[PPT] - Asias Growth Challenges Ulrich Volz SOAS University of London & PowerPoint Presentation

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Asia’s Growth Challenges

Ulrich Volz SOAS University of London & DIE

I.S.E.O Summer School “The Global Economy: Searching for a New Equilibrium” 17-24 June 2017, Istituto di Studi Economici e per l'Occupazione

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Over the last half century, the global

economy’s centre of gravity has shifted to Asia

Asian economies today account for more than

a third of world GDP

The region contributes about 60% to total

global growth

Talk of an ‘Asian century’

– ‘Chinese dream’

Nevertheless, its main economies are facing

formidable challenges

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Aim of this lecture

To examine the economic rise of Asia
To discuss the main challenges Asian

economies are facing today, and the implications of their success or otherwise in addressing these challenges will have for the world economy

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Outline

(1) Long-term trends in & drivers of economic growth across East Asia (2) Five major challenges:

– Finding new growth models – how to avoid or

vercome the middle income trap?

– Demographic change – Maintaining social cohesion – Safeguarding financial stability – Aligning growth with environmentally sustainable development – how to manage a green transformation to low-carbon growth?

(3) Conclusions

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(1) Long-term trends in & drivers of economic growth across East Asia

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“The East Asian Miracle”

“From 1965 to 1990 the twenty-three economies of East Asia grew faster than all other regions of the world. Most of this achievement is attributable to seemingly miraculous growth in just eight* economies” (World Bank, 1993)

*Japan, Hong Kong, Korea, Singapore, Taiwan, Indonesia, Malaysia, Thailand

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1992

Source: National Geophysical Data Center, National Oceanic and Atmospheric Administration, http://ngdc.noaa.gov/eog/maps.html DMSP OLS Global Composites Version 4, “stable lights data” 7

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2010

Source: National Geophysical Data Center, National Oceanic and Atmospheric Administration, http://ngdc.noaa.gov/eog/maps.html DMSP OLS Global Composites Version 4, “stable lights data” 8

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Asia’s share in global GDP

0% 10% 20% 30% 40% 50% 60% 70% 1700 1820 1870 1913 1950 1970 1980 1995 2010 2020 2030 2040 2050

Source: ADB (2011): Asia 2050: Realizing the Asian Century, Manila: Asian Development Bank. 9

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Source: World Economic Forum (2017).

Share of global GDP in 2016 (in %)

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“Asia’s rise will continue up to 2050 …, by 2050 it will account for 53% of global GDP” (EIU, 2015, 4)

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GDP per capita in current US$

Source: World Bank, March 2017. 10.000 20.000 30.000 40.000 50.000 60.000

1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Brunei Hong Kong Japan Korea Singapore

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GDP per capita in current US$

Source: World Bank, March 2017. 2.000 4.000 6.000 8.000 10.000 12.000

1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Cambodia China Indonesia Laos Malaysia Myanmar Philippines Thailand Vietnam

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Population shares by income group

58,8 8,7 90,1 1,6 25,6 75,2 8,9 96,2 15,5 16,2 1,0 2,2

20 40 60 80 100 1991 2015 1991 2015 %

Low Middle High Developing Asia World

Estrada, G., X. Han, D. Park, and S. Tian (Forthcoming): Asia’s Middle-Income Challenge: An Overview, Manila: Asian Development Bank. 14

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Regional trend in poverty headcount ratio with $1.9 a day poverty line

Source: PovcalNet, the on-line tool for poverty measurement developed by the Development Research Group, World Bank. http://iresearch.worldbank.org/PovcalNet/. Note: These regional estimates are based on $1.9/day in 2011 PPP except Bangladesh, Cabo Verde, Cambodia, Lao PDR, and Jordan which use $1.9/day in 2005 PPP. 15

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Size of the global middle class: 2015-2030 (billion people)*

Source: Kharas, H. (2017): “The Unprecedented Expansion of the Global Middle Class: An Update.” Global Economy & Development Working Paper 100, Washington, DC: Brookings Institution.

1,38 2,023 2,784 3,492 1 2 3 4 5 6 2015 2020 2025 2030 North America Europe Central and South America Asia Pacific Sub-Saharan Africa Middle East and North Africa

16 *Middle class is defined as comprising households with per capita incomes between $10 and $100 per person per day in 2005 PPP

terms. This implies an annual income for a four-person middle-class household of $14,600 to $146,000.

