Image
July 15, 2019

Past performance is no guarantee of future results. Questioning the inevitability of Asia’s rise.

Job displacement by automation is already sizable on a per capita basis in the US (concentrated on labour intensive manual work) and the rise of an Asian middle class with the rising wages they demand may have set the time bomb ticking for these trends to be repeated in Asia.

The Asian Development Bank estimates that Asia-Pacific accounted for around 60% of global growth in 2017.

According to the IMF the figure was slightly higher still in 2018. Asia’s share of global GDP has continually increased over the last decade, now accounting for around 30% of the worlds output. It’s predicted that this share of global GDP will sit at over 50 percent by 2050. All pretty positive stuff…

The primary drivers of this growth can essentially be tagged as demographics – increasing levels of urbanisation and the rise of a middle class.

Asia will arrive at a tipping point in 2020 where the majority of it’s population will be deemed middle class. This should itself fuel further economic growth. In fact,

by 2030 Asia will represent 66% of the global middle-class population

and 59% of middle-class consumption, compared to 28% and 23% respectively in 2009.

When you look at the stats, Asia’s continual rise seems likely right now, but a contrarian opinion is possible – in this day and age inevitable outcomes are generally far from inevitable #brexit… my point is that it would be naive to assume any particular trajectory as inevitable. Asia’s collective share of global GDP is estimated to have been circa 60% in 1700, and then the industrial revolution and European colonialism happened with GDP finally bottoming out at <20% by 1950. Suggest such a thing in Ming dynasty China and you’d have been laughed out of the forbidden city.

So what could go wrong?

Demographic taxes

Population size is one reason often quoted as to why the region will lead the 21st century, especially economically, and Asia's 14 leading nations (China, India, Indonesia, Japan, the Philippines, Vietnam, Thailand, South Korea, Malaysia, Australia, Taiwan, Hong Kong, Singapore and New Zealand) account for nearly two-thirds (65%) of the world’s population. China is generally seen as leading the charge in growth. However, demography in China is less supportive to the picture of relentless growth than it was a decade ago. China has for some time benefited from a large demographic dividend. A demographic dividend as defined by the United Nations is “the economic growth potential that can result from shifts in a population’s age structure, mainly when the share of the working-age population is larger than the non-working-age share of the population". Increases in labour supply boost economic growth. This decade however the working age population in China has started to shrink, a trend that looks worryingly similar to the pattern seen in Japan. The rate of change is also a cause for concern with the shift from demographic dividend to demographic tax occurring faster in Asia than elsewhere. It is true to say that there are some young Asian economies (Indonesia for example) who are following more positive trends and for this next wave of Asian nations to mature the demographic dividend as it comes through could add a further 1-2% to their GDP. For Japan, China and Vietnam however, the working age population has peaked, and as much as positive demographic trends add to the economy, negative subtract (according to the IMF .5-1% growth per year). This demographic tax is further compounded by other factors that move in parallel with shifting demographics. Precautionary savings and spending habits are for example adjusting in these countries further impacting growth. Ageing populations reduce economic growth and to deny the risk that Asia will grow old before it gets rich would be blinkered to say the least.

The middle ground

In a steadily growing economy per capita GDP should rise continuously but many middle-income countries don’t follow this pattern, take South Africa. In reality, such countries see bursts of growth followed by periods of stagnation or decline. Obviously it’s easy to over simplify things but it’s generally pretty easy for a country to fall into what’s known as the middle income trap. At one end of the scale countries in the middle income trap aren’t able to compete with low-income, low-wage economies in areas like manufacturing and at the other end they can’t compete with advanced economies in high-skill and service sectors or technological innovation. Given the number of Asian nations at similar stages of development it seems likely that a good portion will become trapped in this middle ground.

Growth isn’t enough.

To break free of the middle income trap a nation needs to shift from resource-driven growth, with low-cost labor and capital, to productivity-driven growth. Many Asian countries are actually seeing declining productivity growth. What’s important is to achieve the growth, and to be able to transition to a high income economy in time to reap the rewards.

Infrastructure

Asia still needs large scale infrastructure investment to sustain it's growth. The United Kingdom’s construction of an extensive railway network during the industrial revolution for example had far-reaching effects on the British economy, society and life in general. The iron industry and coal output increased, similarily there was a great expansion of other metals industries which in turn influenced the development other industry, equalised agricultural prices and increased markets so on and so forth. However Asia still has large gap between infrastructure needs and finance. This is certainly somewhere that international capital markets can help. In order to fund the development of infrastructure, finance needs to be in local currency – this is fuelling a trend of local currency bond market growth in countries like Malaysia where the size of bond outstanding in terms of GDP is already the same as Canada, however the overall economy is still small. For Banks, extending balance sheet to local currency in markets such as Mongolia requires the use of derivatives to ensure financial risk from clients is managed and controlled. The cross currency swap market has a crucial role to play and is certainly very active in Asia with for example the Chinese borrowing in dollars and swapping into to renminbi. The cost of funding is also very efficient, and local standards are continually developing in parallel and converging with global, but relatively speaking it’s still early days for much of Asia.

Rise of the machines

The world bank has forecast that two thirds of emerging market jobs could be automated, this poses a risk to developing economies where the relative cost of labour is currently cheap. Asia is still attracting jobs and final demand has yet to be realised, but the economy of the future is digital and digital technologies require skill. Unlike steam and previous technologies, which essentially didn’t require education, digital tech requires high levels. Job displacement by automation is already sizable on a per capita basis in the US (concentrated on labour intensive manual work) and the rise of an Asian middle class with the rising wages they demand may have set the time bomb ticking for these trends to be repeated in Asia. Whilst the service sector is growing, it’s also still early days.

Rise of the oceans

Asia is also vulnerable to extreme weather, and climate change is an ever present concern. According to the UN, the impact of climate change could slash up to 9% off the South Asian economy annually by the end of the century. The human and financial toll could be even higher when extreme drought, flooding, earthquakes etc. are factored in. A report by the Asian development Bank has predicted that

due to climate change by 2050, the collective economy of six countries (Bangladesh, Bhutan, India, the Maldives, Nepal and Sri Lanka), will lose an average 1.8% of their annual gross domestic product, rising to 8.8% by 2100. 

Another good example of the relative vulnerability of Asia to climate change is Japan. Japan’s economic competitiveness is threatened due to it’s heavy reliance on imports from countries that themselves face climate change-exacerbated security risks. Climate change for example could critically disrupt supply chains in the automotive and electronics industries, endangering Japan’s competitive advantage in these sectors.

The solution here is harder to see but growth in a green bond market and similar trends in green and sustainable finance are surely a step in a positive direction for all of us.

There are certainly a number of impressive examples of growth in Asia, but on balance measures of living standards, technological capacity, political freedoms all still lag behind those of the United States and other developed economies and there seem to me to be a number of banana skins lining the road to "the Asian century". China and India reasserting their historical place at the top table, it's hard to argue with that, Asia generally though still has some distance to come.


Popular
Most Viewed

Image

Related Articles


June 30, 2022

SIMM Falls Short says PRA Letter to Banks




2 MIN



Risk Management


June 28, 2022

FMSB Statement of Good Practice on Trading Platform Disclosures




2 MIN



Regulation


June 20, 2022

Regulatory change and data fragmentation are key challenges for 85% of firms




2 MIN



Regulation