Transcript
CHAIR
Good morning to all of you. I have the privilege of introducing the two speakers for the first session this morning on Prospects for Asia.
Our first speaker is Dr Jayant Menon, who is the Lead Economist in the Office of Regional Economic Integration in the Asian Development Bank. His recent research has focussed on trade, regional integration and development challenges in the Asian Region. With his background and extensive experience he is clearly the right person to tell us what Asia will look like in 2050. Dr Menon will talk for 25 minutes on Realising The Asian Century.
Our second speaker is Professor He Fan, a Senior Fellow and Deputy Director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences. His recent work spans a wide range of issues including the Renminbi Exchange Rate Policy, China's Foreign Trade and Investment Policy, Financial System Reforms as well as Asian Monetary Cooperation. He is uniquely placed to give us China's perspective on structural changes after the global financial crisis, again in 25 minutes.
Before we begin, let me reiterate what David said, we have a very full programme and a full house today, so let me remind the speakers to keep to their allotted 25 minute time. I have asked to be a task master in time keeping; there is supposed to be Camilla, there she is, who will raise the yellow flag as a signal that you have five minutes left in your presentation; and she will raise the red flag to signal that you will need to wrap it up pronto.
With this, may I invite Dr Menon to the lectern.
DR JAYANT MENON
Thank you very much, Madam Chair, and good morning everyone. Let me start by thanking the organisers, the Treasury, Reserve Bank and IMF for inviting me to be here today on behalf of ADB. Although I have to quickly say that anything that I will say here today will be my personal views, and not necessarily those of the ADB, so that I don't get into any trouble when I get back to Manila; but I'm certainly pleased to be part of this important workshop.
Let me start off by saying that my presentation today actually will be a bit more of a question based presentation than an answer. So the question that, I think, I'd like to pose is, will this be Asia's Century? The rhetorical answer to that is, yes, perhaps, maybe not, but what are the challenges that Asia needs to confront in realising its potential? So no clear answers, but, hopefully, more issues and questions to be discussed later.
Let me start off by first noting, as Dr Henry said, my presentation will pretty much be based on this publication from the ADB, with the Centennial Group in Washington DC that looked at a number of questions about Asia in the coming decades.
The motivation for the study was to inject sobriety into quite a bit of Euphoria already surrounding what appears to many as Asia's inevitable rise. The key message to come out of this publication is that Asia's rise, or the Asian Century, is certainly plausible, but there is no autopilot, or there's no guarantee that this will be Asian's Century, there's still a lot of work to be done, and a lot of challenges to be confronted.
Why 2050? Well, if you look at history, about 40 years ago Japan was the first Asian country to become a member of the OECD, so 50 more years, looking forward, what could Asia look like, how many more members will the OECD have from Asia is one way to think about this.
Just very quickly, Asian means different things to different people. In this study Asia's defined to cover East Asia, South Asia and Central Asia. It's a highly diverse region and this is a working definition that we've used which covers almost 60% of world population and 20% of land mass.
Now, a few quick caveats, forecasting growth 40 years in the future is not an easy task; forecasting growth four years into the future is also not easy. So, I guess, the focus of this study and my presentation will be on the issues rather than the numbers, but everybody wants numbers, so there are numbers in there.
These numbers, I guess, are based on projections made out of a relatively simple model that we adapted from the Growth Commission with work done by Homi Kharas and others. History matters a lot in the projection of these numbers that we present, productivity is a key factor, the productivity co-efficient, the key factor that determines which countries succeed and which don't.
We have, basically, two scenarios that we present; one is the Asian Century, which is high case, this is when Asian realises its potential, and the low case scenario is what we call the middle income trap. With the Asian Century scenario we have 11 so called converging economies that can continue their power study and growth trend into the future. The middle income trap scenario has these economies falling into the middle income trap in the next five to ten years, and growth slows out to 2050.
These scenarios don't include worst cast or perfect storm scenario, which is certainly possible, but it's impossible to quantify. We recognise that, but we don't actually try to measure it in any way. The order of my slides are slightly out, I hope to make this one slide.
Let me start off by saying that when you talk about Asia's rise, you're really talking about the re-emergence of Asia. Up to the Industrial Revolution Asia was most of the world, about 60% of the world's economy, and this fell off sharply following the Industrial Revolution to bottom out at about 15%. More recently we've seen Asia rising again with its share today almost reaching 30% or world output. Of course, this started off with Japan and the NICs, newly industrialising countries, but, more recently, China and India have been driving a lot of this growth in Asia's re-emergence.
