Reform and human capital critical to Asia’s future

Hong Kong, 20 Jan 2016

India’s working age population is set to boom in the two decades as the country bucks demographic trends seen throughout most of Asia.

While China, Korea, Japan and other major economies face challenges from an ageing workforce, India is preparing for the largest growth in working age population of any country in the world.

In the next 10 years alone, 100 million people are set to enter the working age range of 15 to 64 and the number of rich households is expected to double to 10 per cent by 2025.

The challenge for India’s economy is to make the most of its young workforce and ensure its people have the skills and available jobs to propel the country’s growth.

Asia has already undergone a spectacular transformation in the past 20 years.

It was not until the 1970s and 80s Asia began its technological catch-up game, first in Japan, then the “four tigers” of Hong Kong, South Korea, Singapore and Taiwan, followed by China and eventually India.

Whether the next 20 can be just as bright will depend on how each economy confronts specific hurdles on its path to progress.

To mark the 20th anniversary of the opening of Macquarie’s first office in Asia, Macquarie’s Asia Research team has broken with tradition to produce 20 Years in Asia, a 20-year thematic research report exploring key trends that will shape the region in decades to come.

Factors that have been critical to the emergence of Asian countries as major players in the global economy – improvement in human capital, institutional reform, investment in research and development – will remain key determinants of Asia’s economic progress, explains Viktor Shvets, Head of Asian Equity Strategy at Macquarie.


Asian economies have chartered a turbulent course over the past 500 years.

In the 1500s and 1600s, China and India alone accounted for more than 50 per cent of global GDP in the 1500s and 1600s.

That dropped to just 20 per cent by the late 1800s as the western world industrialised and Asia became less relevant globally, says Shvets.

It was not until the 1970s and 80s Asia began its technological catch-up game, first in Japan, then the "four tigers" of Hong Kong, South Korea, Singapore and Taiwan, followed by China and eventually India.

"There were factors that helped these economies to take the same route as the western world," Shvets says.

Those factors included improvements in the human skill set, a larger savings pool that drove investment in infrastructure, growing rates of urbanisation, and the opening up of economies such as China making it easier to do business.

"Generally speaking, Asia has come a long way and now accounts for around a third of  the global economy and trade and around 40 per cent of global savings flow," Shvets says.

"It’s still lagging if you compare Asia to the western world but investors in the last three decades have witnessed one of the world’s strongest and deepest periods of economic transformation."

Macquarie’s research estimates Asia- including Japan - grew at an annual real GDP growth rate of 6 per cent over the last 20 years.

The forecast for the next 20 years is that growth will slow to an annual pace of 4 to 5.5 per cent.

Shvets says that is largely due to poor demographics including ageing populations in China, Japan, Korea and Taiwan, an expected drop in investment as economies, primarily China, shift their focus to consumption.

Despite the decreasing rate of growth, the outlook for Asia is positive over the next 20 years.

"Asia could become close to 50 per cent of the global economy," predicts Macquarie Senior Analyst Chetan Seth.


Demographics are likely to play a key role in determining the path Asia takes from here.

Both India and ASEAN, which have younger populations, have opportunities to propel growth forward, so long as their economies turn this apparent demographic advantage into a “dividend” rather than a curse.

"It’s a dividend if you assume the demography is skilled enough and will be able to find jobs," Seth says.

"But if that does not occur, either if they’re not skilled enough or there are not jobs, it’s a problem."

Macquarie’s analysts highlight the particular relevance this has for India, where the work force is expected to grow by 100 million in the next two years.

"That basically means that the Indian government has to create 10 million jobs a year. This is a monumental task," Seth says.

Asian countries will also have to ensure they continue to move up the value chain by increasing living standards and growing the amount of GDP per capita.

Industries such as farming will need to become increasingly sophisticated and add to technology their work methods.


In China there has been huge investment in infrastructure over the past two decades.

Macquarie’s Head of China Strategy Erwin Sanft says the country became something of an "economic miracle", using a young labour force and large pool of national savings to turn itself into "the factory of the world". 

But the tide is turning and the very factors that worked in China’s favour could soon work against it.

Macquarie’s research raises the possibility of  a "soft rebalancing" in China and a shift in focus from investment to consumption as the main driver of economic growth. 

"China invested a lot and the demand now is not sufficient for that capacity," Seth says.

"People are concerned about over-leveraging in parts of China. If China is unable to rebalance, there will be global implications."

Seth says it is clear that demand in China for hard commodities such as steel, nickel, zinc and coal will take the first hit. 

But Macquarie remains cautiously optimistic about the overall prospects for energy consumption in Asia and forecast Asia’s primary energy consumption will rise by 31 per cent by 2025 and two thirds of that demand increase will be for fossil fuels.

How to manage the environmental impacts of economic development will be one of the biggest challenges Asian economies will face the next two decades. 

Seth says Asia’s share of carbon emissions will continue to rise. 

"That is something we can’t deny and we’ve not kept that open ended."

Continued urbanisation could also be problematic if countries fail to put sufficient emphasis on demands for water and sanitation.

But the biggest "game changer", Seth says, will be technology.


Macquarie’s regional technology team highlights the "tectonic shift from Japan to the rest of Asia in the last 20 years" and that further technological advancement "could completely change the balance of power in Asia in the next 20 years as has been the case during the last two decades."

"No one knows what technology will be like 10 to 15 years down the line," Seth says.

"No one would have predicted the implications of the use of smart phones 15 years ago."

Macquarie’s analysts say some of the potentially negative consequences of a world dominated by technology include the erosion of the importance of human labour and a drop in the capacity of emerging markets to develop viable growth strategies.

But unlike in other emerging markets, graduates in the Asia-Pacific tend to specialise in science, engineering and technology, rather than humanities.

Coupled with improving infrastructure, a more sophisticated labour force could lead to more research and development, new products "and a higher degree of complexity of the country’s economic output".

"Higher complexity rates have a strong correlation to productivity and income levels," says Seth. 

"Which will unite improvements in physical infrastructure with improving human capital and the ability to climb value chain."

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