Popular talk revolves around how Asia is decoupling from the United States in economic terms. But the ‘Asia is coming into its own’ construct is undermined by the lack of significant domestic demand drivers in the erstwhile East Asian tigers. To be sure, the share of exports headed to the United States from these economies has been reduced in recent years, but only to be redirected to China, leaving them as dependent as ever on export-led growth.

Following the Asian financial crisis, many of the countries in the region focused on fortifying themselves against any external shock by building up massive foreign-exchange reserves and running large current-account surpluses. But in doing so, they seem to have forgotten what it takes to be growth stars. Companies and consumers in economies from Taiwan to Malaysia have been keen to pay down debt and stay away from any form of leverage, resulting in record-low loan-deposit ratios in the banking system. Historically, in strong growth phases, loan growth usually increases as people feel more inclined to borrow and banks become more willing to lend, signaling higher confidence.

While the deep psychological scars from the East Asian crisis have been an important reason for keeping a lid on domestic demand, policy sclerosis and the inability to reinvent economic models have also played major roles in undermining growth prospects. Indonesia, for example, should aim to grow 8 to 9 per cent in the current global environment, given its large exposure to commodities and a low per capita income of $1,700 that provides ample scope for ‘catch-up’. Instead, its growth rate has barely averaged 6 per cent during the past few years, with the government balking at carrying out key reform — particularly in the labour sector, where highly restrictive laws result in only one of every three Indonesians holding a full-time job.

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