Role of Production Networks in Sustaining and Rebalancing Asia's Growth

In last few decades, Asian production networks have contributed significantly toward the rapid trade expansion and economic growth in East Asia. Developed Asia produces technology-intensive intermediate goods and capital goods and ships them to the People Republic of China (PRC) and ASEAN for assembly by lower-skilled workers. The finished products are then exported to the US, Japan, Europe, and other countries. In view of ongoing global financial crisis and European debt crisis, the ability of the rest of the world to absorb Asia’s exports has decreased. Export production in some Asian countries has also been subsidized by artificially low prices for labor, land, and energy, and by lax enforcement of environmental regulations. Asian economies should thus rebalance away from relying too much on exporting subsidized goods to developed economies. On the supply side, the best way to rebalance growth is to increase productivity in order to raise wage rates and living standards. This can be done by leveraging production networks to graduate to higher value-added, knowledge-intensive activities. On the demand side, producers in the region should turn to Asian consumers as an engine of growth. This can be facilitated by improving connectivity through increased investment in connecting infrastructure such as transport and telecommunications; and by implementing a region-wide FTA. This paper addresses these issues by providing an analytic description of production networks in Asia. It then discusses how developing Asian countries could leverage production networks to facilitate technology transfer to domestic firms and how a regional FTA could bring Asian producers and consumers together. Finally, it considers how infrastructure investment in large and connecting projects could help to rebalance and sustain growth in the region through increased connectivity and reducing trade costs.