Great Asian Slowdown

by John West, Asian Century Institute

We are now in the midst of the “Great Asian Slowdown“, driven by aging populations and the failure to undertake to take structural reforms to boost productivity, argues John West.

East Asia’s leading economies of China, Japan, and Korea are slowing down. This is due in part to a number of short-term factors like the weak global economy, and rising wage costs and excess capacity in China.

But there are more fundamental factors at work. Aging populations in these and some other East Asian economies is a secular trend dragging down potential growth, and which will keep economic growth on a weaker trajectory for the foreseeable future. This adverse trend is being exacerbated by a failure of governments to seriously implement structural reforms to turn up productivity as a growth driver.

These countries benefited from demographic dividends during their high-growth periods, thanks to their large youthful populations. But as populations age, and working age populations decline, demography becomes a “tax” rather than a dividend.

Neither advanced Western countries, nor commodity exporters from the emerging world, will be able to rely on Asia as a big source of growth, as they have in the past few decades. In fact, many emerging economies and advanced countries will suffer from dumping from China’s excess capacity in many industries.

Japan — East Asia’s first slowdown economy

Japan was of course the country that led Asia’s development. It was also the first to be hit by the adverse demography of aging populations, due to low fertility and rising life expectancy. Japan’s working-age population started declining in 1995, and has been falling ever since.

As a result, Japan’s annual potential economic growth rate fell from over 3% in the early 1990s, to less than 1%. Today, the Bank of Japan puts Japan’s potential growth rate at just 0.5%. Japan shifted from being a demographic dividend to a demographic tax country. Its aging population is pulling its potential growth down.

The Japanese government could have responded by launching structural reforms to boost productivity. But it didn’t. Productivity remains chronically low in the country’s services and agricultural sectors. Today, Japan’s labor productivity is a mere 70% of the US level.

Japan could also have made serious efforts to offer more economic opportunity to women and youth. But it hasn’t.

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Author: Travis Esquivel

Travis Esquivel is an engineer, passionate soccer player and full-time dad. He enjoys writing about innovation and technology from time to time.

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