Contrasts and contradictions: A review of Asian economic development from 1995 to 2015 A report by The Economist Intelligence Unit Commissioned by Contrasts and contradictions: A review of Asian economic development from 1995 to 2015 Contents Then and now The elephant in the room: India A regional trading hub The ASEAN economic community Development of capital markets Asia’s magnetic middle class From the world’s factory to the world’s mall: the digital future of retail in Asia Conclusion 10 © The Economist Intelligence Unit Limited 2015 Contrasts and contradictions: A review of Asian economic development from 1995 to 2015 Then and now The everyday sensory experience of Asia’s emerging cities over the past two decades has been a combination of the constant noise and upwards growth of a vast building site, and the buzz created by young people in pursuit of unprecedented opportunities for education, economic activity and social freedom In 1995, if a Western student hoped to have a business career in Asia, they were probably taking classes in Japanese—the language of the economic powerhouse of Asia China had yet to join the World Trade Organisation and its international relations were still reeling from the Tiananmen Square crackdown of 1989 India had only recently shed its notorious “Licence Raj” system, a hotbed of bureaucratic corruption, which had sprung out of that country’s severe approach to central planning As Indonesia’s authoritarian president, Suharto, prepared to celebrate 30 years of his New Order, citizens across East and South-east Asia were starting to tire of the heavy-handed regimes—whether of communist or nationalist origin—that had © The Economist Intelligence Unit Limited 2015 emerged in the process of decolonisation, and were looking for more liberal, pluralistic systems As a confident middle class emerged on the back of export-oriented industrialisation, winds of change were blowing from Mongolia and South Korea in the north to Thailand and Indonesia in the south, destined to be whipped up further by the 1997-1998 Asian financial crisis Twenty years on, a Westerner circulating at a conference in Shanghai and conversing in fluent Mandarin is not unusual enough to turn heads China has leap-frogged Japan in terms of economic output shifting the centre of gravity of global trade in the process China has become one of the world’s most sought-after markets, with interest also growing in the nearby bloc of fast-developing economies known as the Association of South-East Asian Nations (ASEAN) These, along with the developed Asian economies of Japan, South Korea, Hong Kong, Taiwan and Singapore, form a dynamic and increasingly integrated trading network—and a vital hub within global supply chains Contrasts and contradictions: A review of Asian economic development from 1995 to 2015 The elephant in the room: India During its 1991 balance-of-payments crisis, India’s government flew the country’s entire gold reserves to Europe as collateral—and committed to a reform programme—in exchange for an IMF bail-out The resulting changes led to a decade of optimism about India’s growth prospects, but in 2013 another balance-of-payments crisis loomed large as the rupee plummeted against the US dollar and the cost of importing foreign oil once again threatened economic stability This shock prompted a re-examination of India’s economic fundamentals India still faces many of the same challenges as in the early 1990s: energy shortages, an inefficient state-run banking sector, a narrow tax base, tensions between its diverse communities, regional insurgencies, endemic poverty and corruption and inadequate access to education However, the size of its economy has also more than quadrupled over the past 20 years, and the Reserve Bank of India (the central bank) has accumulated a healthy stash of foreign-exchange reserves This puts India in a better position to cope with unexpected external shocks, and the country’s youthful population and broadly positive trajectory are causes for optimism Yet, even with the current reform-minded prime minister, Narendra Modi, at the helm, India’s economic future remains uncertain India’s development path is often compared— unfavourably—to that of China In the early 1990s both countries faced the challenge of lifting hundreds of millions of their citizens out of poverty, but only China has come close to eradicating this problem in the years since When drawing contrasts between China and India, two features stand out: their governance and their economic structure The ruling Chinese Communist Party has linked its political legitimacy to economic growth and social stability, and the careers of party cadres have long hinged on their ability to hit growth targets This has provided an incentive for rapid development—often at a high cost to civil rights and the environment India, meanwhile, is a participatory democracy whose socialist roots are proving more resilient Illegal land grabs for development cannot easily be swept under the rug—although the flipside of this is that even more reasonable efforts at acquiring land tend to be strenuously resisted As a result of these differences in governance, the two countries’ economic structures have diverged © The Economist Intelligence Unit Limited 2015 Contrasts and contradictions: A review of Asian economic development from 1995 to 2015 A regional trading hub The past two decades have seen Asia’s emerging markets grab a