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Regional contribution to next middle class billion, 2015-2022

Source: Kharas, H. (2017): “The Unprecedented Expansion of the Global Middle Class: An Update.” Global Economy & Development Working Paper 100, Washington, DC: Brookings Institution. 17

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Human Development Indicator

Source: UNDP, March 2017. 0,0 0,1 0,2 0,3 0,4 0,5 0,6 0,7 0,8 0,9 1,0 1990 2000 2010 2014

Brunei Cambodia China Hong Kong Indonesia Japan Korea Laos Malaysia Myanmar Philippines Singapore Thailand Vietnam 18

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Life expectancy at birth

Source: UNDP, March 2017.

10 20 30 40 50 60 70 80 90 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Brunei Cambodia China HongKong Indonesia Japan Korea Laos Malaysia Myanmar Philippines Singapore Thailand Vietnam

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High savings and investment rates
Investment in human capital
Infrastructure investment
Export promotion, helped by competitive

exchange rates under the Bretton Woods and Bretton Woods II systems

Openness to inward FDI in most economies
Integration into regional and global value chains

Major drivers of growth

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Factors behind the “East Asian miracle”

In 1993, the World Bank published a report called “The

East Asian Miracle”

Emphasised domestic investment and rapidly growing

human capital as the principle engines of growth in High-performing Asian Economies (HPAE)

– HPAE: Japan, 4 tigers (HK, Korea, Singapore, Taiwan), 3 NIEs (Indonesia, Malaysia, Thailand) – High levels of domestic financial savings sustained high investment levels – Agriculture, while declining in relative importance, experienced rapid growth and productivity improvement – Population growth declined more rapidly in HPAE than in

ther parts of the developing world

– Some HPAE benefited from initially better-educated labour force and a more effective system of public administration

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World Bank report concluded that there is nothing

“miraculous” about the HPAE’s superior record of growth, but that it was largely due to a superior accumulation of physical and human capital

“Fundamentally sound development policy” as major

ingredient for achieving high growth:

– Good macroeconomic management that provided the stable macroeconomic framework necessary for private investment – Policies to increase the integrity of the banking system and to make it more accessible raised level of financial savings – Agricultural policies that stressed productivity – Price distortions were kept within “reasonable bounds” – Openness to foreign ideas and technologies

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Systematic government intervention through

different channels to foster development and in some cases the development of specific industries

– Targeting and subsidising credit to selected industries – Encouraging some forms of lending (for exports, to small and medium-size enterprises, to particular sectors) – Keeping deposit rates low and maintaining ceilings on borrowing rates to increase profits and retained earnings – Establishing and supporting government banks – Public investment in applied research – Protection of domestic import substitutes – Establishing firm- and industry specific export targets – Development of export marketing institutions

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Important role of institutions and institutional

mechanisms that allow for clear performance criteria for selective interventions and monitoring of performance

Governance as a central aspect of

development

Build-up of human capital and technological

development

Important differences between countries’

policies

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(2) Major challenges for future growth

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i. Finding new growth models – how to avoid or

vercome the middle income trap?
ii. Managing demographic change
iii. Maintaining social cohesion
iv. Safeguarding financial stability
v. Aligning growth with sustainable development –

how to manage a green transformation to low- carbon growth?

Five major challenges

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Environmental, social and economic development

Source: Johann Dréo (2006)

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(2.i) Finding new growth models – how to avoid or overcome the middle income trap?

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The phenomenon of hitherto rapidly growing

economies stagnating at middle-income levels and failing to graduate into the ranks of high- income countries

Old growth models don’t work in a rapidly

changing global environment

The low-hanging fruits of development have been

picked

Need for upgrading of technologies and move to

knowledge-based economies

The middle income trap

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Determinants of growth-slowdowns

Institutions
Demographic transition
Lewis turning point
TFP slowdowns
Infrastructure
Macroeconomic environment and policies
Economic structure

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Contributions to growth, 1960–2014 (%)

50,0 55,5 10,3 21,9 11,4 12,8 28,3 9,8

20 40 60 80 100 Middle income rising to high Middle income staying there Physical capital Labor Human capital Productivity

Source: ADB (2017): Asian Development Outlook 2017, Manila: Asian Development Bank. 31

