Articles & stories The Next Generation of Growth
Since World War II, Asia has experienced three “economic miracles”: first, the tremendous growth of Japan, which lasted from the early 1950s to the late 1980s; second, the rise of the four Asian Tigers (Hong Kong SAR (China), Korea, Singapore and Taiwan) stretching from the mid-1960s to the mid-1990s; and finally, the China-led growth surge from the early 2000s until around 2014. While South Asian nations such as Malaysia and Thailand participated in the two latter boom periods, overall the northern Asian economies benefited most. Measured by GDP per capita, these economies have managed to catch up with – and in some cases surpass – those of Germany and the United States, the two leading Western economies.
The key question for the future is whether other economies in Asia, including China, will be able to achieve a similar feat or will stall at a low- or middle-income level. Given that a number of Asian economies are among the poorer emerging markets (see figure), their catch-up phase will, in the best of cases, be a very prolonged one. That fact apart, the key concern is that the development models which made the previous growth miracles possible may no longer be available for these latecomers.
Inter-Asian Trade as a Key
One of the major factors that drove the successful growth of the “early bloomers” in Asia was their focus on exports – particularly to the United States and Europe. In the period from the 1980s onward, the share of Asian exports absorbed by the US and the EU ranged from 31 percent to 43 percent of total exports (in USD).
With economic growth now far slower in the US and Europe, these economies can no longer act as the major growth drivers for the less developed Asian economies. Latin America and Africa are also very unlikely to take over that role in the foreseeable future; therefore, export-driven growth will only be possible if it is of an intra-Asian nature. Although trade among newly industrializing Asian countries has slowed in the past two years, its share in their overall trade grew from 22 percent in 1980 to more than 38 percent in 2015. Given that China already accounts for 69 percent of Asian GDP (excluding Japan) and 42 percent of all non-Japanese Asian imports, it will be crucial that the Chinese economy remains on a healthy growth track.
Even if intra-Asian trade re-accelerates and volumes rise in coming years, it seems unlikely that it will ever play the same role for employment as was the case during the past decades. For one thing, East Asia is rapidly aging, which curbs its growth potential. However, trade is likely to continue to consist largely of flows of semi-processed or fully processed manufactured goods – segments where productivity is rapidly advancing.
Employment shares are thus unlikely to rise anywhere near to the levels witnessed in the more advanced Asian economies during their boom years. This implies, conversely, that services will have to play a far greater role even in less developed economies if the catch-up process is to succeed. However, there is still some uncertainty as to whether this can happen. That said, there is still ample latitude in most of the poorer Asian economies to improve physical infrastructure, especially in urban centers, thereby contributing to growth and, especially, absorbing labor that would otherwise remain in unproductive agriculture.
High Savings Rate as a Recipe for Success?
In an oft-quoted 1994 article entitled “The Myth of Asia’s Miracle,” Paul Krugman argued that the rapid economic growth of Asian countries such as Singapore would be only temporary. Written just a couple of years before the outbreak of the Asian crisis, this analysis seemed truly prescient. As it turned out, however, Krugman’s warning was premature, for growth re-accelerated in Singapore and the other economies shortly after the crisis and remained at very high levels until very recently.
Moreover, saving and investment levels actually rose after the Asian crisis, with the result that many countries generated savings in the form of a current account surplus. Governments contributed substantially to the generation of such surpluses by limiting fiscal deficits. Thailand, for instance, managed to turn a fiscal deficit of -6.3 percent of GDP in 1998 into a surplus of 0.25 percent of GDP in 2015. Moreover, after the boom period and the currency crises that followed, central banks reined in inflation. Given the investment needs described above as well as the need to invest in human capital to train young populations for a service-oriented economy, high savings actually appear to be a prerequisite for a successful growth strategy. One reason for this is that relying on foreign capital exposes economies to the risk of being hit by external financial shocks.
With economies around the world advancing rapidly in terms of technology, the future of the poorer Asian economies is unlikely to lie in policies promoting industrialization, although comparative advantages for segments of manufacturing may arise where costs of industrial labor are lower. Urbanization, infrastructure and a broad range of service industries are more likely to become the key growth drivers. Consequently, investment in human capital will be ever more important. Funding it will require high national savings, which can only be generated if governments resist excessively expansionary monetary or fiscal policies. Moreover, deeper financial systems within countries and more financial integration among countries are needed in order to create larger and more liquid capital markets and thus better match the sources of finance with their productive uses.
Source: Credit Suisse Bulletin “The New Asia” published in March 2017