Asia is diverse and complementary, and Asia-for-Asia industrial supply-chain networks are emerging.
Asia is a highly diverse region, there is no single Asia but many. We identified 4 distinct groups of economies based on scale, economic development, interactions with one another, and connectedness to the world.
Each of these “4 Asia’s” has characteristics that complement the other three (Exh 2). As they integrate with 1 another, this may make the region more resilient in the face of any global volatility.
- Advanced Asia. The countries of this group (Australia, Japan, New Zealand, Singapore, and SKorea) have all achieved high levels of per capita GDP of between $30,000 and $60,000, are highly urbanized and connected. They provide technology, capital, and a market for more high-end consumption to the rest of Asia. Their outbound FDI was $1-T in 2013–17, accounting for 54% of total regional FDI outflows.
In Y 2013–17, China accounted for 35% of total Asian outbound FDI.
- China. China, the second largest economy in the world, is big enough and sufficiently distinct from others in the region to stand in its own category, acts as an anchor economy to the rest of the region and as a connectivity and innovation platform for neighboring countries. In 2013–17, it accounted for 35% of total Asian outbound FDI. Having built significant innovation capacity, China accounted for 40% of the world’s patent applications in Y 2017.
- Emerging Asia. These countries (Bhutan, Brunei, Cambodia, Indonesia, Laos, Malaysia, Mongolia, Myanmar, Nepal, the Philippines, Thailand, and Vietnam) is relatively diverse but tends to have small, highly intra-regionally connected economies. The average share of intraregional flows in these economies is 79%, the highest of the 4 Asias. Around 72% of trade, 80% of capital flows, and 85% of people flows in this group are intraregional. These economies provide labor and growth to the rest of Asia while being highly culturally diverse.
- Frontier Asia and India. These economies (Afghanistan, Bangladesh, Fiji, India, Kazakhstan, Kyrgyzstan, Maldives, Pakistan, Sri Lanka, Tajikistan, Turkmenistan, and Uzbekistan) historically have had low levels of regional integration. The intra-regional share of goods, capital, and people is only 31%, the lowest in Asia. They have had a broader range of trading relationships historically. In Y 2017, Europe, the Middle East and Africa, and North America accounted for 45% of these economies’ imports and 66% of exports, 56% of their FDI inflows, and 53% of their FDI outflows. They are major producers of services, notably business services in India, but are also moving into manufacturing, as in Bangladesh. They have young labor forces, and offer new markets as they integrate with the rest of Asia.
The economies of each of these Asias is expected to be comparable in size to any of today’s continents by Y 2040. China may be comparable to the size of North America by then. Advanced Asia and Frontier Asia and India may each be bigger than the Middle East and Africa combined. Emerging Asia may be comparable with Latin America.
Increasing flows between countries in the 4 Asia’s are creating powerful new networks. The 3 in particular; industrialization, innovation, and cultural and mobility are helping to reinforce those flows and connections.
Rising consumption, maturing domestic value chains, and uncertainties around global trade are driving the formation of Asia-for-Asia supply chains. Manufacturing sector employment tends to peak at about 30 percent of total employment, usually after economies reach per capita GDP of between $10,000 and $20,000. Many Asian countries are at 15 to 20% in terms of employment in manufacturing, suggesting huge potential for further industrialization. In this developing industrialization network, we discern three major developments:
China is phasing out labor-intensive manufacturing, and Emerging Asia and Frontier Asia and India are picking up share.
From Ys 2007 – 2017, China’s manufacturing share of GDP increased slightly, from 30 to 34%. At the same time, manufacturing became a more prominent activity in other Asian economies. The manufacturing share of GDP in Vietnam increased from 16% in Y 2007 to 22% in Y 2017. Some Frontier Asia and India countries are also industrializing, such as Bangladesh whose manufacturing share of GDP rose from 16% to 22% between Y’s2007 and 2017.
Underpinning this growth is Advanced Asia and China, which are investing heavily in Emerging Asia and facilitating their growth. These 2 Asia’s account for 43% of Emerging Asia’s exports and 61% of its imports, and for 47% of Emerging Asia’s FDI inflows and outflows.
For example, 79% of Vietnam’s FDI inflows in the electronics sector between Y’s 2013 and 2017 came from SKorea, helping the country to become a hub for electronics manufacturing.
Despite a major influence from Advanced Asia and China, Emerging Asia’s economic ties are still strong within their group.
For instance, exports to other economies in Emerging Asia still accounted for 15% of the sub-region’s exports in Y 2017. And 31% of Emerging Asia’s capital flows between Y’s 2013 and 2017 remained within the sub-region, up from 26% in Y’s 2008–12.
Frontier Asia and India has large potential to grow its industrial base but has found it challenging thus far. Infrastructure is insufficient and lacks quality, and heavy and time-consuming bureaucracy has made decision making slow, deterring investment.
However, there is huge potential with large and young populations, and significant capital and investment flowing into these economies. These countries have significant scope to integrate further with other Asian economies.
Exports from Bangladesh, Pakistan, and Sri Lanka to the rest of Asia are now growing at a faster compound annual growth rate than to other regions.
New cities across Asia are developing as dynamic industrialization hubs. These “rising cities” on Asia’s industrialization network, among them Jamnagar in India, Phnom Penh in Cambodia, Hai Phong in Vietnam, and Bekasi in Indonesia tend to have received strategic and investment support from their respective governments including in infrastructure, and incentives to attract large businesses.
Stay tuned for The Future of Asia (parts 4/5)
Have a terrific weekend.