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Asia-Pacific: the rise of China in a (geo)politically diverse continent

Economic Report

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To the Asia-Pacific overview page

  • Poverty has been significantly reduced in East Asia and the Pacific, but remains high in South Asia
  • Strong economic growth swells the ranks of the APAC middle class going forward, mainly driven by China and India
  • The democratisation process is expected to broadly continue across the region; China is likely to remain an outlier
  • Corruption levels in emerging APAC are relatively high, although political risk is relatively low
  • China’s influence in the region is increasing via its growing role as the region’s export destination, its increasing infrastructure investments, and its initiatives like the Silk Road and Asian Infrastructure Investment Bank
  • Military spending is on the rise. For countries involved in the dispute surrounding the South China Sea, this may generate stability risks 

Significant poverty reduction in East Asia and the Pacific

Income levels have risen strongly over the past 50 years in almost all Asia-Pacific (APAC) countries, although there remain huge differences in income levels between countries (see also Loman, 2016). As a result of increasing income, poverty levels have decreased sharply, particularly in East Asia and the Pacific[1] (figure 1 and 2). That being said, poverty levels remain relatively high in South Asia[2]

Figure 1: Significant poverty reduction in East Asia and the Pacific
Figure 1: Significant poverty reduction in East Asia and the PacificSource: World Bank
Figure 2: Large differences in poverty levels between countries
Figure 2: Large differences in poverty levels between countriesSource: World Bank
Figure 3: Inequality increased in half the region
Figure 3: Inequality increased in half the regionSource: World Bank

Meanwhile, income inequality has increased in around half the counties for which we have data (China, Vietnam, Sri Lanka, Laos, Indonesia, Australia, India, Mongolia and Bangladesh; figure 3). This is in line with global developments (Stand & Rising, 2011). A decline in both poverty and income inequality is welcome, as both can fuel social discontent and socio-political instability (Alesina and Perotti, 1993; Collier et al., 2003).

The rise of the middle class

Emerging APAC’s middle class is expected to grow rapidly in the next two decades on the back of strong economic growth. The middle class is defined as people with a daily income of USD 10-100 in 2005 PPP terms, who are thus able to buy relatively expensive products like televisions, cars or refrigerators. According to Kharas (2010) APAC’s middle class is forecast to increase to 1.7bn by 2020 and 3.2bn in 2030 (table 1). This will be ten times more than North America and five times more than Europe in 2030. By far the most important countries driving the rise of the middle class in APAC, but also globally, are China and India. In 2030, according to Wilson (2010) roughly one billion people in China (around 70-75% of China’s projected population)[3], and roughly 475 million people in India (around 30%[4] of India’s projected population) could be middle class.

Table 1: Rising middle class in Asia Pacific (millions of people, global share)
Table 1: Rising middle class in Asia Pacific (millions of people, global share)Source: OECD

The middle class is not only a driver of consumption and domestic demand, its social role is equally important. The middle class can be also seen as one of the drivers of democratisation and progressive but moderate politics (source OECD), however this does not hold true for China or the poorest countries in the region (e.g. Myanmar and Pakistan), where a middle class has yet to develop. Nevertheless, in the past decade a democratisation trend has been visible in both developing and emerging economies across the region (figure 5) (EIU democracy index). On the one hand, the number of full as well as flawed democracies in the region has increased, with South Korea becoming a full democracy and Malaysia and Singapore switching to flawed democracies from hybrid regimes. Flawed democracies such as Indonesia, Malaysia and Hong Kong have shown the most significant progress on the path to democratisation. The authoritarian regimes of Myanmar, Vietnam, and Pakistan have made some progress towards a relatively more democratic governance. However, the general trend towards democratisation is not without setbacks, as can be seen for example in Bangladesh, Sri Lanka and Thailand, where governments have made a detour from the democratisation path. Bangladesh and Thailand are still struggling to find their way back, while Sri Lanka is back on track after the presidential elections in January 2015. It is worth noting that despite the rapid growth of its middle class, China has remained one of the most authoritarian countries in the region. Its future democratisation path remains uncertain.

