13 June 2016
Asia's fading economic mojoAsia's dynamic economies have lost a slice of their economic growth potential these past few years. Decisive action will be necessary to stop the rot, writes John West.
Slip sliding awayEmerging Asia has seen its economic growth rate slide down from an average of 8.3% annually from 2006-2010 to 5.7% in 2016. This is perhaps not so surprising with much of the world economy being in the doldrums.
But what is more disconcerting is that emerging Asia's "potential economic growth rate" has also fallen from 8.5% in 2007 to 6.7% in 2014, a fall of almost 2 percentage points, according to a recent Asian Development Bank (ADB) report.
In other words, the emerging Asia group cannot now grow any faster than 6.7%. And looking into the future, the downward slide will only continue.
Asia loses its mojoHow could miraculous Asia somehow lose its economic mojo?
You only have to look back on the transitory nature of some of the factors driving emerging Asia's high-growth period to glean some insights.
First, urbanization has been a key driver of development as "surplus labour" from the countryside has moved to the city to work in factories. The “Factory-Asia” development model has been based on lots of low-cost labour to manufacture clothing, footwear, and toys, as well as assembling electronics.
But economies like Korea, Taiwan, and China began hitting the wall as surplus labor was exhausted, and wages started rising. Growth rates began slowing, and the pressure was on to make higher value-added products.
Second, much of this surplus labour advantage in East Asia has also come from a large youth bulge in countries’ demographic profiles. Large, energetic and youthful populations are key to driving low-cost labour development.
But low fertility rates now mean that populations in most Asian countries are not reproducing themselves. During 2015-2020, most Asian economies will see slower growth in their working-age populations than in the previous five years. In fact, Hong Kong, Taiwan, China, Korea and Thailand will experience falling working-age populations.
These trends in working-age populations will lop almost half a percentage point off emerging Asia’s annual growth rates. And as populations are now ageing rapidly, this imposes social costs on government and family budgets.
Losing the “advantage of backwardness”Third, experience shows that the initial stages of economic catchup to world leaders can be pretty easy, with a common sense cocktail of measures. Improve economic freedom for your citizens. Open up to foreign investment and trade. Invest in a bit of basic infrastructure. Send the kids to school. Absorb existing world technologies and knowledge. And away you go.
But as you start climbing the development ladder, progress becomes more challenging. More sophisticated policies are necessary. Developing countries lose the "advantage of backwardness". And growth naturally slows down. This is evident in the case of emerging Asia's most advanced economies, Hong Kong, Korea, Singapore and Taiwan, whose combined potential growth rate fell from about 9% in 1988 to just over 3% in 2014.
Dragged down by ChinaFourth, all Asian economies are now suffering from the slowdown in China's economic growth. China has of course become the world's second biggest and Asia's biggest economy. It has also become far and away the most important trading partner for virtually all other Asian economies. Emerging Asian economies now need to ignite new sources of growth, notably in the domestic economy.
In sum, there is a whole swag of Asian economies which now find themselves with slowing growth potential, especially Korea, Cambodia, Hong Kong, Taiwan, Vietnam, China, Sri Lanka and Thailand.
And as the above factors continue to operate, Asia's growth potential will only continue to slide down in the years ahead.
At the same time, some Asian economies with fast-growing populations like Indonesia and the Philippines have seen their potential growth rise, while potential growth rates have been stable in Bangladesh and India. But it is only a matter of time before demography catches up with them, and they suffer from a fading economic mojo.
Followers of Japan, Asia's first-mover, would not be surprised by the fading of Asia's economic growth potential. As recently as 1990, Japan's potential economic growth rate was still healthily above 3%, while today it is a miserable 0.5% according to the Bank of Japan.
How to revive Asia’s growth potentialWhat to do? Is it destiny to suffer fading economic growth potential?
There is indeed a lot that Asian economies can do to revive their economic growth potential.
Improving the competency of work forces by investing more in education and training. Enhancing economic opportunity, especially for capable women and seniors who want to continue working. Making it easier for women to combine family and working lives, which would lift fertility rates. Opening up to migration from neighbouring countries.
There are many "structural reforms" that could also boost Asia's economic growth potential. Removing domestic barriers to competition. Opening up economies to more international trade and investment. And investing in R&D to foster innovation.
Impediments to the "structural transformation" of the economy must also be eliminated. Economic development involves dramatic transformations as workers move from rural to urban areas, as high-tech activities take over from low-tech, and as the private sector becomes more important than state-owned enterprises and banks (notably in China). But there are far too many impediments to such structural transformations.
Asia's infrastructure-poor countries, like India, Indonesia and the Philippines can do much to improve growth potential by investing in basic physical infrastructure.
Asia’s deficit in courageWill emerging Asian economies bite the reform bullet?
It’s very difficult to be optimistic. For many years, the OECD and other organizations have been pushing Japan and Korea to implement structural reforms to lift productivity, but to little avail.
Their service sectors, the most important part of modern economies, are still horribly inefficient, with services labor productivity in Japan only about half that of the manufacturing, while in Korea it is less than half. Both countries suffer from a lack of political leadership to tackle the vested interests that are holding back these countries from achieving their full potential.
In the case of China, the government has promised that market forces will play a “decisive role” in the economy. But again, the government is very hesitant, and is unwilling to tolerate any short-term adverse effects from undertaking necessary reforms.
Asia's success in lifting 1 billion people out of poverty during 1990-2012 was thanks to the region's very high growth rates. But as the Asian Development Bank has argued "developing Asia's progress toward high-income status will increasingly depend on how fast it can close the gap in policy and institutions with respect to the advanced economies".
Much stronger leadership and political will than is presently in evidence will be required to realize the Asian Century.