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Productivity growth will come from innovation…

0,3 0,9 0,3 0,6 0,9 Upper-middle income staying there Upper-middle income rising to high

Research & development stock per labour hour*

44 182 50 100 150 200 Upper-middle income staying there Upper-middle income rising to high

Patent applications (resident) per million persons

Source: ADB (2017): Asian Development Outlook 2017, Manila: Asian Development Bank. 32 *Cumulative gross expenditures on R&D measured in 2010 constant $ per unit of labor hour

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…driven by entrepreneurs with new ideas or technology…

Low Income Middle Income High Income

5 10 15 20 7 8 9 10 11 12

Log GDP per capita Ratio

Opportunity-driven/necessity-driven early-stage entrepreneurship

Source: ADB (2017): Asian Development Outlook 2017, Manila: Asian Development Bank. 33

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Share of most complex exports

4
2

2 4

6 7 8 9 10 11

Income per capita (log)

Source: ADB (2017): Asian Development Outlook 2017, Manila: Asian Development Bank. 34

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Innovation requires investment in human capital…

2,9 6,1 9,7

0 2 4 6 8 10 12 Low Middle High Total schooling

0,05 0,20 0,57

0,0 0,5 1,0 Low Middle High Tertiary schooling

Average schooling years by income group

Source: ADB (2017): Asian Development Outlook 2017, Manila: Asian Development Bank. 35

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More innovative economies need more advanced infrastructure…

94,2 56,5 20 40 60 80 100 Upper-middle income rising to high Upper-middle income staying there Kilowatt hours per 100 people

Electricity-generating capacity

28,1 10,2 20 40 Upper-middle income rising to high Upper-middle income staying there Per 100 people

Internet users

Source: ADB (2017): Meeting Asia’s Infrastructure Needs, Manila: Asian Development Bank. 37

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…but Asia still has large infrastructure needs

$881 $459 $1.340 400 800 1.200 1.600 Current Investment Gap Annual Needs $ billion in 2015 prices

Meeting the Investment Gaps, 2016–2020 (annual averages)

Source: ADB (2017): Meeting Asia’s Infrastructure Needs, Manila: Asian Development Bank. 38

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Efforts needed to attain high income

Pattern of growth will have to evolve

– Innovation, human capital and infrastructure play key roles

Sound policies and institutions are vital to

support this evolution

Role of macroeconomic stability remains

indispensable

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(2ii) Managing demographic change

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The region as a whole has been undergoing a

demographic transition process

– Move from high fertility and mortality to low fertility and mortality

Population growth is slowing down across the

region and total population is projected to fall by the end of the 21st century in all countries except for the Philippines and Timor-Leste

– Japanese economy already hit hard by demographics – Thailand will be the first developing country in the region to reach its population peak in 2023, followed by China in 2028

Demographic dividends have been largely reaped

in most countries

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Estimated and projected population by major area, medium variant, 1950–2100

1 2 3 4 5 6 Billions Asia Africa Latin America & Caribbean Europe Northern America Oceania

Asia Africa

Source: United Nations, Department of Economic and Social Affairs, Population Division (2015). World Population Prospects: The 2015 Revision. 42

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Rising dependency ratios

The share of working population is currently at its peak

in most countries

Working-age population (15-64 years) is projected to

shrink by about 10% in China and Thailand between 2010 and 2040

Working-age population will continue to rise for a few

more decades in Malaysia, Myanmar, Indonesia, Cambodia, the Philippines, Lao and Timor-Leste

Major implications for economic dynamism, health

care systems, old-age care, pension systems, migration…

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Total dependency ratio (ratio of population aged 0- 14 and 65+ per 100 population 15-64), 1950-2100

30 40 50 60 70 80 90 100 110 120 Cambodia China India Indonesia Lao PDR Malaysia Myanmar Philippines Thailand Timor-Leste Vietnam

Source: United Nations, Department of Economic and Social Affairs, Population Division (2015). World Population Prospects: The 2015 Revision. 54

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Young populations gave the region a growth dividend in the past

0,4 0,8 1,2 Developing Asia People's Rep.

f China
Rep. of Korea

India Philippines % points Contribution to annual growth rate per capita GDP,

1981–2010

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…but some countries now face a demographic tax

0,8
0,4

0,0 0,4 0,8 Developing Asia People's Rep.

