During the last decade, the economies in the Asia-Pacific region* expanded by an average of 6% per year (in inflation adjusted terms). One result of the economic growth in the region was an increase in private consumption, which grew from $1 trillion to $2.5 trillion during the same period. Growth in spending essentially tracked the growth in GDP, suggesting a relationship between higher income levels and household consumption (see chart below). However, higher income levels, mixed in some cases with greater access to credit, not only increased the ability of Asian households to consume, but also impacted their spending habits. Many households no longer needed to spend their entire budget on basic necessities such as food and shelter. Instead they were able to spend a portion of their extra income on consumption of discretionary goods and services—everything from air conditioners to motor scooters and movie tickets. In addition, Asia’s rising demand for goods and services has not only been met with greater supply, but also by the expansion of “modern” retail formats, further changing what, where and how people choose to consume.

    Growth in Asian consumer spending is of importance to U.S.-based investors seeking the long-term diversification benefits derived from overseas investing. An Asian economy focused almost entirely on exports is to a large extent dependent on the strength of the importing country’s economy, and accordingly the success of Asia’s exporters has been dependent on U.S. economic health. However, increased consumption in Asia can eventually lead to less dependence on export markets in general, and the U.S. economy in particular, potentially strengthening the diversification benefits of Asian investments for U.S.-based portfolios.

THE WILLINGNESS TO BUY
Increased consumption across Asia is a function not only of an increased ability to spend, but also of the willingness to do so. Asians have traditionally saved a large portion of their income as insurance against uncertainty. This habitual saving was well rooted in logic: Asia has seen its share of war, famine, and financial instability. However, high savings rates were also a product of policies employed by several governments across the region to fund the expansion of the industries deemed important to economic development.

    For example, during Korea’s rapid economic development between the early 1960s and the Asian crisis, the government directed credit to export- as well as import- substituting industries in an effort to industrialize the country. However, many of these industries were capital intensive, requiring high levels of investment relative to GDP. To meet this demand for investment, the government encouraged households to save a greater portion of their rising incomes, thereby suppressing domestic consumption. Even though directed lending has since been scaled back, savings rates in the region remain high by international standards. But the fact that Asians have become willing to spend some of their extra income, rather than reflexively saving it, is indicative at least in part of a new-found sense of confidence in the future. However while spending has increased, it still remains low relative to GDP, especially when compared to developed economies such as Japan and the U.S. For instance, the propensity to consume, which can be measured in terms of household spending as a percentage of GDP, averages about 53% in the Asia-Pacific region* and 55% in Japan, compared to 70% in the U.S.

    Politically, the Asia-Pacific region as a whole has experienced a period of calm relative to previous decades. While the Asian crisis of 1997-98 resulted in widespread economic and political turmoil, there are indications that stability at the household level has improved. One example of this is job creation. Thailand created 4.6 million jobs in a country of about 65 million people between 1994 and 2004, mirroring similar trends across the region. Prices for goods and services, previously another source of instability, have generally stabilized. China’s inflation, which had climbed to over 20% in the mid-90s, has remained under 5% for the past eight years. The combination of greater confidence and rising incomes may explain why Asia’s population has reason to believe that tomorrow will be better than today. And from that belief comes the willingness to spend some of today’s extra cash on discretionary items.

    However, while the region has enjoyed a period of relative calm, Asia continues to face a multitude of factors that could dispel this sense of security. For example religious tensions in southern Thailand have been on the increase, the cross-strait conflict between China and Taiwan remains unresolved, while Indonesia illustrated the potential risk of financial instability when the country’s ballooning oil subsidies resulted in a sharp depreciation of the Indonesian rupiah in August 2005.

WHAT TO BUY AND WHERE TO BUY IT
As income rises, a household spends a smaller proportion of wealth on basic necessities such as food and shelter. This frees up cash for spending on discretionary items; and indeed, evidence from countries across Asia indicates that discretionary spending has increased (relative to basic necessities) with rising income levels. In Taiwan, for example, the per capita GDP in 1961 was about $1,200 in inflation- adjusted terms, and food-related purchases represented 55% of the average household’s budget. There was little left for spending on discretionary items such as cars and telephone service, which represented less than 1% of household spending. In today’s industrialized Taiwan, however, GDP per capita exceeds $13,000, and the typical household can now dedicate a larger proportion of its budget to purchases of cars, cell phones, internet services and vacations. As a result, purchases of transportation- and communication-related goods and services has recently increased to 13% of household spending. As the charts above suggest, this pattern is repeated across the region as household income grows.

    The increased ability of consumers to spend has been conducive to the introduction of previously unavailable products and services, and this too has had its impact on spending patterns. For example, over the past few years low-cost airline tickets have become increasingly available across parts of the region. In Malaysia, which is home to one of the fastest-growing low-cost carriers in Asia, many middle-class families can now afford to fly for the first time. This increased affordability is also changing the perception of travel, with an increasing number of people now vacationing outside of their home countries and for shorter periods of time.

    Along with the introduction of new goods and services have come new ways in which to buy them. “Modern retail” formats—from malls to convenience stores—have made important inroads into Asia’s traditional retail environment, and currently account for 47% of retail sales across the region.

    The development of modern retailing varies greatly from country to country. In India, for instance, the traditional retail sector—small-scale mom-and-pop stores—employs nearly 21 million people, representing close to 7% of the country’s workers. With the exception of a brief period during the 1990s, the sector has for decades been fiercely protected from foreign competition and insulated from potential investment. As a result, though modern retail has indeed experienced rapid growth over the past several years, it still accounts for less than 5% of India’s retail sales. India’s Associated Chambers of Commerce and Industry estimates that in 2004, India had about 50 malls, compared with about 18,000 shopping centers†† in the U.S., which has a population one-quarter the size of India’s.

    However, an estimated 300 malls are in various stages of development across the country, and while strong opposition remains, there are signs that international companies may be permitted to enter the field in the not-too-distant future. Based on experience from other countries in Asia, it seems likely that access to a broader array of services and products, as well as more convenient ways to buy them, will play a role in shaping the future spending habits of India’s households.

    The region’s consumer habits are continuously evolving. The interaction among rising incomes, greater access to credit, and the increased availability of goods and services will play an important role in determining the extent to which Asia’s economies can chart their own course more independently of the U.S. and Europe.

Sources: CEIC, IMF, World Bank, AC Nielsen, ADB, National Council of Applied Economic Research (NCAER), HSBC, Census of India
* Excludes Japan, Australia, and New Zealand
** All dollar figures are in U.S. dollars with exchange rates calculated as of 12/31/04
*** PPP is a measure of the relative purchasing power of different countries’ currencies over the same goods and services after accounting for differences in local price levels.
† Incentives included a 20% tax deduction for credit-card expenditures and a monthly government-sponsored lottery with a prize of $100,000 to the holder of the winning credit-card receipt. In Korea most of the cards issued were not credit cards with a revolving credit as in the U.S., but cash cards, which allowed cardholders to access short-term loans that were repaid in full on a monthly basis.
††Shopping centers in excess of 100,000 sq. feet.; PBS.