After years of robust economic momentum, Asia’s two largest emerging countries are on the wane.
The double-digit gross domestic product (GDP) growth rates of China were impressive, but they are a thing of the past. It looks like the country’s economy may hit only 7.5% this year, and given the propensity of its provinces to inflate their economic estimates that true figure could well be lower.
India is faring a lot worse. The country's GDP growth peaked at 9.3% in 2010, but it has since fallen victim to New Delhi's populist, spend-thrift, anti-business mindset. Amid bureaucratic and regulatory inertia, India's economy will be lucky to grow much over 4% this year.
While Asia’s biggest economies start to flag, two unlikely neighbours have risen to offer rapid GDP growth: Bhutan and Mongolia.
According to the International Monetary Fund (IMF), the tiny Himalayan kingdom of Bhutan enjoyed economic growth of 9.7% in 2012 and 8.5% the year before. Overall its economy has expanded by an average of over 8% over the past four years, although it’s possible that its growth could slow slightly to 6.3% this year.
The North Asian country of Mongolia is growing even quicker. Its GDP increased by 17.5% in 2011 and 12.28% last year. The IMF predicts it could accelerate further to 14% for the whole of 2013.
What’s the secret of these frontier markets?
In large part it is down to their size, or lack thereof. Bhutan only has a populace of 700,000, it’s a small place of only 38,390 square kilometers, and its GDP was only worth US$2.2 billion at the end of 2012, according to the IMF. Mongolia is bigger but remains relatively modest, with a GDP of approximately US$10.25 billion at the end of last year and a population of 23 million.
Growing small economies at a rapid rate is a lot easier than maintaining such expansion in larger countries. It’s also cheaper to introduce the sort of infrastructure and support services that can make a pronounced increase in GDP growth.
But it helps that both nations are eager to attract foreign investment.
On September 2 Bhutanese prime minister Tshering Tobgay visited southern neighbour India (GDP growth expectations: 4.1% in 2013) to market his country’s potential to business leaders eager to find somewhere to make more money.
“We are extremely keen to attract more investments from India and…FDI (foreign direct investment) regulations have been made more conducive to Indian investors by permitting investment in rupees,” he told local business leaders.
New Delhi would be glad of the currency stipulation; the last thing it wants is yet more Indian corporates shoveling money offshore and further weakening the rupee.
Mongolia has spent several years dithering over the how much freedom it should give foreign companies to exploit its abundance of natural resources. It has made its share of mistakes in doing so – the government aims to repeal a controversial foreign investment law this month, just a year after implementing it.
The law had stated that foreign companies needed government approval before buying over 33% of a local business in areas including mining, banking and finance, media and telecommunications, and parliamentary approval for over 49%. Foreign investment plummeted after its implementation, so Ulan Bator is trying to undo the damage it created. The law change followed the government’s attempts to tinker with a deal signed with Rio Tinto over Oyu Tolgoi, a giant gold and copper mine.
Plus the government is considering giving companies that invest over US$10 million into Mongolia a seven- to 10-year tax-benefit window.
Open to investment
India and China could learn from the policies of their tiny neighbours.
New Delhi should take notes on the Bhutanese government’s commitment to investment liberalisation. The latter country is keen to encourage foreign capital into education, health, hospitality, information technology, financial services and infrastructure development, according to Tobgay.
That commitment to reform has been distinctly lacking in an increasingly paralysed Indian government. Finance minister P. Chidambaram announced that US$27.8 billion of stalled energy and infrastructure projects would get the go-ahead on August 27, but this smacked more of desperation than the outcome of considered, long-term planning.
Plus India’s upper house of parliament is busily voting through populist policies, including a land acquisition bill that hikes the cost of acquisition for growing corporates. Industrialists panned the law, saying it would make projects unviable.
Meanwhile China should reflect on Mongolia’s evolving attitude towards foreign investors. Ulan Bator’s willingness to admit a mistake and rectify its foreign investment law is an encouraging sign. In contrast there are few signs that Beijing will drop its longstanding foreign investment restrictions into sectors including banking, automobile manufacture and telecommunications.
If anything the environment for foreign companies is getting worse. Foreign lobby groups have criticised the country of late for seemingly discriminatory regulatory enforcement. The issue hit the headlines in August with a spate of investigations into alleged corruption activities at some foreign pharmaceutical companies, but observers note that the alleged bribery is a standard industry practice and that Beijing has only targeted international firms with its investigations.
Both Bhutan and Mongolia have more work to do if they are to become paragons of fair business practices and attract greater investment. Bhutan only entered the World Economic Forum’s global competitiveness index this year, where it was ranked 109th out of 148 countries. Mongolia stands at 107th. Ulan Bator’s priority should be to install a set of fair and open investment and mining rules and then stop tinkering with them.
Yet for all their faults both countries seem eager to engage with and attract foreign companies and investors to develop their economies. And they are reaping the economic rewards of doing so.
Bhutan and Mongolia’s larger neighbours should take heed if they want to improve their own outlooks.