f China
Rep. of Korea

India Philippines % points Contribution to annual growth rate per capita GDP,

2011–2030

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Family support is declining in Asia, but public transfers are underdeveloped

50

50 100 150 Uruguay Mexico Costa Rica Chile Brazil USA Sweden Slovenia Spain Hungary Germany Austria Japan Thailand Taipei,China Philippines Korea, Rep. of Indonesia India China, People's … %

Support system for people ages 65 and above, selected economies

Private transfers Public transfers Savings

Asia Europe and USA Latin America

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Countries’ response depends on their stage in the demographic transitions

Younger countries must:

– Capitalise on their demographic dividend, which is neither automatic nor guaranteed – Create more jobs and training

Older countries must:

– Pursue structural reforms to offset the decline of demographic dividend – Use their large and growing pool of retirement savings to develop the financial market

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… but there are also common actions

Both groups of countries must begin to lay the

foundation for fiscally sustainable old-age economic security systems

Heterogeneity provides the base for

potentially large gains from regional cooperation and integration (migration)

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(iii) Maintaining social cohesion

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Share of total income going to top 1 percent income group in developing countries, 1920–2005

Source: Atkinson, Piketty, and Saez (2011): “Top Incomes in the Long Run of History,” Journal of Economic Literature, Vol. XLIX. 61

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Annualised change in inequality of expenditure or income, 1990s and 2000s

Source: Kanbur et al. (2016).

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Consumption expenditure share of the richest 10%, selected developing Asian economies

36 35 32 32 31 30 30 30 29 29 27 25 31 20 25 30 35 40 1990 or earliest 2014 or latest

Source: World Bank PovCal data. 63

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Quintile ratios for countries with rising inequality

3,9 7,4 7,1 5,2 4,8 5,7 4,7 8,2 8,2 6,3 6,6 6,8 3 4 5 6 7 8 9 Bangladesh Fiji Georgia Lao PDR Sri Lanka Viet Nam 1990s 2010s

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Rise in Asia’s inequality over time is a concern

Asia-wide Gini increased to 45% in the 2010s

compared to 40% in the 1990s

Asia’s recent experience contrasts with

“growth with equity” in the 1960s and 1970s

Many African and Latin American countries

recorded declines in Gini coefficients

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Inequality of opportunity is also prevalent

Children from poorest households 3–5 times

more likely to be out of school, and 10–20 times less likely to attend college

Infant mortality rates among poorest

households 2–3 times larger

Gender disparities in tertiary education persist

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Why inequality matters (1)

If inequality had remained stable in the

developing Asian economies where it increased, the same growth in 1990–2013 would have lifted an additional 165 million people out of extreme poverty—equivalent to 4.5% of the region’s population in 2013

The rise in inequality in 19 OECD countries is

estimated to have knocked 4.7 percentage points

ff their cumulative growth between 1990 and

2010

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Why inequality matters (2)

High inequality could lead to a misallocation of

human capital

– Those with little wealth or low income cannot invest in human capital or wealth- and income-enhancing activities

High and extreme inequality can damage society

and institutions

– It can strain social cohesion and lead to conflicts that discourage investment

High inequality may cause political backlash

– Public pressure to enact populist policies may benefit the poor in the short term, but hold back efficiency and growth in the long run

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Why has inequality risen?

Technological progress, globalisation, and market

deregulation favour:

– skilled over unskilled labour – capital over labour – certain geographical locations (such as urban and coastal areas) over others (such as rural and inland regions)

Aging populations, since older cohorts have a

more unequal income distribution than younger cohorts

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Education inequality accounts for 25–35% of total inequality

8,1 26,5 20,3 29,9 29,8 25,0 23,2 24,7 30,8 35,7 44,2 46,2 10 20 30 40 50 1995 2007 1993 2009-10 1990 2010 2002 2008 1994 2009 1995 2005 PRC India Indonesia Pakistan Philippines Thailand Share of between-group inequality, %

Income inequality decomposition by educational attainment of household head

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Spatial differences contribute to widening inequality

13 21 22 26 32 35 38 54 10 20 30 40 50 60 Sri Lanka (2009) Philippines (2009) Pakistan (2008) Indonesia (2009) India (2008) Viet Nam (2008) Bhutan (2007) PRC (2007)

