwan by 8.4%, Hong Kong 7.2% and Singapore 8.4%. Over the same period, by contrast, average growth in the Group of Seven leading industrial countries was only 2.7%, of which the US managed an average growth rate of 2.6%, and the UK only 2.2%. Surely, however, these Asian economies are merely enjoying the rapid growth rates traditionally associated with the early phase of industrialisation, just as the current G7 economies (America, Britain, Japan, Germany, France, Italy and Canada) did many years ago?

After all, while these economies are catching up fast, they do not come near EC countries in terms of national income per head. Between 1980 and 1990, measured in US dollars, per capita gross domestic product in Taiwan increased from 24% of Britain's level to 46%, while that of South Korea rose from 17% to 33%. Japanese GDP, on the same basis, rose from 94% of the UK's level to 139%.

While it is true that there is a large catch-up element in the growth of the dynamic Asian economies, it is also the case that there is nothing on the horizon to suggest that a slowdown is likely. Indeed, the opposite is true. A powerful spur to growth in the Asia-Pacific region is coming, and will continue to come, from China's rapid economic development. Guangdong and the other coastal regions of China are currently expanding at an annual rate of well over 20%, pulling the whole economy along at an annual growth rate over the past two years of 10% to 15%. The go-go areas of southern China, with a combined population of around 160 million, are drinking the heady brew of capitalist economic development after years in which the dead hand of bureaucracy kept growth in check. And beyond the coastal regions lies a total Chinese population of 1.2 billion, a vast market for both capital equipment and consumer goods, which the current fast-growing economies of Asia, plus Japan and to a lesser extent the US, are ready to supply.

Indeed, calculations in the World Bank's World Development Report suggest that, measured on the basis of local purchasing power, GDP in China is third in the global league table, behind the US and Japan, but well ahead of Germany, France and Russia, and more than twice that of Britain.

The potential for growth in this region has been recognised in Washington. During his visit to Japan and South Korea earlier this summer, President Clinton made much of the fact that the US sees trading links with the powerhouse 12e Pacific Rim economies as having considerably more potential than the older, and less dynamic European economies. This autumn, the US will host the annual ministerial meeting of the Organisation for Asian-Pacific Economic Co-operation, the informal grouping that includes the US, Japan and 13 other mainly Asian economies.

Can Britain do anything other than admire from a distance Asia's continued emergence as the world's most dynamic region? British industry has, of course, already chalked up some notable export successes in China, particularly in the area of heavy capital equipment. And, of all the EC countries, Britain's links with Japan, through inward investment by Japanese companies, are strongest.

The lessons from Asia go rather further than this, however. Europe has placed far greater emphasis on removing the internal barriers to trade, in which it has been only partly successful, instead of removing the barriers to growth within its economies.

There has been a presumption that, by simply allowing European economies to trade more freely with one another, all other elements of economic success will fall into place. Twelve slow-growing Euro-sclerotic economies will not, however, be trans-formed into dynamic economic forces simply by a bit of additional trade.

Successive UK governments, and many UK companies, have seen their success, in terms of performance, diminish when measured against a European standard. But that standard, at a time when the Asia-Pacific region is making the economic running, is not necessarily appropriate.

The UK economy cannot hop several thousand miles and join the dynamic Asians. But it can learn some lessons from them, the most powerful of which are that deregulation and incentive-based tax systems, in combination with extensive investment in the infrastructure, provide the spur for rapid economic growth. The Asian economies are like the poor boys who, by effort and determination, become champion boxers. Too much of Europe thinks that the world owes it a living.

David Smith is economics editor of The Sunday Times.

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