Asia’s stifled services

Changyong Rhee

The eurozone crisis has dominated discussion among policymakers over the last few years, but the economic slowdown in Asia’s two giants—the People’s Republic of China (PRC) and India—has become a source of growing public concern as well. How worried should we be about an additional drag on the global economy?

After years of double-digit GDP growth, the PRC’s economy is decelerating. At the Asian Development Bank, we predict that its growth will slow to 7.7% this year, from 9.3% in 2011. The PRC’s population is aging, real wages are rising, and growth is moderating toward more sustainable rates.

India, too, has massive potential to grow fast and reap a demographic dividend, but it has been struggling with structural reform. We expect that India’s expansion will slow to 5.6% in 2012, from 6.5% last year.

Weak external demand is partly responsible for the falloff in growth, but internal factors—namely, slowing investment and stagnating consumption—are also holding back economic expansion. Maintaining growth in the face of a global slowdown is a daunting task, and requires rethinking the future of “factory Asia”.

Asia’s boom was driven largely by intraregional manufacturing linkages: intermediate goods and parts were sourced from within Asia for assembly into final goods exported to advanced economies. But, with budget-tightening around the world, demand for Asia’s exports is expected to continue to falter. Where,

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