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Global macro & geopolitics from a small economy perspective

Can Asia’s growth be sustained?

David Skilling
20 August 2017

From Japan and China to ASEAN, Asia has been the stand-out global growth story of the past several decades. Over the past 60 years, successive waves of Asian economies have converged towards the income frontier, with sustained growth rates that are unprecedented in the historical record. And the latest updates to the IMF World Economic Outlook forecast a solid near-term outlook: emerging Asia is forecast to grow at 6.5% for 2017 and 2018; China at 6.7% and 6.4%, and India at 7.2% and 7.7%. In contrast, advanced economies are forecast to grow at about 2%.

The global centre of economic gravity will continue to shift towards Asia. But the multi-decade forecasts that have Asia continuing at stellar growth rates should be treated with caution. The historical economic record suggests that sustained over-performance is rare. Some form of meaningful regression to the global growth mean seems likely.

First, consider Asia’s slowing productivity and demographics. Between 1960 and 2000, countries like Singapore, Taiwan, South Korea, and Japan experienced labour productivity growth of about 4-5%, plus growth in hours worked of about 2%. More recently, countries like China and Vietnam have experienced similar records.

But many Asian economies are experiencing slowing growth in the working age population. For example, China is currently at peak working age population, of almost exactly 1 billion, which is projected to reduce to 800 million by 2050. The IMF recently warned again that Asia will get old before it gets rich, with peak working age population shares occurring at low per capita income levels. Countries like China, Thailand and Vietnam have peaked (at 10-30% of US per capita income); Indonesia and India have longer to run before they peak, but also at relatively low per capita income levels.

There are also challenges on productivity. Across Asia, there has been a shift into higher productivity sectors (such as from agriculture into manufacturing) as well as convergence to the productivity frontier within sectors. But some of the low-hanging fruit has already been obtained, and it is more demanding to upgrade productivity when middle income status has been achieved. Some lower income Asian countries are also finding it difficult to use manufacturing as the productivity growth machine that the Asian tigers did; the problem of ‘premature deindustrialisation’.

A second structural factor is a challenged international economic and political system. Asian countries have been primary beneficiaries of globalisation, and a liberal rules-based order. Without globalisation, the Asian miracle would not have been possible: export-led growth has been at the core of economic strategies from the hub economies of Singapore and Hong Kong, to South Korea, Taiwan, and Vietnam. China now accounts for over 10% of global trade now, up from less than 3% in 2000 prior to its WTO accession.

But there are emerging pressures on globalisation. For one thing, growth in cross-border trade and investment is likely to be slower than the levels observed in the decades prior to the crisis. And the global trade system is facing challenges: from the withdrawal of the US from the TPP to the potential for protectionist measures. Various initiatives in Asia (such as the AEC and RCEP) are not as ambitious, and initiatives like OBOR will only be useful over time. The fragmentation of the global system, and the increasing interaction of geopolitics and international commerce, introduces frictions into the system, which is likely to slow the intensity of globalisation. Although Asia is increasingly the location of final consumption, this will have an impact.

So after decades of very strong performance, several key supporting features (demographics, productivity catch up, rapid globalisation) are weakening. And there are several risks in Asia also, from geopolitical risk to the very rapid growth in China’s corporate debt that has fuelled China’s recent growth.

To respond to these challenges, and transition to new growth models, will require strong political institutions. Economic history shows that this is a demanding process. And, perhaps ironically, the outstanding economic success of many Asian economies will make this process particularly challenging. The unique factor in Asia’s economic rise has been its speed and scale. Previous periods of take-off have been slower. The UK took 35 years from 1820 to double its GDP, and another 35 years to 1890 to double it again. The US grew about twice as fast over this period, doubling its GDP three times between 1820 and about 1870. In contrast, China doubled its GDP between 1980 and 1992; again between 1992 and 2002, and again by 2010.

The economic and political institutions that support high income countries developed over more than a century of relatively gradual growth in the West, but these institutions have not yet had as much time to develop in Asia. There are notable exceptions, such as Singapore, but stronger policy and institutional capability will be required to sustain strong performance and manage new stresses. And some of the recent political and institutional developments are not encouraging.

There are at least three practical implications. First, Asia strategies need to be robust to a wide range of economic outcomes: past performance is no guarantee of future success. Second, a key feature in assessing the outlook for specific countries in Asia will be institutional and policy quality. And lastly, because Asia has been the global growth engine, and accounts for over one third of global GDP, the success of Asian countries in meeting these challenges will have a material impact on the rest of the global economy.

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