Why shape-shifting Asia is good for the world
As the global economy flirts with potential recession, the changing shape of the Asian economy offers prospects for long-term organic growth driven by new consumers and opportunities in the services industry.
In its latest forecast, the International Monetary Fund upgraded its estimate for 2023 growth in emerging and developing Asia from 4.9% to 5.3%, which is more than triple the expected pace of US expansion and more than seven times faster than that seen for the euro area.
Other estimates vary in their numbers, but all broadly agree that Asia is where the growth is. This broad-based optimism is largely based on two long-term trends.
The first is that years of prudent fiscal management since the Asian financial crisis of the late 1990s have enabled most regional economies to emerge from Covid with minimal scarring. The second is that Asia’s intraregional economy is undergoing a historic shift that is making it much less dependent on the health of Western economies than it once was.
Addressing potential weak spots
Part of the drive for better economic management has been to address potential weak spots, including by strengthening foreign exchange reserves, controlling inflation and ensuring that regional economies do not stumble when interest and exchange rates move against them.
Less noticed, but no less important, is the work of organisations like the Association of Southeast Asian Nations and the enthusiastic embrace of agreements like the Regional Comprehensive Economic Partnership and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, which have optimised the area’s long-term growth potential by removing trade barriers and making the region more attractive for investment.
They also have amplified and reinforced a profound structural shift in the regional economy.
For years, much of developing East and Southeast Asia leveraged its low labour costs to tap into export-driven growth, particularly China and the so-called tiger economies.
This set off the fastest and deepest economic transformation in history. Gross domestic product per capita in East Asia and the Pacific rose from $3,250 in 1990 to $20,300 in 2021, while foreign direct investment inflows rose from $34 billion to $741 billion.
Hundreds of millions of people were given the opportunity to work their way out of poverty. Within a relatively short span of time, they acquired disposable income and moved into the consuming classes.
The rise of the Asian consumer is inexorably tipping the balance of economic influence eastward
The Brookings Institution estimates that the number of consumers in Asia will grow from 560 million in 2000 to three billion, or 70% of the region’s population, by 2030, while McKinsey & Co forecasts that Asia will account for over half of global consumption by then.
These new consumers are buying Asian-made goods as reflected in figures showing that intraregional trade grew 50% between 2019 and 2022, according to shipping conglomerate Maersk.
International investors have taken note. Instead of putting money into manufacturing in Asia for export, international investment is increasingly flowing toward made in Asia, for Asia.
There are opportunities here for Western companies. A wide range of industries, including carmakers, machine-tool manufacturers and luxury retailers, already rely on Asia for the bulk of their new business, and these sectors will continue to flourish for as long as their competitive advantage continues.
Exploiting explosive online growth
The most exciting growth prospects lie in professional service industries, particularly those with well-developed global digital strategies able to take advantage of the explosive growth in Asia’s online community.
The latest UN estimates suggest that Asia’s imports of commercial services increased 9.2% last year and will grow another 5% this year. From global middle-class must-haves like education, entertainment and travel to professional services like accounting, law and architecture, services will drive the next round of growth.
There are particular opportunities for the financial services industry. Part of this will be managing the wealth of Asia’s new consumers - a Boston Consulting Group report last year estimated that Asia will generate $22 trillion in new wealth between 2020 and 2025.
But this will also involve financing lifestyle improvements and contributing to the growth of Asia and its trading partners by facilitating trade and expanding access to financial products that can fund expansion and manage risk.
The rise of the Asian consumer is inexorably tipping the balance of economic influence eastward. Not only is the region becoming less vulnerable to external economic shocks, we are also close to the point where the world needs Asia's economy to thrive as much Asia needs the global economy.
Asia’s success was founded on supplying the world. The future lies in Asian demand.
A version of this article first appeared in Nikkei Asia.