For some time now, East Asia has developed into the engine of the global economy. Alongside the giant China, tiger economies such as Taiwan and South Korea are playing in the top league of industrialized nations. Conversely, Russia continues to direct its energy exports to the region even more than it did before the Ukraine war, and the U.S. is also pushing toward Asia, where it is fighting with Beijing for dominance in the China Sea. With the critical energy supply in Europe and the war in Ukraine, Asia, more than ever, is becoming the engine of the global economy, according to the OECD. In November 2022, India, in particular, was seen as a growth candidate – but with the end of its strict Corona policy, China too is once again taking its place among the growth regions – the International Monetary Fund forecasted 5.2 percent for the People’s Republic thanks to a rebound effect similar to that in Europe.
The economic centers of the West have long been afraid of being knocked off their pedestals by Asian countries due to their rapid development. But what level have the countries of developing Asia actually reached in order to keep up with the classic industrialized countries of the West?
The state of the Asian tiger economies
In the 1970s, Taiwan, South Korea, Singapore, and Hong Kong began their rapid development, which enabled them to catch up with advanced industrialized countries within a few decades. India’s gross value added began to rise sharply at the turn of the millennium. Since gross value added subtracts previously imported inputs and intermediate goods, this indicator is the most meaningful for the increased productivity of an economy. In addition to clothing and jewelry, India began to produce more complex medicines and car parts for the U.S. market – in the meantime, Indian producers Tata and Mahindra & Mahindra have long been building e-cars themselves, and the megacities of Bangalore and Chennai are establishing themselves as major IT hubs. Starting in the 2010s, countries such as Indonesia and Turkey also set off in the direction of industrialization. Other countries such as Pakistan, Malaysia, Vietnam, and Bangladesh were held back by the global financial crisis of 2008.
Gross value added of emerging Asia in billions of PPP US dollars. Unique production of the countries minus intermediate products. South Korea’s growth from relative poverty began as early as the 1980s. India’s production growth from the turn of the millennium. Indonesia’s and Turkey’s start-up phases were upset by the 2010 financial crisis, but they were eventually able to establish themselves. Latecomers such as Pakistan, Vietnam, Bangladesh, and Malaysia can.
Some of them could benefit now that China is evolving from a low-cost supplier to a producer of higher-quality and more complex goods and is now dependent on low-cost suppliers in order to be able to export its own mid-range products, such as cell phones or electric cars, competitively. The trading partners in the East Pacific region have long been more closely networked than in any other region of the world. Even as rivals, India and China are the largest trading partners to each other. China obtains its largest imports from South Korea, Japan, and the island of Taiwan, which it regards as its own territory anyway.
Trade flows in East Asia have long been more interconnected than in most other regions of the world. Cell phones, computers, e-cars and machines have long been built and assembled along these value chains.
Source: UNCTAD
Much to learn for the newcomers on the world stage
China is also no longer alone in terms of learning progress. India’s and Turkey’s growth rates are also catching up. South Korea’s value added is also growing at a high level.
Annual growth rates of value added in products and services in selected Asian countries. (2004=100, 2011=100).
But the newcomers still have a lot to learn when it comes to manufacturing more complex products, especially apparatus for photographic laboratories, which Harvard University’s Atlas of Economic Complexity lists as the most complex product category to manufacture. At the country level, the index tells how complex their export products are and in what quantities they export them. South Korea has long been on par with Western industrialized nations in this regard, with only Germany, Switzerland, and Japan ahead. South Korean smartphones have long dominated Europe’s markets. But the index for most others is also pointing upward, albeit not as high a learning curve as China.
The economic complexity index illustrates a country’s ability to produce complex goods. China rose step by step from 39th to 17th place in 2020, only five places behind the USA at 12th place. South Korea is the world leader in 4th place, behind Japan, Switzerland, and Germany. Turkey also fought its way forward from 56th to 41st place; within two decades, the Turks worked their way up from a score of 0.13 to 0.63; South Korea has a current 1.95 index score. India remained, but still managed to gain 10 index points to 0.42.
China’s productivity development
But despite all the progress, even China as a model student is still a long way from Western or Korean productivity. Although workers in the Middle Kingdom have achieved an average 6.8 percent increase in output per hour every year since the turn of the millennium, at an average of $12 an hour, they are still far behind the $74 an hour produced by a U.S. worker. And even in the last few years before the COVID-19 pandemic, one could perceive a declining curve in China. This trend could intensify as the trade war with the U.S. intensifies and China is cut off from foreign technology and Western manufacturing companies leave the country. But this could benefit the many other countries around China, such as Vietnam, India, Bangladesh or Indonesia.
Labor productivity per hour in China is still far below that in America. In 2018, a Chinese produced an average of $12 per hour compared to $74 earned per hour by an American. (Purchasing power parity adjusted, in constant 2017 U.S. dollars).
What developments does Asia expect
Despite impressive developments so far, Asia’s economies still have a lot of catching up to do. Although the growing middle class in the region’s urban centers plays a crucial role, many countries in the Far East owe their success stories primarily to their sheer number of inhabitants, to whom many activities have been outsourced. Now, the challenge is to pour their knowledge and know-how of a well-educated and performance-oriented middle class into broad and sustainable growth in the long term. As China shows, there is massive potential to leverage productivity throughout the region. The need for this is already on the horizon: China faces a massive demographic shift, similar to Japan and European economies, with many retirees du few young people to provide for them. But this could also boost productivity: companies that were used to employing two workers and now suddenly have to make do with just one have pressure to automate and evolve – and here all countries still have huge potential.
