The Asian Competitiveness Institute at the Lee Kuan Yew School of Public Policy, National University of Singapore, recently organised a session on economic growth in Asia at the 3rd International Conference on Public Policy, 28 – 30 June, Singapore.  This conference, held in Asia for the first time, examined a wide range of public policy issues and attracted some 1500 participants from around the world.

The session entitled “Understanding the Growth Slowdown in Asia and the Way Forward” was motivated by concerns the world economy was headed toward a protracted slowdown.  In the five years before the Global Financial Crisis, average economic growth in the G20 was close to 5 per cent per year, but has since averaged around 3 per cent, with average growth in G20 advanced economies falling proportionately more than average growth for G20 emerging economies.

In Asia, China’s pre-crisis growth rate of around 10 per cent per annum proved unsustainable in light of the world trade slowdown, re-orientation of China’s economy to consumption and services, and high company indebtedness.  Meanwhile, Japan’s growth perpetually disappoints, while many other Asian countries face strong headwinds due to the international trade slowdown, lower commodity prices, and stalled structural reform.

Professor Tony Makin presented a paper, co-authored with Dr Andreas Chai, in the session which argued that further liberalising cross border investment in the Asia-Pacific would significantly improve national income and living standards throughout the region.

International trade growth has dominated foreign investment growth in APEC economies since the 1994 Bogor declaration, reflecting the preference for liberalising international trade over foreign investment.  While it is widely accepted amongst economists that liberalisation of international trade in goods and services improves overall economic welfare, that comparable gains arise from international trade in assets, both financial and real, is far less appreciated.

Yet given capital’s primary role in generating output, increased foreign investment conceivably plays as important a role in economic development as increased international trade in goods and services.

Regulatory barriers to foreign investment are a key reason investment flows are much smaller than trade flows.  These barriers can be defined as any government policy measure which distorts decisions about where to invest and in what form.  They include policy measures that limit the level of foreign investment, create the need for firms to endure costly, and time consuming screening processes required to convince national authorities that projects are in ‘the national interest’.

Most APEC economies adopt some form of screening or registration of foreign investor along with restrictions on levels of foreign ownership of domestic firms. Case-by-case judgments by government bodies are widespread in the region as are limits on ownership, managerial control and board membership, especially in sectors such as telecommunications, broadcasting, and banking.

Considerable scope exists for liberalising foreign investment policy regimes in Asia-Pacific economies. Most notably, foreign investment in the financial, manufacturing, media, real estate and transport industries is either heavily regulated or prohibited in most APEC economies, on the grounds that foreign ownership in these sectors contravenes the ‘national interest’, an ill-defined concept that obscures the economic gains foreign investment can bestow.

Disallowed foreign investment in APEC economies is additional investment those economies could otherwise have put to productive use.  Hence restrictive foreign investment policies in the region deprive economies of opportunities to accumulate extra capital, through either the creation of new assets or the acquisition of existing ones.

Since greater foreign investment provides an alternative pathway to higher growth and living standards in the region, liberalising foreign investment should become a higher APEC priority.

Article written by Professor Tony Makin, Director APEC Study Centre, Griffith University.