Asia has led the global growth story for decades, and the world’s centre of economic gravity will continue to shift towards the region. However, long-term forecasts that show Asia maintaining its stellar growth rates should be treated with caution. History suggests a regression to the mean is probable. Stronger political institutions will be essential to facilitate Asia’s transition to new growth models.
Between 1960-2000, East Asian countries such as Singapore, Taiwan, South Korea and Japan experienced labour productivity growth of around 4%-5%. Hours worked, too, grew by around 2%. China and Vietnam enjoyed similar records in recent years. But many Asian economies are seeing slowing growth in their working age populations. China’s working age population share has peaked at around 1bn, and is projected to fall to 800m by 2050.
According to the International Monetary Fund, Asia will grow old before it grows rich, with peak working age population shares occurring at low per capita income levels. Countries like Thailand and Vietnam have peaked at 10%-30% of US per capita income. Indonesia and India have longer to run before they peak, again at relatively low per capita income levels.
There are challenges to productivity as well. Across Asia, there has been a shift into higher productivity sectors, such as from agriculture into manufacturing, and some industries are hitting their ‘productivity frontiers’. Easily-obtainable targets have already been reached, and it is more demanding to upgrade productivity when middle income status is achieved. Some lower income countries are finding it difficult, too, to support growth through manufacturing, as countries like China and India did in the 2000s. This is the problem of ‘premature deindustrialisation’.
A second structural factor is the challenged international economic system. Asian countries are the primary beneficiaries of globalisation and a liberal rules-based order; without it, the Asian miracle would not have been possible. Export-led growth is at the core of economic strategies from hub economies like Singapore and Hong Kong, to South Korea, Taiwan, and Vietnam. China accounts for over 10% of global trade, up from less than 3% in 2000 before its accession to the World Trade Organisation. But growth in cross-border trade and investment is likely to be slower than the levels observed in the decades prior to the 2008 financial crisis.
Global trade is facing demanding tests, such as the US withdrawal from the Trans-Pacific Partnership and the proliferation of protectionist measures. Parallel programmes in Asia, such as the Beijing-led Regional Comprehensive Economic Partnership, are not as ambitious as the TPP. Large-scale initiatives like China’s Belt and Road are unlikely to make a meaningful impact in the short or medium term. Rising geopolitical risk in Asia, too, is likely to challenge globalisation.
Precedent shows that transitioning to new growth models with the help of stronger political institutions will be a hard task for the region. Ironically, the speed and scale of Asia’s economic success makes this more difficult. In high income countries in the West, strong economic and political institutions developed over more than a century of relatively gradual growth. Asia’s institutions, with Singapore offering a notable exception, have had less time to develop and mature, and strengthening will be required.
Leaders in the region and beyond must respond accordingly and prepare for a wide range of economic outcomes; past performance is no guarantee of future success. Whether Asia, accounting for more than one-third of global GDP, can address these challenges will critically affect the rest of the world economy.
David Skilling is Director of the Landfall Strategy Group, a Singapore-based economic advisory firm.