Now, if we were to realise the Asian Century, or if Asia were to realise its potential, by 2050 Asia could account for 52% of the world economy. Its per capita income could be above $40,000, and similar to what we have in Europe today, and there will be no poor country left in Asia, no low income country.
If this is to be realised then the seven key countries will drive most of this growth, and they are India, Indonesia, Japan, Malaysia, China, Korea and Thailand. Together they will account for more than 90% of the growth up to 2050. This is in no particular order, except for alphabetical, and it's that way by design, because, as I said, we don't want to focus too much on the rankings or the numbers, but rather the issues that countries have to overcome in realising their potential.
In addressing these challenges most of the actions will have to be at a national level, by individual countries themselves. There is a regional agenda as well as a global one, and I'll take these in turn.
Let me start with what I think is the most critical challenge facing Asia going forward; and I think it's interesting that the remarks by the Treasurer and Dr Henry, earlier, covered a lot of the issues that I'm going to talk about in a minute, a lot of the challenges, but no one's mentioned the growth in inequality that has been happening, and looking forward can threaten the realisation of the Asian Century.
Clearly, growth going forward has to be more inclusive. There are growing inequities within countries in terms of rural versus urban, along ethnic lines, along gender lines, that threaten not only social cohesion, but, also, political stability. The Arab Spring is just one recent example, but we've seen tensions rising already in many parts of the world. It can also threaten growth itself, and I think the early signs of that are already evident in China.
Disparities between countries can also ra
ise the risk of mass migrations, and can even lead to conflict. We want to be careful that the catch up that we're seeing in terms of narrowing gaps between countries doesn't occur at the expense of growing disparities within countries.
In order to do that growth has to be more inclusive; and essentially what we're saying is the need for the creation of productive sustainable jobs and removing barriers that limit the participation of a larger number in the growth process itself. Here education is key; but, also, in the poorer countries investments in health and also removing barriers that limit access in the labour market and elsewhere need to be addressed. We see this as a key challenge facing the region in realising its potential.
The growth potential, if it needs to be realised, will certainly intensify the competition for scarce resources, and Australia's place where I don't need to make this point too strongly, this is an issue all of you are very aware of.
Productivity can play its role and needs to play its role in reducing the resource intensity of future growth, but there will have to be a change in the mix of energy going forward. This might not be very good news for Australia, given high reliance on coal exports and so on; but, certainly, it's something that needs to be tackled head on as we look forward to 2050.
A key variable here are uncertainties, the role that nuclear power will play, going forward; but, certainly, we need to move from dirty technologies to cleaner ones in terms of dealing with climate change, but also in terms of ensuring that resource constraints do not cripple growth.
The next challenge, which has already been mentioned today, is demographic change that's already taking place. In a sense this is truly a very long run issue, and we have both ageing and young economies. Ageing economies face shrinking labour forces, and there's a huge fiscal challenge in caring for the aged as we go forward. The country's here, of course, as mentioned, China, but also Korea, Japan, Singapore and many other Asian countries as well.
In fact, there are more ageing than young economies in the region; the young one that's most noteworthy is India, but also some of the Mekong countries, and they stand to gain significantly from the demographic dividend, but only if they're able to create sufficient jobs to absorb new entrants into the labour force. I think this is a major challenge.
With these two types of economies in the region, freeing up labour movements is going to be critical; highly sensitive issue, but something that will need to be addressed because it's already happening anyway, a lot of it informally in many parts of Asia. Formalising it in a sensible way is certainly something that has to be tackled.
Innovation and technological development is going to be a critical factor. We've heard a lot about how much of Asia has grown without too much productivity in the past; this is the [unclear] argument; more factor accumulation than productivity in contributing to the growth. This will need to change if Asia is to realise its potential, so converting economies like China and India must transition from catch up to frontier entrepreneurship and technical change.
This is easier said than done, but investing in education, I think, is probably the key factor. Not just R&D and tertiary education, but in many countries increased investment, and even primary and also secondary education, increasing retention rates is going to be key challenge if you're going to have a labour force that's productive. There are many other factors, of course, that feed into this, and this includes everything from protection of property rights to financing vehicles.