larger and larger share of world trade, with China overtaking the US as the biggest trader in 2013.1 The East Asian trading hub has gained a unique status in global value chains: whereas the NAFTA and EU manufacturing hubs largely serve their own regions, East Asia supplies the entire globe.2 This remarkable success owes in no small part to the intraregional trading dynamic that has emerged, in the so-called flying geese formation World Trade Organisation (2014), ‘World trade report 2014’ China’s share of the world’s exports and imports reached 11% in 2013, compared with the US’s 10.4% Lejour, A., RojasRomagosa, H and Veenendaal, P (2014) ‘Identifying hubs and spokes in global supply chains using redirected trade in value added’ European Central Bank, Working Paper No 1670, April 2014 IMF Directions of Trade Statistics; ADB Asia Regional Integration Cente Manufacturers in the first economy in this formation, Japan, recognised the benefits of outsourcing labour-intensive parts of their supply chains to cheaper locations as far back as the 1960s, and the recipient “Asian tiger” economies of Hong Kong, Singapore, South Korea and Taiwan demonstrated during the 1970s and 1980s that it was possible to move up the value chain at an eye-watering rate from this starting point Over the past 20 years China and the ASEAN economies have sought to emulate these achievements, vying to position themselves as the most investment-friendly environments in the next wave of outsourcing The result of this highly complementary trading network has been a vertiginous rise in the value of East and South-east Asian intra-regional trade (see chart below) The value of total trade more than quadrupled between 1995 and 2014 The share of the region’s total trade, which is intraregional, has not changed significantly since 1995, and has even declined slightly since 2009 At 45%, it is well below the EU’s level of intraregional trade, which stands at 65%.3 A question mark remains with regard to whether Asia’s less-developed economies will be able to join the flying geese formation with the same degree of success as the Asian tigers and Rise in value and share of Asian (ASEAN+3) intraregional trade, 1995-2014 Total trade; (US$ bn) left scale Trade share (%); right scale 6,000 50 5,000 48 4,000 46 3,000 44 2,000 42 1,000 40 38 1995 96 97 98 99 2000 01 02 03 04 Source: ADB Asia Regional Integration Centre; IMF Direction of Trade Statistics © The Economist Intelligence Unit Limited 2015 05 06 07 08 09 10 11 12 13 14 Contrasts and contradictions: A review of Asian economic development from 1995 to 2015 China Two main factors are contributing to the “stickiness” of China as a manufacturing location First, China’s size and potential as a consumer market mean that producers are keen to be there, developing and distributing products tailored to local consumers—and at the velocity required to maintain competitiveness Second, the Chinese government is going to great pains to future-proof the country’s industrial base by promoting automation on a grand scale If it succeeds, many low-skilled manufacturing jobs may well go to robots, rather than workers in Myanmar or Laos—though this will only apply to certain industries ASEAN’s response is to increase its value proposition through further economic integration The ASEAN Economic Community is being established with a view to creating a single market that encourages trade by lowering barriers, and is large enough to divert the attention of global investors away from neighbouring behemoths China and India The ASEAN economic community The vision l Investors no longer face non-tariff barriers l Tax regimes are co-ordinated l Standards are harmonised l Skilled labour can move around freely The potential: ASEAN as a single market lyPopulation (m) 2014 Nominal GDP (US$ bn at PPP) 2019 2014 1,600 2019 30,000 1,400 25,000 1,200 20,000 1,000 800 15,000 600 10,000 400 5,000 200 0 China India ASEAN China India ASEAN Source: The Economist Intelligence Unit © The Economist Intelligence Unit Limited 2015 Contrasts and contradictions: A review of Asian economic development from 1995 to 2015 Development of capital markets Stockmarkets have become an important source of capital for the 22,000 firms currently listed in the Asia-Pacific region (excluding Australia and New Zealand) Equity market capitalisation has roughly trebled since 1995 and now stands at over US$22trn—well ahead of the EMEA region, at US$12trn, although still trailing the Americas at US$30trn.4 Data from World Federation of Exchanges, March 2015 Equity market capitalisation of the AsiaPacific region (excluding Australia and New Zealand) in 1995 was US$7.7trn The data for the Americas includes North, Central and South America However, Asia’s financial markets are far from having reached their potential Room for growth can be seen in the relatively low level of market capitalisation as a proportion of GDP (see first chart below), and in the lack of diversity of financial instruments in use (see second chart below) Progress has been made in these areas, particularly since the Asian financial crisis demonstrated the danger of concentrating risks in a bank-based financial system,5 but certain Singh, S (2011) ‘Financial market depth: friend or foe when it comes to effective management of monetary policy and capital flows?’ in The influence of external factors on monetary policy frameworks and operations, Bank for International Settlements, 2011, vol 57, pp 231-237 asset classes such as corporate bonds are still not widely used Another indication of the lack of maturity of Asia’s financial systems is the very limited presence of foreign firms Singapore is a notable exception, with 37% of the firms hosted on its stock exchange being foreign However, not a single foreign firm is listed in mainland China or Indonesia, while just one is listed on each of India’s main exchanges Holding back participation and investment in emerging Asia’s financial sector is a perception—not entirely unjustified—that the region’s markets function in a somewhat opaque and idiosyncratic manner Recent research has shown that the pricing of Asian stocks is less well correlated to economic and corporate fundamentals than that of their G7 Emerging Asia's financial markets: Plenty of room for growth (Debt and equities as % of GDP, 2Q 2012) 500 500 400 400 300 300 200 200 100 100 0 Advanced economies China Other emerging Asia Source: McKinsey Global Institute Financial Assets Database; McKinsey Global Institute Analysis © The Economist Intelligence Unit Limited 2015 India Contrasts and contradictions: A review of Asian economic development from 1995 to 2015 counterparts.6 In other words, Asian stock prices are less predictable Better market regulation, including more stringent requirements for transparent corporate governance, tends to improve the accuracy of pricing and therefore lessen the impact of speculation on markets The urgent need for such regulatory improvements has been well illustrated by China between mid-2014 and the summer of 2015 (see chart below) A bull run that added US$6.5trn to the value of Chinese stocks over the course of a year was entirely disconnected from trends in the real economy In June 2015 the bubble burst spectacularly, leading the Chinese government to take extraordinary intervention measures in July in an attempt to restore stability to the market Besides improving regulation and transparency, received wisdom holds that financial diversification is key to reducing risk in a financial system However, valid questions have recently been raised about the risks of overly rapid financial market diversification and deepening, as policymakers seek to learn the lessons of the 2008-09 global financial crisis—which after all broke out in the world’s most highly developed financial markets.7 During the last few years, quantitative easing by central banks in the West has caused investors to chase higher returns in Asia’s emerging markets, pushing up domestic debt levels and housing prices Yet as the mid2013 “taper tantrum” showed, when it looks like quantitative easing will be curtailed, investors are quick to pull their money out of higher-risk emerging-market locations Policymakers in Asia’s emerging markets therefore face the challenge of balancing development and opening up their financial systems against the need for stability, and many will understandably wish to proceed at a measured pace China's GDP and stockmarket: a tenuous relationship 16 Real GDP (% change on previous year); left scale CSI 300 index; right scale 8,000 14 7,000 12 6,000 10 5,000 4,000 3,000 2,000 1,000 0 2005 06 07 08 09 10 11 12 13 14 15 Lipinsky, F and Ong, Li Lian (2014) ‘Asia’s Stock Markets: Are There Crouching Tigers and Hidden Dragons?’ IMF Working Paper, February 2014 Source: The EIU; Yahoo Finance See for instance Sahay,R., Čihák, M et al (2015) ‘Rethinking Financial Deepening: Stability and Growth in Emerging Markets’, IMF Staff Discussion Note 15/08 © The Economist Intelligence Unit Limited 2015 Contrasts and contradictions: A review of Asian economic development from 1995 to 2015 Asia’s magnetic middle class Asia is urbanising at an alarming rate, and megacities are becoming the new norm The emergence of an affluent urban middle class has led producers in the region to alter their strategies from producing for export to focusing on local consumers Multinationals are increasingly establishing their product development, marketing and distribution functions in Asian emerging markets, in order to tailor products to local demand The rise of the Asian middle class will also introduce new social and commercial pressures As people become wealthier, they also become more discerning consumers with regard to quality, safety and ethics Widespread outrage about tainted infant milk powder and other scandals in China have already forced changes in regulations and business strategies, with some Chinese food companies partnering with or acquiring Western competitors to build trust In future, better-networked and more environmentally and socially conscious urban consumers in Asia will impact not just the types of products and services on offer, but how these are produced and delivered Consumer power in emerging Asia will equal that of Western Europe by 2019 (% of world total) 40 China, India and ASEAN Four US Western Europe 35 35 30 30 25 25 20 20 15 15 10 10 5 0 1995 96 97 98 99 2000 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 Source: The Economist Intelligence Unit 40 © The Economist Intelligence Unit Limited 2015 Contrasts and contradictions: A review of Asian economic development from 1995 to 2015 From the world’s factory to the world’s mall: the digital future of retail in Asia Asia is redefining retail for the 21st century In towns that have yet to build a modern shopping mall, street markets are giving way to e-, m- and s-commerce as local firms