RaboResearch - Economic Research

Asia-Pacific: can Asia’s convergence story continue?

Economic Report

Share:

To the Asia-Pacific overview page

  • Asia’s economic track record has been impressive
  • In the coming decades, demographics will provide headwinds in the developed countries of the region and China, and tailwinds in South Asia
  • While investment has remained high, total factor productivity growth has fallen, which could suggest that potential economic growth is slowing down
  • However, the innovation outlook for the region is relatively favourable
  • The region scores average on institutional quality, though both the business environment and the quality of infrastructure have improved, especially in the poorer countries

Growth slows down in APAC too

On average, economic growth in Asia and the Pacific has moderated somewhat in recent years (figure 2), thanks to a slowdown in ASEAN and East Asia, while growth in South Asia (i.e. India and its neighbours) has picked up somewhat. Growth in Australia and New Zealand is estimated to have fallen slightly in 2015. As economic growth in the region has remained relatively high, the region’s share of world GDP has continued to grow, particularly thanks to China, though India’s share has also been growing steadily. Japan’s share has fallen (figure 3).

Figure 1: Subregions used in this study
Figure 1: Subregions used in this studySource: Rabobank

We discuss the region’s future growth prospects below, looking at its past performance, demographics, savings and investment patterns, institutions, infrastructure and innovative capacity.

Figure 2: While growth has moderated in recent years…
Figure 2: While growth has moderated in recent years…Source: IMF
Figure 3: … APAC’s share in world GDP has continued to grow
Figure 3: … APAC’s share in world GDP has continued to growSource: IMF

A tale of rapid convergence

The economic performance of Asia since 1950 has been an incredible success story. Between 1950 and 2015, almost all countries in the region managed to reduce their income-per-capita gap with the United States. In particular, the income convergence realised by Japan, South Korea, Taiwan and, more recently, China has been extremely rapid. Only Bangladesh, the Philippines and New Zealand (which was already a developed country in 1950) experienced a widening of their gap between 1950 and 2015. Between 1990 and 2015, all countries in the APAC region except Japan managed to reduce their income gap.

Meanwhile, there are still enormous differences in income levels. Singapore and Hong Kong have a higher per capita income than the US. On the other hand, even after correcting for differences in purchasing power, income per capita in India, Pakistan, Myanmar, Cambodia and Bangladesh is still below 10% of the US level, while income per capita in Vietnam and Philippines is only slightly above 10% of the US level (figure 5).

As a result, poverty remains an enormous social problem, even though it has fallen dramatically in recent decades. According to the World Bank, the number of people living on less than USD 1.90 and USD 3.10 per day respectively in developing East and Southeast (ASEAN) Asia fell from 1,113 million (or 81% of the population) and 1,288 million (93%) in 1981 to 144 million (7%) and 443 million (22%) in 2012. In South Asia, the number of people living on less than USD 1.90 and USD 3.10 per day respectively declined from 535 million (or 58% of the population) and 757 million (85%) in 1981 to 314 million (19%) and 913 million (55%) in 2012.

Figure 4: Rapid convergence…
Figure 4: Rapid convergence…Source: Conference Board
Figure 5: …but inter-country inequality is extremely high
Figure 5: …but inter-country inequality is extremely highSource: Conference Board

Demographics

One factor that will determine growth in the coming decades is demographics. The developed countries of the region will face higher dependency ratios due to ageing, which is likely to have a negative impact on growth. In Japan an already high dependency ratio will increase further. In South Korea, the dependency ratio will increase very rapidly after 2020. Uniquely, given the fact that it is not yet a developed country, China’s dependency ratio will also rise from currently very low levels, though the levels reached by 2035 will still not be very high (figure 6).

