THE STRAW THAT STIRS THE STRAWMEN:

Why the U.S. Still Drives Asia's Growth: Nanyang Technological University Professor Friedrich Wu says hype about China and India aside, the U.S. economy ultimately matters more for Asia (Friedrich Wu , 3/21/07, Business Week)

Despite the recent hype about "Indian triumphalism," it will be decades before that country can emerge to serve as a growth engine for its Asian neighbors. Aside from a few pockets of the economy--such as IT and services outsourcing--that have been penetrated by globalization, an overwhelming majority of the Indian economy remains insular and over-regulated.

A recent World Bank report entitled Doing Business in South Asia 2007 ranks India a lowly 134th out of a total of 175 countries on a business environment improvement index. Furthermore, as Edward Luce has somberly highlighted in his recent book, In Spite of Gods: The Strange Rise of Modern India, it would be sheer hubris for Indian leaders to proclaim their country to be the next great economic power.

India presently has more than 300 million people living in absolute poverty. Only 10% of its workers are employed in the formal economy, 35% of its population remains illiterate, and it has the largest number of HIV-infected patients in the world--while corruption is so endemic and deep-rooted that the author laments that "it is the system."

In the case of China, its average 9% to 10% economic expansion in the past five years and its rising investment and trade ties with economies in the region have indeed helped lift the growth of its neighbors. Nevertheless the Chinese economy itself is prone to recurring episodes of "overheating", and hence lacks macroeconomic stability.

As such, in the near term, it is hardly a reliable and sustainable growth engine for its economic partners. While the Beijing government has implemented, since 2004, a plethora of administrative and market-based measures in an attempt to control runaway growth, the jury is still out on whether these policies can cool the turbo-charged economy.

The IMF and Asian Development Bank have separately warned that Asian economies and commodity-exporting countries with strong investment and trade ties to China would suffer various degrees of collateral economic damage should an "overheating" Chinese economy experience a precipitous fall into a "hard landing".

Aside from this risk, China itself is still very much dependent on the U.S. market. In 2005, nearly a quarter (21.5%) of its total exports were shipped to the U.S. Even though other Asian countries have become less dependent on the U.S. market, the latter still absorbed between 10.4% (Singapore) and 20% (Malaysia) of these countries' total exports.

Furthermore, exports to the U.S. account for as high as 20% or more of the gross domestic products of Hong Kong, Malaysia, and Singapore. The ratios for China, Taiwan, and Thailand are lower but still average a not-insignificant 7% to 10%. Last but not least, for many Asian countries, their growing exports of components and parts to China for assembling into finished products also depend on final demand in the U.S. market. Should the latter's demand decelerate or contract, Asian countries' exports to China would also falter.

Just as important, the U.S. is ranked the largest (for Malaysia, South Korea, and Taiwan) or second largest (Philippines, Thailand, and Singapore) foreign investor in many Asian countries. For these six countries, at least 25% of their 2005 total, inward, foreign direct investment came from U.S. multinationals. A trend away from--or an abrupt decline in--U.S. foreign direct investment in the region would certainly hurt most Asian economies, resulting in significant job losses.