INASIA

Insights and Analysis

Trends That Will Shape Asia’s Economic Future (Part 1)

February 4, 2015

By Véronique Salze-Lozac'h

This is the first of a two-part blog.

Last month, the International Labour Organization (ILO) announced troubling global trends in unemployment, which is expected to worsen in the coming years. According to its 2015 Employment and Social Outlook report, young workers aged 15-24 are particularly hard hit by the crisis, and Asia is home to the largest number of these young people. Similarly, OXFAM’s January briefing note warns against the risk of the huge gap between rich and poor hindering economic growth, undermining democratic institutions, and triggering conflict in the region.

A worker in Gurgaon

The ILO announced troubling global trends in unemployment, and young workers aged 15-24 are particularly hard hit by the crisis, and Asia is home to the largest number of these young people. Photo/Conor Ashleigh

Indeed, while Asia enters 2015 as the world’s fastest growing region, it is also experiencing new social tensions and economic vulnerabilities. As the international community defines the post-2015 Sustainable Development Goals (SDGs), there is a general agreement that to accomplish higher levels of development, Asian economies have to achieve a more inclusive and sustainable growth.

To ensure that this century will indeed be the “Asian Century,” the region will need to confront many challenges and manage ongoing trends. Here are four to look for:

1. Asia as the driver of growth

The good news is that Asia will continue to be the driving force in world economic growth. In 2014, China became the world’s largest economy in purchasing power parity (PPP) terms, overtaking the United States for the first time in history. The ADB forecasts that Asia’s per capita income could rise six-fold in PPP terms to reach Europe’s levels by 2050. Overall, the emerging Asian economies are expected to grow by 6.9 percent per year from 2014 to 2018.

Underpinning economic growth in Asia is not only the rise in domestic demand, particularly for middle-income countries such as Thailand and Malaysia, but also an increase in foreign investment in less developed countries such as Cambodia, Laos, Myanmar, and Vietnam.

Asia is also looking more inward, integrating Asian regional value chains and producing products for domestic consumers. The challenge will be to sustain growth rates and move countries toward and beyond the middle-income level.

2. The growing tide of inequality and disparity

Both inequalities within countries as well as disparities across economies are threatening the long-term growth prospects of Asia.

The gap between Asia’s rich and poor has widened considerably over the past 20 years. According to the latest Knight Frank wealth report, over the next decade Asia will overtake Europe in terms of its billionaire population (especially in China, India, Indonesia, and Vietnam), with a forecasted 66 percent growth in the number of the ultra-high-net-worth individuals.

While some inequality can help promote investment by fostering the accumulation of capital in the hands of a few entrepreneurs, too much inequality implies reduced economic mobility that can lead to misallocation of resources and to social and political unrest. The challenge will be to guarantee greater economic opportunities for low-income populations to achieve more inclusive and balanced growth.

3. China and India: Asia’s trendsetters

China and India are defining factors in Asia’s overall economy, and as emerging superpowers, both are now determined to exert more influence in the region. However, over the longterm, China and India’s growth outlook is still uncertain, as is their capacity to implement policy reforms that will help them overcome their current weaknesses.

According to the ADB, India is forecast to grow by more than 6 percent in 2015-16, giving it an even greater capacity to create a dynamic South Asia. A new government under Prime Minister Modi is moving to enhance its stature in global politics and play a major role in integrating South Asia – the region’s least integrated bloc. Meanwhile, China is determined to play a more active role in financing projects in the region, as shown by its role in spearheading the Silk Road Fund and the Asian Infrastructure Investment Bank (AIIB).

Given the importance of China and India, Asia’s fate will depend on their capacity to address their numerous social, environmental, political, and economic challenges. These include the recent decline in exports caused by the slowdown in the U.S. and Europe, as well as weaknesses in their financial sectors, poor local government finances, and real estate vulnerabilities. Additionally, both countries will need to confront the uneven development and rapid urbanization that have accompanied their impressive growth rates.

4. Regional integration and regional fragmentation

Ongoing regional cooperation and integration will further solidify Asia’s position as the driver of global growth. On trade, energy, water, food security, and climate change, the cost of non-cooperation is gradually becoming clear to the governments and elites of Asia. Countries will find that stronger regional economic cooperation, including through SAARC in South Asia and ASEAN in Southeast Asia, will be key to achieving more equitable and inclusive growth.

Through integration, consumers will enjoy greater choices, better quality, and lower prices with goods from neighboring countries. A recent study, co-produced by The Asia Foundation and CUTS International, found that intra-regional tariff reduction would lead to an approximate gain of $2 billion a year in welfare for South Asian consumers.

However, the risk of regional fragmentation is also increasing, spurred by rising nationalism and tensions between countries that threaten the emergence of an “Asian identity.” There is also a proliferation of bilateral agreements, lack of real commitment to regional integration, risk of inefficiency, weak political support at the national and subnational levels, and resistance from companies that have no desire for a freer trade environment.

In next week’s blog, I will outline four more trends, starting with connectivity: the big revolution in Asia.

Véronique Salze-Lozac’h is The Asia Foundation’s senior director for Economic Development Programs based in Bangkok. She can be reached at veronique.salze-lozach@asiafoundation.org. The views and opinions expressed here are those of the individual author and not necessarily those of The Asia Foundation.

2 Comments

  1. Hi Miss Veronique, I am interested in what you have written here. I am an Indonesian and have learned that the gap between rich and poor is detrimental to a nation. Indonesia reached big economic growth in 2014. Yet as you assert, there are actually more existing ultra high net worth people than new millionaire entrepreneurs. Hence I would like to ask you, how can every emerging country practically overcome the challenge to achieve more inclusive and balanced growth? Thanks in advance for your answer. I have a dream to help end extreme uneven economic development in my country. I also pray for increasingly successful future in your social career with Asiafoundation.org. Great to know you!

  2. Dear Yukie,

    Thank you for your comment. There are certainly not one but a myriad of ways to achieve more inclusive growth, one of those, may be underlying all others, is good governance, one area where The Asia Foundation has been active for decades, including in Indonesia. I encourage you to check the activities implemented by our field office in Indonesia. I would be happy to discuss this further with you by email.

    Best regards

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