On the other hand, most of the less developed countries in the region will face favourable demographic trends (figure 7). In South Asia, dependency will fall in the coming decades, which should boost economic growth, though to fully reap the benefits countries will also have to tackle the problem of underemployment. Within ASEAN, Cambodia, Indonesia, Laos, Myanmar and the Philippines are also expected to experience demographic tailwinds. Demographic trends will be less favourable in Thailand and, to a lesser extent, Vietnam.

Figure 6: Rapid ageing in East Asia, while demographics improve in South Asia…
Figure 6: Rapid ageing in East Asia, while demographics improve in South Asia…Source: UN
Figure 7: … less clear trends in most countries in Southeast Asia and Oceania
Figure 7: … less clear trends in most countries in Southeast Asia and OceaniaSource: UN

Investment

High savings and investment ratios have been another pillar of (East) Asia’s economic rise. Investment to GDP ratios are still relatively high in Asia. China clearly stands out, along with Bhutan. In fact, in China’s case the problem is too much saving and investment rather than too little. High credit growth and inefficient investment could pose risks to financial stability and while consumption growth has remained strong, the household savings rate in China remains very high. In the countries affected by the Asian crisis, investment fell as a percentage of GDP after 1998, but most countries still have decent investment levels. Some of the poorer countries, such as Cambodia, Myanmar and Mongolia, rely substantially on foreign savings, which could increase their external vulnerability. Meanwhile, despite an increase in recent years, investment levels in the Philippines are still relatively low. Pakistan is an extreme outlier, with very low investment and gross savings levels that constrain the country’s growth potential.

Figure 8: High levels of investment…
Figure 8: High levels of investment…Source: IMF
Figure 9: …and often also high saving
Figure 9: …and often also high savingSource: IMF

High levels of investment appear to have continued to support economic growth, as most countries in the region have managed to continue to achieve decent growth of labour productivity, with labour productivity growing most rapidly in China, Myanmar, India, Sri Lanka and Indonesia (figure 10). Labour productivity growth has however been rather low in Pakistan and Malaysia. Labour productivity growth also declined in the developed countries of the region, particularly in South Korea and Singapore.

Figure 10: Labour productivity growth
Figure 10: Labour productivity growthSource: Conference Board
Figure 11: TFP growth
Figure 11: TFP growthSource: Conference Board

Growth of total factor productivity (TFP), a proxy for the efficiency of an economy, has slowed in the region after the outbreak of the Great Recession, with the Philippines and Indonesia as the only exceptions. Vietnam even experienced an outright decline of TFP both before and particularly after the Great Recession. Asia and the Pacific is not the only region to encounter the trend of slowing TFP growth, as a slowdown in TFP growth appears to be a global phenomenon.

In the case of China, the rapid integration in the world economy, accompanied by fast growth in the manufacturing sector, underpinned very high levels of TFP growth before the Great Recession. The strong increase of investment in infrastructure and real estate that took place in China after the outbreak of the Great Recession might explain why TFP growth has fallen in China, as investment in real estate is likely to contribute less to GDP than other types of investment, while it may take time before infrastructure investment will fully bear fruit.

Enabling factors

Institutions

We now turn to a number of enabling factors for future growth. Institutions are an important determinant of longer-run economic performance (see, for example, Acemoglu and Robinson, 2012). Institutionally, the region scores close to the world average, though ease of doing business is somewhat better than the world average (figure 12). Unsurprisingly, there are very large differences between countries. The developed countries have high scores, while China’s score is quite poor. This is largely due to China’s low ranking on voice and accountability (i.e. lack of political freedom) and political stability and absence of violence/terrorism.

Figure 12: Institutional score close to world average
Figure 12: Institutional score close to world averageFigure 12: Institutional score close to world averageSource: World Bank, Rabobank
Figure 13: Huge disparities within the region
Figure 13: Huge disparities within the regionSource: World Bank, Rabobank

The World Economic Forum also gives a relatively favourable rating to the business environment in the region. More importantly, the business environment has improved more than elsewhere between 2006/2007 and 2015/2016. ASEAN’s score in particular has shown an improvement (figure 14). Among individual countries, the scores of Cambodia, the Philippines, Nepal, Sri Lanka and Indonesia have improved, while Pakistan, and India and Thailand have fallen back somewhat in this index (figure 15).

