Asia’s surplus has been widely blamed (unfairly) for causing the global crisis. The housing bubble was destroyed by inflows of foreign money that helped inflate the market. Many Westerners believe that Asians should spend their money rather than bank it away. But a more rigorous analysis suggests that in most Asian economies it is investment, not consumption, that is too low.
Even economists who believe that most of the blame for the crisis lies in Washington, DC, argue that Asian economies need to shift from exports and investment to consumption as their new engine of growth. “Asian economies fell from 65% of GDP in 1980 to 47% in 2008. American consumer spending, by contrast, accounts for more than 70% of GDP(Roach, 2009).” In China the blame lies entirely with saving, which rose faster than its investment rate. (India’s saving rate climbed just as steeply, but it was matched by an even bigger jump in investment, which kept its current account in deficit.)
Figure 1: Plunging Investment Rates of Asia since 1995
As seen in the figure above, the saving and investment curves correlate, yet savings are much higher than investments. Asians are scared to lose money in their market as the stock market is full of risks. The Indians in 2009 invested about 46% of their GDP, as a consequence of their steady economic growth in the past few years. Philippines, has remained low on investment, being the least investing country in 1995 and also in 2009. With more investment in markets, companies will have an opportunity to innovate more with better resources and create useful products. With useful products, consumer demand will increase and the global economy could be stimulated again.
current account surplus: Equal to country’s domestic saving minus its domestic investment.