Asia’s Rise: Undoubted but not Unimpeded

If there is one defining feature of the tectonic shifts in economics, geopolitics and society taking place today, it is the rise of Asia. Asian economies – particularly those in East and South East Asia as well as India – are at the heart of the changes that are underway in the global economy. Asia is now home to about 60% of the world’s population, generates around one-fourth of global output (set to rise to half by 2050), and produces 47% of the world’s manufacturing. With this has come a rise in prosperity – around one-third of global middle-class spending is by Asians. The spectre of the Asian Financial Crisis that badly hit the region’s key Eastern economies (primarily, Korea, Malaysia, Indonesia, Hong Kong, Thailand and Philippines), has, seventeen years since, faded into distant memory. In the six or so years following the onset of the global recession, projected and actual growth rates in emerging and developing Asia were often as much as 6 percentage points higher on average than that of advanced economies. In 2014 and 2015, while advanced economies are set to grow at 2.2% and 2.3%, emerging and developing Asia is set to grow at 6.7% and 6.8%, respectively. This is higher also than the 4.9% and 5.3% forecast for the wider group of emerging markets and developing economies.

 

Asian Vitality

 

China, one of two regional anchors along with India, has long surpassed Germany as the world’s leading exporter. Asian firms are among the world’s most valuable brands, Japanese and Korean cars are ubiquitous on European roads, American technology giants like Apple source billions of dollars’ worth of advanced components from Korean and Taiwanese suppliers, and Chinese firms are buying into German, British and American companies across a slew of sectors. Western multinationals and consumer brands have flocked to Asian cities to gain a foothold in the growing markets, as Asians aspire to a Western standard of living, and increasingly, can well afford it. Industry estimates suggest that Asian consumers account for half of the US$ 80 billion global luxury brands market. Technology diffusion is not only enabling Asian firms to compete better on a global scale but also giving rise to disruptions in consumption patterns through e-commerce.

 

“Exports to China by the top-10 exporting ASEAN countries now exceed their exports to either the NAFTA region or the EU”

 

China’s Alibaba online marketplace, for instance, now boasts 180 million users, handled around US$ 250 billion worth of transactions in 2013 (more than eBay and Amazon combined), and has filed for what is arguably the world’s largest technology IPO valued at close to US$ 20 billion (higher than that of Facebook’s). Meanwhile, intra-Asian trade is proving to be a most vital element of Asia’s economic vibrancy, post-crisis. Exports to China by the top-10 exporting ASEAN countries now exceed their exports to either the NAFTA region or the EU.

 

Newer emerging Asian economies are also showing promise. The Philippines, for example, is making great strides away from being “the sick man of Asia”, following sweeping reforms by the current President, Benigno Aquino III. GDP grew by 7.2% in 2013, the fastest in ASEAN, and this too despite the devastation wreaked by Typhoon Haiyan. Philippines sovereign debt was upgraded to investment grade and the country rose up 26 places in the Global Competitiveness Index (since 2010) and 30 places in the Doing Business Index.

 

But the rise of Asia is by no means a foregone conclusion – many factors will influence the future trajectory of this rise. Aside from country-specific challenges too numerous to be reviewed here, some wider challenges merit discussion.

 

Inclusive Growth

 

The rise in wealth and affluence in Asia is startling, but not surprising given the rapid growth seen there. Industry estimates suggest that Chinese consumers lap up 10% of worldwide luxury sales and East Asian shoppers account for between one-fourth and half of all purchases at designer stores in Europe. Just sixty years ago, the picture in Asia was very different. It was the world’s poorest region. Strong growth has lifted millions of out poverty, but much remains to be done. The ADB estimates that around 1.7 billion people in Asia still live on less than US$ 2 a day, and roughly 700 million on less than US$ 1 a day. Disparities exist among sub-regions of Asia as well – poverty remains highest in South Asia and is lowest in East Asia (driven mainly by China’s slashing of poverty from 85% in 1990 to 30% by 2008).

 

“Inequality in Asia is rising. While Asians now take a greater share of global luxury sales, 1.7 bn people in Asia still live on less than US$2 a day”

 

Income inequality, too, is a challenge for the region. According to further ADB estimates, in the 12 countries that account for more than four-fifths of Asia’s population, income disparities worsened over the last two decades. During this period, the Gini-coefficient (measuring inequality) in Asia has deteriorated sharply from 38 to 47. While the glitzy Chinese city of Shanghai has achieved living standards similar to Portugal, the number of poor in just eight Indian states is more than in twenty six of the poorest African countries combined.

 

Ageing Population

 

Ageing population, income inequality and rapid urbanisation are three of the critical challenges to Asia's rise.

Ageing population, income inequality and rapid urbanisation are three of the critical challenges to Asia’s rise. Image (c) Anushka Wijesinha, Seoul, South Korea.

Another characteristic of the rise of Asia is the seismic shifts in its demographic structure. Asia is ageing at an unprecedented pace. Emerging evidence suggests that this increase in the ‘ageing population’ will occur more rapidly than in the West, giving rise to numerous public policy challenges including financing of healthcare and social welfare (pensions, etc.). Some countries like Japan and South Korea will experience this more rapidly than others like India and Indonesia. China will be particularly challenged, as its one-child policy will cause a sharp rise in old-age dependency. Slowly, the demographic dividend – which helped many of these Asian countries attain rapid growth – will wane.

 

Rapid Urbanization

 

Another prominent feature of the Asian growth has been the rapid urbanization of Asian cities, characterized by extensive rural-urban migration, heightened pressure on urban infrastructure like transport, water, housing and sanitation, and the concomitant rise in pollution. While the more newly industrialized countries in Asia such as China and India still do not have a majority urban population yet, the number of urban inhabitants is growing fast. It is estimated that by 2025, over half of the population in Asia will be urban.