Figure 4: Governance regimes differ widely across the region
Figure 4: Governance regimes differ widely across the regionSource: Economist Intelligence Unit
Figure 5: Democratisation trend not without (minor) setbacks
Figure 5: Democratisation trend not without (minor) setbacksSource: Economist Intelligence Unit

High risk of protests and high level of corruption

Although on average the APAC region scores close to the world average, corruption levels in emerging APAC are relatively high (figure 6). This is a hindrance to economic progress since corruption often acts as a tax on conducting transactions and negatively affects a country’s institutions, economy, government efficiency and the equality of the tax system as it usually benefits the wealthy. Furthermore, Kiewiet de Jonge (2009) among others has found that perceptions of corruption increase an individual’s likelihood to participate in protest. Indeed, protest is a common and recurring phenomenon in developing APAC countries (figure 7). Besides corruption, the causes of protest are various and differ per country, but include human rights, government policy, cultural disputes, demands relating to quality of life and disagreement with the current regime or election results. However, despite the high risk of protest and several upcoming elections (see table A1 in the appendix), political risk is relatively low in APAC (figure 8). This is explained by the relatively low scores on underlying indicators such as government and policy instability and state failure. Nepal, Pakistan, Bangladesh, Myanmar and Mongolia are exceptions.

Figure 6: Control of corruption is low in developing APAC
Figure 6: Control of corruption is low in developing APACSource: World Bank
Figure 7: High risk of protest in developing APAC
Figure 7: High risk of protest in developing APACSource: IHS
Figure 8: Political risk is relatively low
Figure 8: Political risk is relatively lowSource: IHS

Going forward, the rise of the middle class and their increasing demand for an improved quality of life could result in increased political discontent, unless governments are able to meet rising expectations. Among other things, this last factor will require improvement in institutional quality (see Loman, 2016).

Increasing importance of China

The US has long been the main trading partner of APAC. Over the past 20 years however, China (including Hong Kong and Macau) has become the key export partner for the APAC region (figure 9). During this period, exports to China as a share of total exports increased in all countries for which we have data (figure 10). The ASEAN region became more dependent on trade with China (figure 11), due to its geographical proximity and interlinked supply chains. Australia, Hong Kong, Mongolia and to a lesser extent New Zealand also became heavily dependent on trade with China (see also Kalf and Weernink, 2016).

Figure 9: China has become the most important export destination for the region…
Figure 9: China has become the most important export destination for the region…Source: UNCTAD
Figure 10: ... but its importance differs per country
Figure 10: ... but its importance differs per countrySource: UNCTAD
Figure 11: ASEAN export to China is increasing
Figure 11: ASEAN export to China is increasingSource: UNCTAD

Besides trade relations, China’s influence in the region is shaped by huge investment, most prominently in commodity and infrastructure sectors. These infrastructure investments have several benefits for China. They will improve China’s transport links, could boost China’s clout in the region and could also support domestic metals and construction companies that are struggling with overcapacity.

Economic battle between China and the US

Both China and the US desire to claim leadership and dominate trade in the Asia-Pacific region. In order to enhance their economic footprints in APAC, both countries have initiated various bilateral or multilateral partnerships in the region. Apart from its economic impact, trade is also an instrument to increase political influence. The US initiated the Trans-Pacific Partnership free trade agreement, which excludes China. Once implemented, TPP will include the US and 11 other nations bordering the Pacific: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam. Other countries, like the Philippines and Indonesia, are also considering joining TPP. TPP may lead to more intense trade between TPP parties and to diversion of trade away from East Asian countries that are not participants. As for trade creation, TPP will have a major effect on participating countries that are currently very protective of their own sectors as trade liberalisation will stimulate efficiency.

China in turn has initiated the New Silk Road, which is an important part of China’s foreign policy strategy to increase China’s power in the region and abroad. The Chinese Silk Road initiative was founded in 2013 and consists of a land route between China and Europe and a maritime trade route linking Chinese ports with African and Europe’s Mediterranean countries. Its aim is to create closer ties with the rest of Asia, Europe, the Middle East and Africa. It can be a potential strategic rival to the US-led TPP, as around 60 countries have already signed bilateral declarations of intent. The Silk Road initiative could increase infrastructure quality, trade intensity and China’s influence in the Eurasian region.

