Empty stomachs at Canberra's Asian banquet

Few analysts in Asia see the region's collective rise as inevitable or even probable. And underestimating labour, capital and political challenges will only lead to missed opportunities for Australia.

If advanced regional economies such as Japan, Singapore or South Korea released a white paper on positioning the country to take advantages of future opportunities in the region, it is highly unlikely that they would include the term ‘Asian Century’ in the title. Indeed, the term ‘Asian Century’ is used far more frequently in Australia than it is anywhere else throughout Asia.

This doesn’t necessarily make Julia Gillard’s Australia in the Asian Century white paper a flawed document. But it is clear that few analysts in Asia see the collective rise of all major countries in the region as inevitable or even probable – as the white paper seems to do. And just as Australia has consistently overlooked unmistakable signs that China’s continued and rapid growth is far from inevitable, it is now also underestimating the challenges facing many rising countries in Asia. This can only lead to bad policy and even missed opportunities.

One striking thing about the document is the uncritical use of straight line extrapolations about continued growth in countries like China, Vietnam, Indonesia and India, up to 2025 and beyond. Rapid growth in poor countries with a young working population is relatively easy to achieve.

Requirements include stable government and society, embracing foreign investment and expertise, utilising national savings for investment, and basic capitalist incentives that allow workers to benefit from the proceeds of their labour and enterprise (i.e., a rejection of socialism). China is the poster child of this rapid growth pathway.

Yet the great challenge for Asian countries is the extent to which they can escape the ‘middle-income’ trap. If they succeed, then countries will join a small and elite group consisting of European and North American states, in addition to Asian countries such as Japan, South Korea, Taiwan, Singapore, Australia and New Zealand. Fail, and once hyped up Asian countries will find it almost impossible to compete with economies beneath and above them – with possibly dangerous consequences for political and social stability.

In essence, the question is one of productivity. The white paper is correctly identifying improved productivity as an essential national capacity that will allow Australia to seize external opportunities. For China and the other rising economies, drastically improving productivity goes to the heart of national and social resilience.

If that sounds a little melodramatic, consider the following observations. East Asia (China, Japan and South Korea) is a rapidly aging zone. China is in the most vulnerable position for the following reason: If we take projections in 2020 as a point of comparison, China’s GDP per capita will be one third of what Japan’s was at a similar age demographic moment in the latter’s history. (This generously assumes 8 per cent GDP growth per year.) This means that China will be the first major country in modern history to grow old before it grows rich.

In Southeast Asia, there are significant differences in age demographics. Up to 2020, Singapore, Vietnam, Thailand, Malaysia, Indonesia and the Philippines will all have favourable working-age demographics. However, by 2035, only the Philippines, Indonesia and Malaysia will have this. Rather than a demographic dividend, Singapore, Thailand and Vietnam (in descending order) will experience a growing ‘demographic tax’ as their population ages. In contrast, it is well known that India will remain a relatively young population up to the middle of this century.

The point here is that every non-advanced Asian economy has a limited window of opportunity to grow as rich as possible before it grows old. The further down the value chain they are in the region, the harder it will be to significantly improve productivity gains in order to offset the drag on growth that ageing can produce. For example, it is no surprise that the Chinese desire to move up the manufacturing value chain, and to improve their presence in global services markets, is explicitly linked to a strategy to cope with their ageing population. It is much more feasible for a 60 year old to add value in the services industry than it is in physical construction.

It is in this context that every low and middle income country in Asia faces enormous problems and challenges. Putting more and more labour inputs to generate growth will become less feasible for almost all countries (except India). In an environment where almost every government is building its legitimacy on the capacity to generate growth – in order to maximise their windows of opportunity – the contest for capital will be increasingly intense. History shows that in low-middle income countries, vast amounts of capital go in and out of the economy far more rapidly than in advanced economies as much of it is speculative rather than long-term and genuinely committed.

Improving the drivers of productivity such as innovation also requires good policy and institutions. And this requires appropriate institutions. Take the obstacles facing genuine innovation (and not just cheaper replication or intellectual property theft) in countries such as China.

One is corruption. China ranks 75 according to 2011 Transparency International tables, nestled in between Tunisia and Gambia. India ranks 95th, Indonesia 100th, and Vietnam 112th. In contrast, Asian countries that have escaped the middle-income trap invariably have high rankings: for example, Singapore is 5th and Japan is 14th.

Property rights is another essential criteria. China is ranked 57th, Indonesia is 86th and Vietnam is 87th. Once again, looking at successful Asian economies, Singapore is ranked 3rd and Japan is 15th.

A broader ranking is the Heritage Foundation/Wall Street Journal’s Index of Economic Freedom which takes into account a number of factors including intellectual property rights, policies encouraging entrepreneurship, and ease and transparency of doing business. China is ranked in the ‘Mostly Unfree’ category at 138th, as is Indonesia (115th), India (122rd) and Vietnam (136th). To demonstrate that the Index is not one simply biased towards western countries, advanced Asian economies such as Singapore, Japan, Taiwan and South Korea are ranked 2nd, 18th, 22th and 31st respectively.

The upshot is that it is highly unlikely that all of Asia’s major countries will successfully ‘make it’. The likelihood of stagnation and even failure in one or several of these Asian countries is also high. A failing China or Indonesia would almost certainly create instability in the region. The point is that the phrase ‘Asian Century’ has limited analytical or policy value, despite its seductive appeal in Western countries.

Why does it matter? After all, many of the proposals, if adequately funded, are laudable even if we cannot accurately read the future. One problem is a mindset of Canberra setting a big picture, a visionary roadmap for the country, with businesses tailing behind. The reality should be the reverse – the government listening intently to the business community, with the latter far more responsive and adept at picking up on-the-ground realities. For example, businesses knew about an impending slowdown in China ahead of officials, while government and their analysts were still spruiking the story of China’s paradigm defying growth story – and berating those who publically cast doubt upon their most optimistic scenarios. As the clich goes, governments are terrible a picking winners (or the timing of them at least), including countries. Remember that learning Bahasa Indonesian was considered essential in the 1980s, Japanese in the 1980s and 1990s, and it is now Mandarin.

Another problem is that government reports tend to be less analytical and looser with data and their implications than private sector analysts, whose survival depends on it. For example, the white paper reiterates several times that Asia will have the largest ‘middle class’ in the world. Even if we assume the most optimistic economic scenarios for the region up to 2025, the middle classes in much of Asia will be a far inferior consumer group in comparison to those in advanced countries in terms of spending power and consumption.

Remember that those earning $US10,000 per year are now widely classified as being part of China’s ‘middle class’. Calls by the government to target Asia’s emerging middle class (at the expense of their Western counterparts) is poor economics and bad policy. Indeed, there is a reason why manufacturers in countries such as China, Japan, South Korea and Malaysia still consider Western consumers their bread and butter markets well into the future, even if regional economies present the more exciting growth prospect.

Finally, multinational companies need a China strategy, an India strategy or a Vietnam strategy just as they may need a Brazil strategy or a Chilean strategy if those two latter countries fulfil their potential. Top Japanese firms have a China strategy which many have integrated with a Taiwanese strategy. They do not begin with an ‘Asian strategy’, and a chief executive suggesting that could well be laughed out of the boardroom.

The Australia in the Asian Century white paper puts forward many good suggestions about building national capacity. Even though it is a strong discussion paper, it cannot provide a ‘roadmap’ for Australian industry into the future. We need a responsive and adaptive government to realise opportunities in the region, rather than a prophetic one.