Asia’s Export-Driven Growth Model Is ‘Broken,’ Roubini Says

By Liza Lin

May 7 (Bloomberg) -- Asia’s export-driven growth model is “broken” and nations in the region need to do more to boost domestic demand, said Nouriel Roubini, the New York University economics professor who predicted the financial crisis.

“The old model of export-led growth is broken,” Roubini said in an interview with Bloomberg in Singapore yesterday. “Unless policy makers find ways of stimulating consumption and private domestic demand, then the growth recovery is going to be, even over the medium term, weaker than otherwise.”

Asia’s developing economies are almost twice as reliant on exports as the rest of the world, with 60 percent of their overseas sales ultimately destined for the U.S., Europe and Japan. The International Monetary Fund yesterday said it expects recessions this year in South Korea, Singapore, Taiwan, Malaysia and Thailand.

“Asia has to find a new model of growth,” said Roubini. “This is happening too slowly and this will make Asia’s recovery lag.”

Asian nations must implement more policies to boost domestic consumption as advanced nations are unlikely to absorb the region’s excess production, Asian Development Bank President Haruhiko Kuroda said May 4. To boost local demand, Asian governments need to spend more on health and education and boost social safety nets to encourage consumer spending and reduce precautionary savings, he said.

‘Weak Outlook’

Exports by developing Asian economies may shrink 10.3 percent this year, after growing 14.7 percent in 2008, the Manila-based ADB predicts. Global trade may contract for the first time since World War II this year, according to the World Trade Organization, as U.S. and European demand slumps.

“A good chunk of Asia is going to be in recession this year, with the exception of China and India,” Roubini said. “Recovery is going to occur next year, but even then I see a weak outlook for the U.S., Europe and Japan, and unless there is a recovery in these economies, the recovery in Asia is going to be less than otherwise.”

Asian policymakers have been responding to the global recession by slashing interest rates and implementing fiscal stimulus packages. Governments in the region have pledged to pump more than $950 billion into their economies through increased expenditure, tax cuts and cash handouts to kick-start local consumer and business spending.

Further fiscal stimulus may be required in Asia given the likely weakness of the recovery in the U.S., Europe and Japan, Roubini said.

‘Long Recovery’

“Greater fiscal stimulus might be necessary,” he said. “One way to stimulate domestic demand in the short run is domestic public demand.”

Economies in Asia face a “long recovery ahead” from the global slowdown and “forceful” fiscal measures are still needed to lift the region out of the recession quickly, the IMF said in a report yesterday.

“Asia’s strong reliance on external demand weigh against the prospects of a speedy turnaround,” the IMF said. “Despite governments’ efforts to invigorate domestic demand, the prospects of a recovery at this stage hinge critically on a rebound in global activity.”

The IMF last month lowered its world economic growth forecasts and said the global recession will be deeper and the recovery slower than previously thought as financial markets take longer to stabilize. The world economy will contract 1.3 percent, it predicts.

The U.S. remains weak and the consensus among analysts that the world’s largest economy may expand in the third and fourth quarter is “too optimistic,” Roubini said.

“Certainly the rate of economic contraction is slowing down from the freefall of the last two quarters,” he said. “We are going to have negative growth to the end of the year and next year the recovery is going to be weak.”

To contact the reporter on this story: Liza Lin in Singapore at Llin15@bloomberg.net.