Let me move on to finance next, and here, again, looking forward, Asia's biggest challenge is deepening its financial markets. They're already quite large, but shallow; there's no better indication of that than the fact that most of Asia's savings, which is also most of the world's savings is still intermediated outside the region. So, going forward, financial reforms that deepen financial markets; but also reduced vulnerabilities, the risk of crisis needs to happen. Asia could have the largest stock, banking and debt markets in 2050, and so this is a key challenge that needs to be addressed.
Where will most of this future growth come from? Clearly, it will happen in Asian cities; in fact, more than 80% of the potential future growth with the Asian Century scenario takes place in Asian cities; and this creates a lot of challenges going forward.
Cities can be great centres of learning, innovation and cultural heritage; but it can also be hot beds of social unrest and all kinds of other problems, as we have seen in some cities of Asia. As one Town Planner put it, I think, what we need is urban centres that look more rural, and rural sectors that look more urban, going forward. So town planning that creates more compact, energy efficient and liveable cities is a challenge facing Asia's future. Already, I think, we see that the current world population will reside in cities by 2050, as the UN projects; so this is certainly a trend that's occurring without doubt.
The next challenge is governance, and here we're not just dealing with corruption, although that is an important issue in itself; but providing for more transparent and accountable governance is a key challenge. Effective decentralisation is part of that, but this needs to be implemented very carefully; it can actually create its own problems if institutions are not strengthened to support the process of decentralisation. Certainly, increasing the voice and participation of citizens in the poorer countries in particular, will have to play its role in delivering the Asian Century.
So those are the key challenges that the report identifies, that need to be overcome in order to realise Asia's potential. Most of these issues have to be dealt with at the national level, the involve national actions by individual governments. Regional cooperation has its role to play, and it can be both an important bridge between Asian and the rest of the world, but also within Asia.
We have seen that tensions can rise between countries within Asia over what appear to be secondary subsidiary issues like a small bunch of islands that people claim to be their own. It's very important that forums exist to vent these pressures and deal with these tensions. In fact, most of the conflicts within Asia, within countries between regions in countries; and, again, effective regional forums can help in addressing those problems.
The type of regional cooperation that we envisage is one that's flexible and pragmatic and open. The concept of open regionalism is something that Australia, through APEC, is clearly identified with; this is the type of regionalism that we propose in this report.
There is also global agenda that needs to be addressed. Asia, as it becomes most of the world, will have to actually play a bigger part in the preservation of the global commerce; to put it crudely, they can no longer free ride. It needs to take greater ownership in ensuring peace and security, financial system stability; we've seen that already through the G20 process to some extent, and a rules based and open trading system. If you are a bit more than half the world, you need to play a bigger role and be much more responsible for the whole.
This is clearly a challenge that needs to be addressed. Asia need to delicately manage its rise as a major player in the global economy and governance, and has to be seen as well as acting as a responsible global citizen.
Now, I've already go the yellow card, so let me try and move on quickly to wrap up. I guess, when you talk about Asia's Century, what we're talking about is not just Asia that benefits, but also other regions of the world. In fact, it's not just Asia that hopes that this will be Asia's Century, Africa and Latin America, I think, have similar ambitions, and also moving in the right directi
on.
The Asian Century, I think, can be a century of shared global prosperity; Australia will be part of that. Realising the Asian Century is in all our interests in the same way that failing to realise the Asian Century has a very high opportunity cost, mainly to Asia, of course, but also to the rest of the world.
Let me then end by talking about the other scenario, the middle income trap scenario. So far I've been talking about what might be possible if its potential is realised, but if Asia fails in addressing those challenges I mentioned, then one possible low case scenario in the future could see Asia's share of the world economy little changed from what it is today. Today's it's 28%, the low scenario in middle income trap scenario, see it growing only to 31% of the world. Of course it's a much bigger world in 2050, but its share doesn't increase by much, it's per capita income is about half of what it could be and the idea that there will be no poor country in Asia is not one that will be realised under the middle income trap scenario.
So let me finish off by saying that these are possibilities that we see for what Asia could be in 2050. It's not what we think Asia will be, but what it could be; also what it couldn't be, which is the low case scenario. The worst case scenario is one where you have this perfect storm situation, and where crises occur more than one, where there's competition for finer resources resulting in conflict. That is also a possibility we need to bear in mind; but, certainly, there's great potential and if Asia's able to address the challenges facing it, it could be most of the world economy by 2050. This would benefit not only Asia, but Australia and the rest of the world. Thank you.