Consumer Spending in Asia free essay sample

Asia is the world’s largest and most populous continent. Interestingly the countries which fall under Asia vary in size, environment, historical ties and governance systems. Thus the wealth of these countries differs quite drastically. For example in terms of Gross Domestic Product, GDP (the market value of all the goods and services produced by labour and property located in a country† (About. com 2009)), Japan has the largest economy on the continent. In fact measured in terms of GDP Japan has the second largest economy in the world (Wikipedia 2009). Yet this is a far cry from other Asian countries such as Pakistan and Bangladesh, where the annual turnover of some large Multinationals exceeds the national GDP. Unfortunately despite the fact that Asia accounts for roughly 60% of the worlds population (wikipedia 2009), it has been overshadowed (in economic terms) by the shear might and power of the western economies, namely America. However in a bizarre twist of fate, sparked by the now infamous credit crunch, which has had a devastating effect on the once robust economies of the West, many are now asking the question, can Asians replace Americans as a driver of global growth? (Economist June 2009). We will write a custom essay sample on Consumer Spending in Asia or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page These Asian countries or economies are often referred to as the ‘Emerging Markets’. This definition is often widely used and loosely defined. The term ‘Emerging Markets’ was first coined by by Antoine W. Van Agtmael of the IFC (International Finance Corporation) of the World Bank in 1981 (Heakal 2009). It is used to describe fast growing economies, which have embarked on economic development and reform programs (Heakal 2009). Thus they are considered to be transitional economies, as they are moving from a closed economy to an open economy, whilst importantly building accountability within the system (Heakal 2009). China and India are examples of two prominent ‘Emerging Market’ Countries. Gone are the days these economies were ignored. The growing economic strength of these countries, one could go as far as to say may be seen as a threat to current international business. China and India use their generating wealth to actively compete with the West (Ashburton, 2006). For example, the take-over of Corus Steel by the Indian company, Tata made it the largest Indian take-over of a foreign company and the world’s fifth largest steel firm (BBC News, 2006). Another example is of the Indian company Taj Hotels positioning itself as a global player as succeeding Four Seasons Hotels in operating as a New York City landmark. As many multinationals face domestic market saturation (Fenwick, 2001) they could undoubtedly benefit from accessing these huge markets. The purchasing power of China is greater than that of any other country in Asia, and the second largest in the world (Wikipedia 2009). However the economies of these ‘Emerging Market’ countries vary considerably from the west in terms of culture and it has been argued that unlike countries in the West, individuals have a tendency to save rather than spend, thus have large current account surpluses. However the statistics tell a rather different story. ‘In China, India and Indonesia spending has increased by annual rates of more than 5% during the global downturn. China’s retail sales have soared by 15% over the past year’ (Economist 2009) . These are phenomenal numbers. This includes government spending thus does overstate the numbers, however according to official household surveys, the percentage increase is in fact more in the region of 9%. This is highly impressive in comparison to the downturn in the west. Sales of cars have increased by a staggering 47%, clothes 22% and sales of electronics have increased by 12%. Ironically while car sales were up in Asia, the American taxpayers had to bail out the once massive Ford. However its not good news across all of Asia, spending has suffered as a result of increased levels of unemployment and lower wages in countries such as Hong Kong, South Korea, and Singapore. In these countries real consumer spending was 4-5%. Yet there are positive signs in countries such as Taiwan, where retail spending rose in May for the third consecutive month, that spending is beginning to increase. The fact remains, relative to American consumer spending, Asian consumer spending has soared (Economist 2009). However despite the strong growth and purchasing power of China, the fact remains that in dollar terms China’s population spend 1/6th of that in America. This explains in part why the Chinese Government have taken such bold steps to boost consumption. For example they have made it easier to borrow, as well as issuing a number of subsidies for villagers, enabling them to buy vehicles and electronic goods such as TV’s, computers and mobile phones. This is a Government who wants its people to dig deep into their wallets and spend. Furthermore there are sufficient grounds for a positive outlook for the future. As incomes rise, this will no doubt have a positive effect on future sales. At the moment, only 30% of rural households own a refrigerator (compared with urban households). If the hopes of the governments in Asia are to be met, and consumer spending is to continue to soar, the answer lies in financing. The developed countries have a household debt to GDP ratio of around 100%, this is significantly higher than that of most Asian economies whose household debt is less than 50% of GDP. In particular in China and India, this is even lower at 15%. Interestingly the one exception to this is South Korea, where households have as much debt relative to their income as Americans. It seems the Chinese Government have plans in progress to tackle this. As in May this year the Chinese Bank, began planning legislation which will allow foreign institutions to set up consumer-finance firms, which will allow loans for consumer-goods purchases. However perhaps the biggest question is whether these governments will allow their exchange rates to rise, to allow the shift of balance between growth from exports to domestic spending. The rise in exchange rate would increase consumer’s real purchasing power and arguably more importantly give companies a reason to start producing goods for the domestic market. Unfortunately these governments have been reluctant to allow currencies rise too fast. Asian spending is without a doubt an important part of global growth. Surprisingly prior to the financial crisis which has hit the west, Emerging Asia’s consumer spending contributed slightly more (in absolute dollar terms) to the growth in global demand than did America’s (Economist 2009). For a long time Globalisation and free markets, have been blamed for widening the gap between the rich and the poor. It has been argued markets create the ‘Progressive exclusion of the poor’ (Patnaik 2003 p. 62). Indeed there has been much research which has reached the conclusion capitalisation has been ‘dominated by uneven development, in which divergence is the rule and convergence the exception’ (Weeks 2001 p. 28). Perhaps, and it is a big stretch at the moment, the latest developments indicate a shift to the once overlooked. However this pessimist cant help but feel, that these Emerging Market economies are far away from truly enjoying the fruits of their labour, and perhaps even much worse, they have only been given a taster, to something which will avail them until their governments wake up to the fact that rather than subsidising western consumers through undervalued currencies, they need to revalue the currencies.