create digital platforms adapted to peculiarly local conditions India’s digital commerce market enjoyed average annual growth of 35% between 2010 and 2014, although with predicted sales of US$15bn in 20158 it still lags far behind China, which had surpassed US$300bn by 2013 Indian firms are eager to emulate the success of China’s Alibaba, whose IPO in the US last year smashed global records A challenge for contenders is how to handle payments, with consumer trust sorely lacking, debit- and credit-card usage low and a clunky banking system Snapdeal, one of India’s leading digital commerce firms, has followed the lead of China’s Taobao in launching its own secure payment service, TrustPay A more basic response by most e-retailers has been to offer a cash-ondelivery option, accounting for around one-half of transactions In a smart domestic innovation, Indian firms have also come to rely on networks of local couriers to overcome logistical problems and reduce delivery costs What is remarkable is how fast online retail is growing in Asia’s emerging markets (albeit often from a very low base)—despite lagging physical infrastructure and financial services According to the 2013 ICT Development Index produced by the ITU, a UN agency focused on information and communication technology (ICT), China scored 5.1 and India just 3.1 out of ten for access to ICT, compared with the UK’s score of 9.2 The experience of Asia’s e-retail pioneers—pushing ahead while they wait for policies and systems to catch up—demonstrates that where there’s a will, there really is a way Internet and Mobile Association of India (2014), 'IAMAI Digital commerce report 2014.' © The Economist Intelligence Unit Limited 2015 Contrasts and contradictions: A review of Asian economic development from 1995 to 2015 Conclusion Asia in 2015 is a region of contrasts and contradictions Smart business districts sit uneasily alongside squalid slums Even as living standards soar for the urban middle classes, quality of life is dragged down by pollution Apparently strong foundations of economic interdependence are rocked by underlying geopolitical fault lines The economic outlook for Asia is bright but contingent on smart domestic 10 © The Economist Intelligence Unit Limited 2015 and foreign policies Will South Asia’s children get access to the education they need to contribute to their region’s future? Will China succeed in transitioning away from inefficient, GDP-boosting investments and towards a more balanced and productive economy? Will diplomacy prevail in the East and South China seas? Cause for optimism is provided by the emergence of a generation of well-educated, worldly and engaged citizens While every effort has been taken to verify the accuracy of this information, The Economist Intelligence Unit Ltd cannot accept any responsibility or liability for reliance by any person on this report or any of the information, opinions or conclusions set out in this report LONDON 20 Cabot Square London E14 4QW United Kingdom Tel: (44.20) 7576 8000 Fax: (44.20) 7576 8500 E-mail: london@eiu.com NEW YORK 750 Third Avenue 5th Floor New York, NY 10017 United States Tel: (1.212) 554 0600 Fax: (1.212) 586 1181/2 E-mail: americas@eiu.com HONG KONG 1301 Cityplaza Four 12 Taikoo Wan Road Taikoo Shing Hong Kong Tel: (852) 2585 3888 Fax: (852) 2802 7638 E-mail: asia@eiu.com GENEVA Rue de l’Athénée 32 1206 Geneva Switzerland Tel: (41) 22 566 2470 Fax: (41) 22 346 93 47 E-mail: geneva@eiu.com [...].. .Contrasts and contradictions: A review of Asian economic development from 1995 to 2015 Conclusion Asia in 2015 is a region of contrasts and contradictions Smart business districts sit uneasily alongside squalid slums Even as living standards soar for the urban middle classes, quality of life is dragged down by pollution... domestic 10 © The Economist Intelligence Unit Limited 2015 and foreign policies Will South Asia’s children get access to the education they need to contribute to their region’s future? Will China succeed in transitioning away from inefficient, GDP-boosting investments and towards a more balanced and productive economy? Will diplomacy prevail in the East and South China seas? Cause for optimism is provided... investments and towards a more balanced and productive economy? Will diplomacy prevail in the East and South China seas? Cause for optimism is provided by the emergence of a generation of well-educated, worldly and engaged citizens While every effort has been taken to verify the accuracy of this information, The Economist Intelligence Unit Ltd cannot accept any responsibility or liability for reliance by any... E-mail: americas@eiu.com HONG KONG 1301 Cityplaza Four 12 Taikoo Wan Road Taikoo Shing Hong Kong Tel: (852) 2585 3888 Fax: (852) 2802 7638 E-mail: asia@eiu.com GENEVA Rue de l’Athénée 32 1206 Geneva Switzerland Tel: (41) 22 566 2470 Fax: (41) 22 346 93 47 E-mail: geneva@eiu.com ... South Korea, Hong Kong, Taiwan and Singapore, form a dynamic and increasingly integrated trading network and a vital hub within global supply chains Contrasts and contradictions: A review of Asian... Intelligence Unit Limited 2015 Contrasts and contradictions: A review of Asian economic development from 1995 to 2015 Conclusion Asia in 2015 is a region of contrasts and contradictions Smart business.. .Contrasts and contradictions: A review of Asian economic development from 1995 to 2015 Contents Then and now The elephant in the room: India A regional