The story of productivity in Asia is a new one, not a repeat of 1990s
July 01, 2014 00:00 By David Mann 2,682 Viewed
The recent economic slowdown in Asia has fuelled investor fears that the region is back where it was two decades ago - stuck in the cycle of flat or falling productivity that sparked the crisis of the late 1990s.
However, this is very far from the truth. The fact is that since 2000, Asia’s productivity performance has been solid across the board, which was not the case in the 1980s or the 1990s.
Productivity around the world, including in Asia, has slowed in the past few years, in line with more sluggish growth rates following the 2008 global financial crisis. But we expect global growth to pick up this year and strengthen further in 2015, and this should mean a revival in productivity.
Asia is well placed to continue to grow faster than both developed and other emerging markets, helped by rising productivity.
Undeniably, there are structural issues in Asia and need for reform, but – as shown in a new report by Standard Chartered Global Research – we believe that much of the slowdown in productivity since the most recent global financial crisis has been down to cyclical factors, which are now being reversed.
It is also important to separate the China story from the rest of Asia. If you exclude Japan and China, the contribution of capital to growth in gross domestic product has been slowing in Asia for many years, while productivity growth has been sustained.
In China the contribution of capital is still rising, resulting in excess capacity in many sectors, while productivity growth has slowed.
Even so, China still has huge potential to use investment and urbanisation to drive strong growth in the coming decade, and the new leadership has demonstrated its appetite for reform, taking short-term pain for long-term gain.
To put things into perspective, it is also worth noting that China’s capital stock (structures, equipment and machinery) per worker is only one-fifth of the US level.
Across Asia, urbanisation is set to be significant driver of productivity as agricultural workers shift into manufacturing and services.
The newly urbanised workers will also need a higher-quality, productivity-enhancing capital stock.
An excessive focus on investing in residential-property construction in Singapore and Hong Kong may help to explain why these economies have higher capital stocks per worker than the United States, yet lag on productivity and were the region’s weakest performers on this metric between 2011 and 2013.
The demographic challenge facing many Asian countries in the coming years cannot be ignored. All Northeast Asian economies, as well as Thailand and Singapore, face shrinking working-age populations by the mid-2020s, and some will reach this point as soon as the second half of this decade.
Illustrating the scale of the challenge, the United Nations estimates that from now to 2025, China’s working-age population will shrink by 15 million, nearly three-quarters of Australia’s total population today.
From 2025-30, China’s working-age population will fall by another 20 million, and the country will need to find an extra 1.5 percentage points of GDP growth from other sources in order to compensate for its shrinking working-age population by 2025.
The demographic outlook is much more favourable in Southeast Asia. Indonesia and the Philippines are estimated to add a combined 35 million people to their working-age populations between now and 2025, according to the UN.
This is equivalent to half of Thailand’s total population today.
Despite the demographic headwinds in many economies, we expect a recovery in productivity in the coming years, helped by urbanisation, reform and productive investment. Economies with still-low capital stocks per worker – China, India, Indonesia and the Philippines – have the strongest potential.
Ageing populations in Northeast Asia and Singapore will put more of a burden on urbanisation, infrastructure and reforms to boost productivity and growth.
But talk of long-term structural barriers to rising productivity in Asia – and fear that this may spark a new crisis – is based on an out-of-date view of the region and fails to take into account the huge steps forward taken in recent years.
David Mann is regional head of research, Asia, Standard Chartered.