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ASIAN economies may be leading a global recovery, but that rebound may be more fragile than it looks, a leading economist has warned.
Countries such as China should aggressively make structural reforms in areas such as health care and education if they are to sustain growth in domestic demand, Morgan Stanley's chief economist for India and Asean, Mr Chetan Ahya, said yesterday.
Although policymakers in India and China have taken some steps to increase such social safety nets, he said the measures so far are minuscule.
Economic stimulus packages, driven by government spending, will boost domestic demand only temporarily rather than build a strong foundation for domestic demand growth.
Personal savings rates in developing countries such as China and India are very high because of the lack of social security, Mr Ahya said.
The savings rate in Asia excluding Japan is 43 per cent of economic output and 51 per cent in China.
But there is also a high savings rate in the corporate sector as a result of decreased risk appetite since the Asian financial crisis, said Mr Ahya in an interview with The Straits Times at the Morgan Stanley office in Capital Square. He was discussing a report released on Monday.
The report stated that rescue measures have been short-term stop-gap ones to fill the collapse in exports rather than serious structural changes.
Asian economies are largely export-oriented and have suffered from a drop in demand from the major importing economies of the United States, European Union and Japan, known as the G3. Mr Ahya said there is a risk that these three major economies may suffer a relapse despite signs of recovery.
'If G3 economies don't come back soon, because they have to deleverage, beyond this cyclical boost what is it that policymakers are doing to make sure we have a stronger foundation to this domestic demand recovery?'
China needs to raise domestic consumption while Taiwan and countries in South-east Asia need to boost domestic investments.
Export-dependent Singapore will have to restructure its export model to areas of growth in Asia.
He said the Government has already highlighted areas such as solutions to urbanisation, wealth management and health care as growth areas.
'What I like about Singapore is the nimbleness of the whole growth model, it is very adaptable,' he said.
However, he said, before that can take place there will be an adjustment process period of low growth.
'To grow at 5 per cent will be difficult in this environment,' he added. Singapore will likely grow below that for the next two to three years.
The economy grew just 1.1 per cent last year and the Government expects it to shrink 4 to 6 per cent this year.
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