Furthermore, China dealt a considerable blow to US leadership in the region when it managed to enlist major European economies (the UK was first) and US allies in Asia as founding members of the Asian Infrastructure Investment Bank (AIIB) in 2014, while the US declined to join and even campaigned against the AIIB. The AIIB’s aim is to increase infrastructure investment in Asia and combined with the Silk Road initiative, this might to some extent address the USD 8tn infrastructure spending gap in the region whilst further consolidating China’s influence in the region.

Additional cooperative initiatives within APAC

In addition to the collaborations mentioned above, APAC is home to various multilateral economic and political cooperative platforms (see table A2 in the appendix). Despite minor progress in various areas including free trade, many countries are still prioritising domestic development over international relations and common interests. Apart from the Chinese initiatives mentioned above, progress on economic integration and common activities in APAC has therefore been relatively slow.

Regional disputes

The region is subject to a number of unresolved tensions. Tensions between India and Pakistan concern the Kashmir region, with both countries claiming territorial rights that extend beyond their national borders. There is the unresolved political status of Taiwan, with Beijing pushing for the full reunification of Taiwan with mainland China, while the pro-independence DPP won Taiwan’s January 2016 elections. There are border disputes between India and China. There is a long-standing dispute between China and Japan regarding territorial claims over the Senkaku Islands. Last but not least there is North Korea pursuing its nuclear ambitions. However, none of these bilateral tensions pose a serious threat of a full-blown war in the short to medium term.

A more serious threat is posed by the conflict in the South China Sea, due to its multilateral character. The dispute concerns territorial claims over the Paracel and Spratly Islands, in which China, Vietnam, Taiwan, Philippines, Malaysia and Brunei are contesting their rights (figure 12). The rationale behind this conflict lies primarily in the fact that the South China Sea is the main trade route for China as well as the other littoral states. Furthermore, the sea's abundant oil resources make controlling it even more attractive, even despite the structurally lower oil prices in the short term.

Figure 12: Territorial claims in the South China Sea
Figure 12: Territorial claims in the South China SeaSource: Rabobank

While the international community has not been actively involved in the dispute, in the last few years China has begun unilaterally establishing indirect control over the contested island groups through a major land reclamation project, the so-called ‘Great wall of sand’, including the construction of objects for military use. This has led to ever-increasing tension between the countries involved in the dispute, where a clear anti-China bloc has formed, backed by Japan and the US striving to preserve the right of free navigation in the region. The US is intended to intensify its naval presence in the region, as suggested by the recent joint military exercises with Japan and Philippines. Meanwhile, in 2015, China began a major military reform aimed at modernising its army and extending its military reach through establishing naval military bases overseas.

Contrary to the global trend of a slight contraction in military spending, every country in APAC (except Japan, Myanmar and Timor) saw its military spending rise. On average, military spending in APAC has risen by 7% in 2014 and by 52% in the period between 2009-2014 (SIPRI, 2015). Although China has been the main driver of this growth, accounting for more than half of it in absolute terms, an increase in excess of 50% in the past five years has been seen in Indonesia, Papua New Guinea, Bangladesh, Vietnam, Pakistan, Philippines and South Korea (figure 13). That being said, the amounts in absolute terms are still relatively low compared to big spenders US and Russia (this is to a lesser extent true for China, figure 14). On a side note, Japan has abandoned its pacifist policy for the first time since WWII, meaning that Japan’s military forces can now participate in military operations overseas.

Figure 13: Huge rise of military spending in the region…
Figure 13: Huge rise of military spending in the region…Source: SIPRI
Figure 14: …but China still far behind the US
Figure 14: …but China still far behind the USSource: SIPRI

Footnotes

[1] Including Japan, China, Cambodia, Indonesia, Korea, Laos, Malaysia, Mongolia, Myanmar, Pacific Islands, Papua New Guinea, Philippines, Singapore, Thailand, Timor-Leste and Vietnam.

[2] Including Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka.

[3] Assuming average income growth rate of around 7%.

[4] Kharas (2010) estimates that around 50% of India’s estimated population will enter the middle class before 2025.

Literature

Collier, P., Elliot, L., Hegre, H., Hoeffler, A., Reynal-Querol, M. and Sambanis, N. (2003), Breaking the Conflict Trap: Civil War and Development Policy, World Bank, Oxford University Press.

Kiewiet de Jonge, C. (2009). Corruption as a Mobilizing Grievance. Paper presented at the annual meeting of the Midwest Political Science Association 67th Annual National Conference, Chicago.

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