Asia growth spurt raises sustainability conundrum
Punting on the sustainable growth rate of emerging Asian economies in the coming decades - a development that will profoundly reshape the global economic order - is a trillion-dollar wager.
On August 21, 1983, the exiled front-runner for the presidency of the Philippines, Benigno Aquino Jr, was gunned down as he stepped off a plane in Manila. The assassination marked the beginning of the end of the 20-year reign of dictator Ferdinand Marcos that saw the Philippines go from one of the region’s brightest economic prospects to the ‘basket case’ of Asia.
Thirty years on, Aquino’s son, President Benigno Aquino III, is pushing through a programme of economic reforms that, together with a crackdown on corruption, has propelled the country back into economic contention. Hiking spending while cutting the fiscal deficit has sparked a boom in consumption and investment. After surging 6.6% in 2012, the economy is forecast to grow 6% this year and to maintain this pace through 2020, according to the Asian Development Bank (ADB).
The stock market was the second best-performing in Asia and fifth best in the world in 2012 by broad market index measures. Market capitalization surged 39% last year and the main PSEi Index rose 17.8% in the first quarter of this year.
The widely anticipated award of an all-important investment-grade credit rating last month seals the Philippines’ place among an economic vanguard of countries in a region that is growing at a blistering 6.6% and has been for the past 30 years.
The question is how long can Asia maintain this rapid pace of growth?
Gareth Leather, Asia economist at Capital Economics, says Asia’s sheer size and diversity means there is no single answer.
“Long-term, the two determinants of growth are demographics and productivity,” Leather explains. “Accordingly, there will be a slowing of economies such as Taiwan, Singapore, Korea, and China as productivity increases gained from technological catch-up are exhausted and the labour force begins to shrink.”
However, he says economies such as India, the Philippines and Vietnam, which are less technologically advanced and where the working-age population is expanding, will enjoy a competitive advantage.
Barring catastrophic shocks such as war or major political upheaval, a wider slowdown in the medium term is unlikely. This is because much of the growth is being driven by development spending, rises in working-age population and consumption, and intra-regional trade – not the global business cycle.
These drivers will continue to gather pace into the next decade. However, Asia could fall victim to its own success, due to the correlation that says GDP growth always slows as per capita GDP approaches developed-world levels.
Given that the per capita GDP of Asian countries are forecast to rise by 75% on average by 2030, GDP convergence with the west is inevitable.
This all points to a slow down – whether due to economies maturing or becoming uncompetitive. Whichever scenario plays out, economies will slow at different paces commencing at varying points in time during the next 30 years.
Economies that industrialized first are at, or nearing, this position, notably the Asian Tigers: South Korea, Taiwan, Hong Kong and Singapore.
Despite a gradual slowing that began in the late 1990s, these economies still managed average annual growth of 6.1% during the past three decades. Their annual growth will slow to 4.4% average for the decade 2011-2020 and slow further in the years 2021-2030 to an average of 3%, according to ADB long-term forecasts.
Economies such as China, where rapid development began more recently, are only now beginning to see sustained phases of high growth moderate. The average growth rates of the region’s non-Tigers are expected to slow to 5.3% in 2011-2020 from 5.8% in the previous three decades. Growth is expected to fall to 4.7% average in the decade 2021-2030.
China’s growth is set to rebound to 8.2% this year after slowing to 7.8% in 2012. GDP growth is expected to ease to 8% in 2014 and keep heading down. Its strong fundamentals mean it will likely sustain growth above 6% through 2020 but beyond that forecasts range between 5% and 8%.
The fall from the double-digit growth rates of the pre-financial crisis era presents a serious threat to regional growth because it coincides with the erosion of China’s dominance in downstream manufacturing, according to Shweta Singh, emerging markets economist at Lombard Street Research.
Asia’s response to the insatiable appetite of the “world’s assembler” for goods and materials, explains Singh, has been to embrace a supply chain model in which economies increased exports of intermediate goods to China while reducing their share of global final goods exports.
“Economies that are tied to China’s export-led growth model via supply-linkages will
be unfavourably exposed as the mainland’s status as an assembly hub comes further under pressure due to its diminishing competitiveness,” warns Singh.
However, domestic-demand-oriented economies and those that can carve out a larger share in global exports – India, Indonesia, the Philippines and Thailand – are much better placed.