How Asian economies can rev up their economic engines as manufacturing growth slows

Yizhe Daniel Xie says as protectionism takes root and monetary policy tightens in the West, intra-regional trade and a focus on services will save the day in Asia

PUBLISHED : Wednesday, 16 May, 2018, 3:37pm
UPDATED : Wednesday, 16 May, 2018, 11:12pm

Asia’s slowing economic growth is poised to reshape the existing development model towards a more service-oriented and integrated economy.  

Burgeoning domestic consumption and economic recovery in the US and Europe helped the region remain a major driver of the world economy. But, the World Bank expects the East Asian and Pacific region to grow at an annual rate of 6.3 per cent, 6.1 per cent and 6 per cent in 2018, 2019 and 2020 respectively, still faster than the world average but below an expansion of 6.6 per cent in 2017 and 6.3 per cent in 2016. The International Monetary Fund and Asian Development Bank have also projected lacklustre growth.  

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In the short term, Asia’s exposure to trade and foreign capital means it will suffer greatly from rising trade protectionism and financial tightening. A large part of the growth slump can be ascribed to China entering the “new normal” of slower but quality growth. The double-digit growth before the 2008 financial crisis has settled into the 6 to 7 per cent band since 2015. The US$12 trillion Chinese economy – larger than the rest of East Asia-Pacific combined – coupled with its central role in the regional production networks and growing outward investment, means that when China sneezes, the region catches a cold.  

However, even excluding China, Asia’s growth slowdown will be broad-based in the long run. First, labour supply is constrained by an ageing population. Japan will see its 127 million population shrink by one-third by 2060, with 38 per cent aged above 65. Unfavourable demographic markers are not only seen in developed economies, but also emerging economies such as Thailand and Vietnam. 

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Second, industrialisation has stalled in some countries. Historically, a strong industrial base has been vital for low-income countries to transition to middle- or high-income status because manufacturing can absorb a large amount of unskilled labour from the agriculture sector. This has been the experience of Japan, South Korea, Taiwan and, recently, China. 

Even if these countries were able to establish a good manufacturing base, it no longer produces as many jobs

However, some Asian countries are experiencing what Harvard University professor Dani Rodrik calls “premature deindustrialisation”. For instance, in Indonesia, the contribution of manufacturing (excluding oil and gas) shrank to 18 per cent of gross domestic product between 2011 and 2016, from 30 per cent before the 1997-98 Asian financial crisis. Furthermore, even if these countries were able to establish a good manufacturing base, it no longer produces as many jobs, due to affordable labour-saving technologies. 

Lastly, the development of global value chains plateaued in 2010. The hallmark of Asian growth was facilitating the flow of capital and technology through regional production networks, lowering the barrier for developing countries to participate in and benefit from trade. But the rise of domestically sourced intermediates owing to industry upgrading, particularly in China, coupled with anti-globalisation sentiment, poses a threat to that model.  

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The changing economic structure means Asia has to seek a new growth model, different from the traditional manufacturing-driven growth. Indeed, most services in the developing world are usually informal and non-tradeable, and the tradeable segments such as financial services and information and communications technology demand high-skilled labour. However, technological improvement and digitalisation have allowed services to be commoditised, segmented and traded just like goods in the global supply chain.

The productivity of modern services – finance, transport and telecoms – is comparable to high-growth manufacturing

The productivity of modern services – finance, transport and telecoms – is comparable to high-growth manufacturing. Moreover, more service jobs would suit ageing Asia. The region must either increase international migration of low-skilled care workers or create large amounts of high-skilled jobs in the field of artificial intelligence.  

With protectionism in the West unlikely to disappear soon, Asia, which views globalisation positively, looks set to speed up regional integration in goods and services, trade and finance. In fact, intra-regional trade and foreign direct investment reached 57.3 per cent in 2016 compared with 55.9 per cent between 2010 and 2015, according to the Asian Development Bank. And intra-regional cross-border tourism is becoming a new growth engine for many Asian countries like Thailand, the Philippines and Japan. The trend is poised to continue.  

Yizhe Daniel Xie is a PhD candidate at the Graduate School of Asia Pacific Studies, Waseda University, in Tokyo. Recently, he was a visiting researcher at the Institute for Economic and Social Research, University of Indonesia, in Jakarta and the Philippine Centre for Economic Development, University of Philippines, in Manila