Developing Asia's short-term prospects still good, but hazier in longer run: ADB

Tokyo

GROWTH in Asia's developing economies will slow somewhat this year and the next compared with last year, but India and South-east Asia should still put in relatively strong performances, even as China's growth continues to slow, the Asian Development Bank (ADB) has said.

Despite the slight dip in overall growth, developing Asia - defined by the ADB as China, India, Indonesia, Pakistan, Bangladesh, the Philippines, Vietnam, Thailand, Myanmar and South Korea - will contribute around 60 per cent of global growth in the next two years, the agency said in the latest edition of its Asian Development Outlook (ADO) report.

The longer-term outlook is more clouded, it said. Aside from warning about short-terms risks being "tilted to the downside", the report drew attention to declines in the potential growth of developing Asia, and warned that this could be the "new normal".

Spillover effects from the slowdown in China, coupled with unfavourable demographics and other factors, could condemn many developing Asian economies to slower growth in the longer term, a turnaround from their stunning performances in the past, the ADB suggested.

The key to raising potential and actual growth rates lies in these economies undertaking structural reform, in particular, those designed to raise labour productivity, said ADB chief economist Shang Jin Wei upon the release of the ADO.

"Potential growth depends on both the growth of the labour force and the growth of labour productivity," he said. "Many developing economies still have tremendous room to use structural reforms to remove distortions in the labour, capital and land markets, and to improve incentives for private-sector investment, all of which lead to higher productivity, and therefore, higher potential growth."

In the shorter term, the gross domestic product (GDP) in the developing Asia region will expand by 5.7 per cent in 2016 and 2017, decelerating from last year's 5.9 per cent in a difficult and uncertain global environment, the report said.

"Solid growth in India (projected by the ADB at 7.8 per cent this year) and a pickup in aggregate growth in the Association of South-east Asian Nations (Asean) will help balance continued growth moderation in China."

The ADB is projecting a growth rate of 6.7 per cent this year for China, the world's second largest economy, down from last year's actual outturn of 6.9 per cent. It noted that while investment had been the main driver of China's economic growth since 2001 - its contribution to growth was 86 per cent at its peak - consumption now contributes to more than half of its GDP.

Aggregate growth in the 10 Asean economies is forecast by the ADB to accelerate from last year's 4.4 per cent to 4.5 per cent this year and 4.8 per cent next year. The report said: "Growth will be led by Indonesia as it ramps up investment in infrastructure and implements policy reform that spurs private investment.

Meanwhile, solid consumption and investment will provide a lift to the Philippine economy. "Thailand's recovery is expected to gather momentum, and Vietnam will sustain its vigorous expansion. In contrast, Malaysian growth will slip further with low oil prices and weak external demand."

The latest ADO has adopted a longer-term and more analytical view of developing Asia's future than in previous years, and concluded that prospects have dimmed somewhat.

"Asia's average potential growth still declined by 2.2 percentage points between 2008 and 2014 from its historical trend," it noted, and asked: "Is this a new normal for Asia?"

"Without structural reform, potential growth in many countries in the region will slide further due to unfavourable demographics, convergence with advanced economies and spillover from growth moderation in China.

"The demographic drag on developing Asia's potential growth will intensify. The region previously benefited from a favourable age structure - the so-called demographic dividend - but slowing population growth and ageing populations are turning this dividend into a burden."

Developing Asia's past success has enabled it to narrow the gap with the advanced economies. The advantage of backwardness, which paved the way for Asia's developing economies to grow by adopting existing technologies, is fading, and they are now converging with the advanced economies in sophistication."