ANALYSIS - Besides consumption, Asia must also invest more

By Alan Wheatley, China Economics Editor

BEIJING (Reuters) - Perhaps by living on another planet you might have missed the conclusion that Asia must boost consumption and let its exchange rates climb to help put the world economy on a more-even keel.

But, until recently, another part of the policy prescription for stronger Asian demand to reduce global imbalances has received far less attention: the region's woefully weak public sector investment, especially in networks such as transport, energy and communications that form the sinews of any economy.

When Asia-Pacific finance ministers met this month in Singapore, Thailand's Korn Chatikavanij was asked about pressure for a rise in the yuan, widely seen as a precondition for other governments in the region to let their own currencies appreciate.

"It's the elephant in the room, for sure, but not the only issue. We were more concerned with how to finance needed infrastructure building," Korn said in a Reuters chat room.

No wonder. Investment in many Asian countries collapsed after the region's financial crisis in 1997/98 and has never fully recovered. In the case of Thailand, gross domestic capital formation was 41.8 percent of gross domestic product in 1996. It halved to 20.4 percent in 1998 and last year was at 28.8 percent.

In Malaysia, investment totalled 43.0 percent of GDP in 1997 but just 19.1 percent in 2008; in the Philippines over the same period the rate dropped from 24.8 percent to 15.2 percent, according to the Asian Development Bank.

The capital spending of the go-go years of the mid-1990s was unsustainably high. Now, in many countries, it is unsustainably low, policymakers argue. And with insufficient investment across Asia to absorb domestic savings, the result is current account surpluses that exacerbate global economic imbalances.

If demand for Asian goods from rich countries remains stagnant, regional production will be depressed, the ADB acknowledged.