ADB Says Asia Heads for ‘New Normal’ Growth

It is not just China that is headed for a “new normal” if policy makers are to be believed. The Asian Development Bank’s recent examination of growth potential shows declines almost everywhere across the region and that it is not a cyclical issue.

According to the 2016 edition of the bank’s annual Asian Development Outlook (ADO), at the very least this “new normal” will see a major shift of the epicenter of growth from developing east and Southeast Asia to South Asia. There are several ingredients to this decline in growth potential and combined they may well make the end result worse than the development outlook suggests.

The first is a very significant slowdown in the growth of working age population. This is the readily predicted outcome of lower birth rates two decades ago but is now affecting almost every country. Thus China, which saw a continuing increase in the working age population from 2008 to 2014, has now begun to see a five-year decline (which will accelerate after 2020).

Thailand too is in the process of moving from moderate growth to mildly negative. The other negatives are found in Korea, Taiwan and Hong Kong. Some countries have seen even more extreme movements with Kazakhstan going from rapid growth to near zero while all those both high (all of South Asia except Sri Lanka plus the Philippines) and middling growth (Vietnam, Indonesia and others) are seeing noticeable falls in their rates of increase.

The one exception to low or negative workforce growth in the richer countries is Singapore, forecast to have a 0.5 percent annual increase. But this would be only a fraction of the 2008-14 level and given that Singapore has long had a very low fertility rate in line with Hong Kong and Taiwan, any increase is due to migration of mostly temporary workers.

That in itself may be under stress due social pressures and a weaker global economy. Curiously the report sees no immigration into Hong Kong though its daily quota from the mainland could offset local aging.

On its own, lower growth or actual declines in in working age population should only make a minor difference to countries with other sources of growth. Thus it might explain a fall from 5.5 percent to 5.1 percent. In the case of China specifically, the ADO says its potential growth is reduced to 7.2 percent from 8.1 percent during 2015-20. India would fall from 6.7 percent to 6.0 percent, Thailand from 2.6 percent to 2.2 percent. These estimates are simply extrapolations from past performance factoring in the workforce change impact. (In the case of China and perhaps others official growth data may be suspect, but that is another issue).

Nor do they account for increases in the workforce resulting from employment of women and later retirement. Most of China’s women are already working, like those in Pakistan.

Labor force is however just one component of growth potential. The ADO lists a number of other key factors which bear upon the rate of increase of the productivity of that labor: tertiary enrollment ratio; labor market rigidity; political freedoms and accountability; government effectiveness; size of technology gap: trade-to-GDP ratio.

Rapid increases could (though not always have been) be easy when huge numbers could be moved from low income farming to simple manufacturing. The potential there remains substantial in some countries, particularly in South Asia, but requires other factors in short supply including capital, infrastructure, good government and markets. For low income countries the “advantage of backwardness” – meaning relative ease of catching up by learning from others – is still there, but slowly fading, according to the ADO, because of convergence.

The ADO does not discuss the application of its list of productivity factors in specific countries, but readers can draw their own conclusions. The scope to benefit from urbanization in China is now limited by the aging of the rural population and lack of land reform. China has cracked the industrialization challenge with a vengeance but is finding it harder to move to higher value-added products and services. Indeed overinvestment in capital intensive industries is a huge burden on the whole economy and a barrier to further progress. Will China now fall into the “middle income trap?”

Other Asian countries may already be stuck in this trap. Thailand has had years of poor productivity growth despite good infrastructure and plentiful local and foreign capital access. The education system is clearly one drag on productivity. A sustained decline in it its commodity prices may show up similar faults in Malaysia where infrastructure is excellent but governance issues, once a minor problem, are now a drag.

Even for the most successful Asian countries, the closer they have come to the US level of technology, the harder the process get, thus their growth in per capita income tends to track US levels but remain behind it -- meanwhile their aging demographics are worse. Taiwan and Korea are still seeing productivity gains but Singapore’s manpower productivity has stagnated for years despite all the talk of its financial services and high-tech industries. Growth has largely been generated by a mostly low income foreign labor force.

The slowing of the northeast Asian economies clearly has a knock-on effect on their smaller or less developed neighbours and will continue to do so, The rapid global trade expansion of the past 50 years may well come almost to a halt. The combination of opening markets in the west and around the region, plus the mobility of manufacturing capital, have been huge factors in spectacular Asian growth achievements.

For now at least global trade is flat. This may be largely a response to the commodity price collapse and its impact on demand in large commodity-exporting countries such as Brazil and Indonesia. However there are longer term challenges to a revival of trade growth including political issues in North America and the EU, long the most open of major markets, and the negative demographics of so much of the developed world.

Meanwhile the area of most rapid population growth – Africa and the Arab world – mostly face social and governance problems which make them an unlikely global spur.

If Asia is to retain its lead global role, the onus now lies mainly on South Asia, Indonesia and the two SE Asian laggards, Myanmar and the Philippines.