 

Environmental Pressures

 

Linked to this is the growing concern around the environmental outcomes of rapid growth. It is now widely accepted that Asia cannot grow under the same ‘pollute now clean later’ pattern as the West. Certain parts of Asia, especially countries located in the tropical region and in islands, are among the most vulnerable to impacts of global climate change.Asia is facing serious environmental degradation issues linked to poor land use management, unsustainable energy consumption, and overuse of natural resources. All of these appear to be influencing changing weather patterns, including freak events. The frequency and the intensity of natural disasters in Asia are showing an increasing trend. During the period 1980 to 2009, over 38% of global economic losses due to natural disasters were reported from Asia.

 

Regional Tensions

 

Across Asia, the geopolitical landscape is littered with hostilities. Some of the most critical ones are the maritime tussles in the South and East China seas, particularly between Japan and China, linked to the territorial claim of the Senkaku/Diaoyu islands; between China and the Philippines, linked to demarcations of the Exclusive Economic Zone in the sea; and among China, Vietnam, Brunei and Malaysia linked to the Spratly Islands. Heightened hostility around the former in 2012 caused China to impose a boycott on Japanese goods, resulting in a 20% year-on-year decline of Japanese exports to China. In the aftermath, Japanese firms sharply cut their foreign investments in China (from 13% of total FDI to 7% in 2013). Meanwhile, South and North Korea continue to be at loggerheads, oscillating between good relations and dangerous escalations. Farther West in Asia, the hostilities are dominated by India and China as well as India and Pakistan. In the former case, the two countries have long-standing tensions around the control of South Tibet (currently in India’s Arunachal Pradesh) along the disputed ‘McMahon Line’. In the latter case, the conflict around Jammu and Kashmir has been the overwhelming narrative shaping the two countries’ relations, and by extension, the region’s.

 

While India continues to be an influential anchor in South Asia, it is China that has emerged as influential across the region through strategic investments and assistance. Some argue that China’s rising preeminence in Asia could be countered by a growing US engagement in the region – rekindled by the Obama administration’s “pivot to Asia” strategy. The much-touted Trans-Pacific Partnership (TPP) appears to be the key tool in this.

 

“The TPP could prove to be a key factor in the US-China rivalry over economic leverage in the region”

 

It is not a typical trade deal – it straddles trade, investment, and strategic economic cooperation. Asian countries that are wary of the security implications of China’s rise may warmly welcome a heightened US presence in the region. The TPP could prove to be a key factor in the US-China rivalry over economic leverage in the region, and a tool for Asia’s other economies to hedge against the rise of China.

 

Asian Integration

 

All of these developments have unraveled how far Asia has to go in terms of a common vision around its ascendance. The closest effort towards bridging this is of course the moves by ASEAN to establish a fully-fledged ‘diplomatic and economic community’ by 2015. But one cannot forget that this is limited to just a sub-set of Asian nations. Asia would need an ambitious regional effort of the type seen in Europe. But unlike the ‘European project’, few political leaders have come out as willing to stake their careers to further an ‘Asian project’. Groups of countries swing between fear/suspicion of, and mutual gain from, the two regional giants – China and India. Little regional cooperation on security and military affairs prevail. There is also a notable absence of pan-Asian institutional arrangements and agreements (similar to the European Commission) to further all these agendas in a manner that is strong, consistent, and widely accepted. Nevertheless, cooperation on trade and investment appears to be growing ever stronger.

 

While much of the attention is on the TPP, another pan-Asian trade deal is taking shape more quietly – the Regional Comprehensive Economic Partnership (RCEP). As Ganeshan Wignaraja, Director of Research at the ADB Institute remarked at a recent IPS seminar, “the RCEP could create the world’s largest trading bloc and have significant implications for the world economy”. The RCEP bloc – that includes three of the largest economies in the world, China, India and Japan – would represent half of the world’s population, nearly one-third of global GDP and global trade, and one-fourth of global FDI inflows. The RCEP, an example of “mega-regionalism”, has the potential to not only bring large gains to Asia, but also carve even stronger position for Asia in the world economy.

 

Sri Lanka Must Take a Strategic View of Asia and Beyond

 

Sri Lanka has much to learn from what has and continues to take place in Asia. This is what the forthcoming IPS flagship annual report, ‘Sri Lanka: State of the Economy 2014’ takes a look at. It argues that, while the Sri Lankan context is no doubt different, and following the Asian trajectory identically may not be feasible or desirable, there are salutary lessons to draw from Asia’s rise, both for Sri Lanka’s own development journey but also in understanding how to best latch on to it. Amidst this, however, Sri Lanka cannot forget that it lies in an enviable geographical location that connects this rising Asia with the rest of the world.

 

“While looking at latching on to rising Asia, Sri Lanka cannot ignore countries to its West”

 

While looking at latching on to rising Asia, Sri Lanka cannot ignore countries to its West – whether it is in Africa, the Middle East, or traditional partners in the industrialized West. Although many are quick to assume it, the countries in Europe and North America are not in systemic decline. They will continue to be poles of innovation, creativity, consumption, and global leadership, and failing to recognize that and navigate accordingly, will only be to Sri Lanka’s peril.

 

This article is based on the ‘Policy Perspectives’ chapter of the forthcoming ‘Sri Lanka: State of the Economy 2014’, the IPS flagship annual publication. Cover image (c) Anushka Wijesinha 2013, Seoul, South Korea.