Share of spatial inequality to total inequality (%)

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Policy makers can act to reverse rising inequality through infrastructure development

Eliminate barriers to investment and job creation
Provide urban infrastructure to absorb rural

population and reduce urban-rural gaps

Improve regional connectivity to reduce regional

disparity

Improve access to markets, and health and

education facilities for the poor

Provide better social services such as hospitals

and schools for a wider section of the population

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Other policy responses (1)

Efficient fiscal policy:

– Increase spending on education and health, especially for the poor – Develop better targeted social protection schemes, including conditional cash transfers – Mobilize greater revenues by broadening the tax base

Interventions to address lagging regions:

– Develop new growth poles in lagging regions – Strengthen fiscal transfers to invest more in human capital and provide better access to public services in poorer areas – Remove barriers to migration from poor to more prosperous regions

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Other policy responses (2)

More employment-friendly growth:

– Support development of small- and medium-sized enterprises – Remove distortions in factor markets that favor the use of capital over labor – Strengthen labor market institutions to provide necessary protection of workers without imposing excessive costs for businesses – Introduce public employment schemes as a temporary bridge to address pockets of unemployment and underemployment

Governance reforms to equalise opportunities:

– Strengthen governance – Level the playing field – Contain monopoly power and corruption – Prevent elite capture – Eliminate social exclusion

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(2iv) Safeguarding financial stability

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China’s debt as a share of GDP

Source: Fitch Ratings, from People’s Bank of China, Bank for International Settlements, Hong Kong Monetary Authority and commercial banks data 76

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(2v) Aligning growth with environmentally sustainable development – how to manage a green transformation to low-carbon growth?

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Rapid economic growth in Asia has

contributed to significant improvements in human welfare, but it has also led to profound socio-economic changes, and serious environmental implications

– Air and water pollution – Rapid depletion and degradation of natural resources – Deforestation and land degradation – Rapid loss of the region’s rich biodiversity endowment

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Asian countries increasingly confronted by the prospect
f a dwindling supply of environmental capital to

support the growing demands of a more numerous, wealthier, and urbanised population

– Changing patterns of consumption and mobility – Clean and ample water, arable land, and unpolluted air are vital ecosystem services necessary to maintain SEA’s economic growth

Yet recent economic expansion has largely been

pursued at the expense of the environment, undermining delivery of these ecosystem services in the future

This unsustainable trajectory will progressively hinder

future development

– Effects on people’s health, livelihood, and security – Compromises the potential of sustained growth and its benefits for future generations

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The ecological footprint of Asian countries is growing

The Ecological Footprint measures the area (in

hectares) required to supply the ecological goods and services we use

It outstrips the available biocapacity – the land

actually available to provide these goods and services

Biocapacity acts as an ecological benchmark

against which the Ecological Footprint can be compared

Both biocapacity and Ecological Footprint are

expressed in a common unit called a global hectare (gha)

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Ecological footprint and biocapacity

Japan China Korea Singapore

Source: Global Footprint Network, 2016.

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Ecological footprint and biocapacity

Source: Global Footprint Network, 2016.

India Pakistan Bangladesh Sri Lanka

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Ecological footprint and biocapacity

Malaysia Philippines Thailand Vietnam

Source: Global Footprint Network, 2016.

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Ecological footprint and biocapacity

Cambodia Indonesia Laos Myanmar

Source: Global Footprint Network, 2016.

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Economic growth came at the expense of high

carbon emissions

East Asian countries are exposed to the effects of

climate change

Climate change and environmental problems

threaten to undermine future growth, food security, and regional stability

Climate change

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CO2 emissions (kt)

Source: World Bank, March 2017.

100.000 200.000 300.000 400.000 500.000 600.000 700.000 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Brunei Cambodia HongKong Indonesia Korea Laos Malaysia Myanmar Philippines Singapore Thailand Vietnam

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CO2 emissions (kt)

Source: World Bank, March 2017.

200.000 400.000 600.000 800.000 1.000.000 1.200.000 1.400.000 2.000.000 4.000.000 6.000.000 8.000.000 10.000.000 12.000.000

China Japan (rights axis) 87

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Carbon intensity of selected Asian countries (CO2 emissions in kg per 2005 US$ of GDP)

Source: Volz (2016). Note: Scale for China is on the right axis. 88

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