Figure 14: Business environment has improved, especially in ASEAN…
Figure 14: Business environment has improved, especially in ASEAN…Source: World Economic Forum
Figure 15: ... but, again, huge disparities within region
Figure 15: ... but, again, huge disparities within regionSource: World Economic Forum

Zooming in on one important pillar of the business environment, infrastructure remains an issue for the region, despite the progress made. Besides China, the least developed countries in the region have also been able to improve their infrastructure (figure 17) substantially. Nonetheless, the latter group’s score suggests that lack of infrastructure remains a big challenge for these countries. The relatively good scores for the developed countries have remained roughly constant, though Australia now scores lower than it did 9 years ago due to a less favourable view on the quality of the country’s road, port and air transport infrastructure. Thailand’s infrastructure score has also worsened.

Figure 16: Infrastructure remains an issue, despite progress…
Figure 16: Infrastructure remains an issue, despite progress…Source: World Economic Forum
Figure 17: … and narrowing disparities
Figure 17: … and narrowing disparitiesSource: World Economic Forum

Innovation

Innovation is an essential factor for future growth, especially for the region’s more developed countries. The innovation outlook looks relatively favourable for the region as a whole, though there are of course big differences between countries. First, expenditure on research and development (R&D) in the region has increased strongly in recent decades, largely thanks to China (figure 18). South Korea, Japan, Australia, Singapore and China all score particularly well. Spending on R&D is much lower in the poorer countries, though India scores relatively favourably considering the country’s still rather low level of income (figure 19).

Figure 18: Rapid growth of R&D in developing part of the region…
Figure 18: Rapid growth of R&D in developing part of the region…Source: World Bank
Figure 19: …but disparities within region are wide
Figure 19: …but disparities within region are wideSource: World Bank

The Global Innovation Index reveals a similar picture. Some countries are among the world’s most innovative countries, but other countries in the region are among the least innovative (figure 20). Not too far behind the developed countries of the region, China and Malaysia score relatively favourably in this index. Considering their still rather low levels of income per capita, Vietnam, Mongolia and India also have quite good scores, while the scores of Myanmar, Nepal, Pakistan and Bangladesh are very low.

Figure 20: Countries are among the most and least innovative worldwide
Figure 20: Countries are among the most and least innovative worldwideSource: Global Innovation Index
Figure 21: East Asia and Australia and New Zealand have the best scores
Figure 21: East Asia and Australia and New Zealand have the best scoresSource: Global Innovation Index
Figure 22: Economic complexity has improved in most countries
Figure 22: Economic complexity has improved in most countriesSource: Atlas of Economic Complexity

As a whole, the region also appears to have moved up in the value chain, as according to the Economic Complexity Index the exports of most countries have become more advanced (figure 22), with the exception of (still very high scoring) Japan, and the commodity producers Australia, New Zealand, Mongolia and Bangladesh. In particular (again) Vietnam, China, Thailand, South Korea and the Philippines appear to have moved up in the value chain.

Conclusion

The overall long-term economic growth outlook for Asia and the Pacific remains rather favourable, even as TFP growth has fallen in recent years, as it has in the rest of the world. Infrastructure and the overall business environment have improved in most countries. The innovation outlook for East Asia in particular looks good and most of the countries of the region have been able to move up in the value chain. However, demographics will result in headwinds in China and the (more) developed countries in the region, but will provide tailwinds in South Asia.

Literature

Acemoglu, D. & Robinson, J. (2012). Why Nations Fail: The Origins of Power, Prosperity, and Poverty, Crown Business.

Atlas of Economic Complexity

IMF (2015), World Economic Outlook, October 2015

Share:
Author(s)

naar boven