For Asia to take advantage of the current global economic situation, governments must find ways to create the environment to foster sustainable domestic demand. Asian countries need--among other things--to take advantage of their particular indigenous characteristics while focusing their efforts toward domestic investments.

This is particularly true for the economies of Malaysia, Thailand, Indonesia and the Philippines. These countries must be prepared in the event China takes on an even bigger role as a low-cost producer of goods. India’s rise as the preferred destination for services outsourced by multinationals could also be at the expense of Southeast Asia (although to a lesser degree).

These countries have held their own in manufacturing, but need to move up the chain from low value-added mass manufacturing products to a higher pricing-power export industry. They must also take advantage of domestic natural resources and spend money on domestic-related investments. The ultimate goal is to create the necessary conditions for domestically driven economic growth.

It remains to be seen whether the respective governments have the capacity, first, to develop this strategy and, second, to execute it. Thailand, under the guidance of Prime Minister Thaksin Shinawatra, has shown its ability in these respects, and though the final outcome of his efforts is still to be determined, Thailand has a substantial head start. If successful, Thailand will join the global economy on terms that will benefit its citizens as well as multinational corporations. The same is true for other Southeast Asian economies that follow a similar strategy.

Wealth distribution is improving in Asia, but financial security remains a privilege of the few. If the improving wealth distribution trends discussed in the previous chapter stop, it will be almost impossible for our scenario to unfold. But it will also be impossible for governments to continue ignoring their people, given the easy access to mass media the majority now enjoys. In other words, the people--knowing exactly what is going on in other places--will demand governments devote more attention to them.
Domestic investment in infrastructure is of paramount importance. Thailand, Indonesia and the Philippines haven't done enough to improve their aging infrastructure, not only in the agricultural sector but also in the service sectors of their economies. This is the only avenue by which these economies will achieve sustainable economic growth.

The status of agriculture provides a case in point. Development has been ignored for the past 30 years. Governments must shift attention from urban centers to developing the rural areas of their countries. Rural areas are not only home to the largest portion of their respective populations--they are also best positioned to exploit natural resources, providing a new, sustainable growth alternative to the countries of Southeast Asia.

The conditions under which these people operate are absurd. In Thailand, for example, many farmers have de facto but incomplete de jure rights over their land. Under a distribution program in place for decades, they are given state land without land title deeds, and they aren't allowed to sell it, pledge it to the bank or use it for purposes other than farming. Until these people and others like them are given access to capital, credit and allowed real property rights, the economies of Southeast Asia will remain prisoners to the whims of multinational corporations.

It is beyond comprehension how a farmer in Thailand can do little better than subsist when the biggest economies on earth do what they can to help their farmers (in the form of subsidies). To understand how important agriculture is for developed and developing economies alike, consider the following. The World Bank and the IMF estimate that removal of US subsidies in cotton could lead to a fall in production, a subsequent rise in global price and a revenue increase of $250 million annually for the countries of West and Central Africa (this is one of the few sectors of world trade in which Africa is internationally competitive). But subsidies for US cotton farmers are likely to increase by 16 percent--this for a total of 25,000 farmers whose net household worth averages about $800,000. This is only one minor example of the manner in which governments in developed economies aid their farmers.

Absurd as it is that developing countries can be penalized for the benefit of a handful (relatively speaking) of high-end farmers, it is also quite naïve to expect that these farmers or their governments would do otherwise. This is why it's extremely important for developing economies to create the foundation for a system that is responsible for facilitating economic and social growth. The difference between rich and poor states is the result of differences in the quality of their economic institutions.

Agricultural subsidies remain an issue where developed economies still dictate the rules of the game and how new members (e.g., China) are joining the system. Although developing economies are currently under pressure to reduce subsidies, Western economies--the US and the EU--subsidize at extremely high rates. Most of their subsidies take the form of direct payments to farmers rather than price subsidies.

According to the latest rules promulgated by the World Trade Organization (WTO), these payments aren't subject to limitations. These rules were written by the developed economies during the “Uruguay Round” of WTO negotiations. China can't adopt such an approach--it still has 240 million farm families and lacks sufficient government staff at the village level to determine the direct subsidy to each household.

The field will level as new members familiarize themselves with WTO procedures. Such members will then demand changes to establish ever more equal footing. Global trade has already provided developing economies the opportunity to create groups in an effort to promote their interests. One of these is the G-20, whose sole purpose is to unite the developing nations and enhance their negotiating power in global trade issues. The G-20 has been urging the US and the EU to cut farm subsidies, which “tend to depress world markets.”

Returning to the cotton example, in July 2005 the US agreed to change a cotton subsidy scheme in order to comply with a WTO ruling, which followed a legal challenge by Brazil. At issue was an export-credit guarantee program for cotton farmers worth $4 billion a year. Although the US promised to change the subsidy, its representative neglected to reveal the administration’s “Step 2” program to compensate US cotton millers for using more expensive US cotton.

Institutions like the WTO, though limited in authority because of national sovereignty, provide developing economies a platform to more easily operate on a global scale. Although the WTO is still dominated--with regard to many issues--by developed economies, negotiations have led to better results for developing economies. Globalization has also furthered this process, as the level of global economic interdependence has increased dramatically, allowing smaller players to demand and receive more than they would otherwise.

© 2006 Yiannis G. Mostrous
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The preceding is excerpted from The Silk Road to Riches: How You Can Profit By Investing In Asia’s Newfound Prosperity, published by Financial Times/ Prentice Hall. The Silk Road to Riches is available at Amazon.com and will soon be in a bookstore near you.