Asia’s future fortunes are not in question. But just how bright a future and how volatile its path will be is uncertain.

An understanding of four key issues and how they relate to Asia’s development can help businesses and investors be better prepared.

The four issues are: how demographics drive destiny; the need for both China and India to institute systemic reforms; tectonic geopolitics; and the disruption of supply chains.

The Asian growth story is about a young demography. Both China and India will face their demographic humps at different rates, and those differences are critical.

China’s economically productive population (between 15 and 64 years old) should peak by 2015 and will thereafter steeply decline. By comparison, India’s is expected to peak only by around 2050. India will surpass China as the world’s most populous country by 2028.

The economic effects of a shrinking and ageing workforce are profound. Gross domestic product growth is driven by changes in the size of the labor force and the level of productivity improvements.

While a shrinking labor force puts downward pressure on GDP growth, this can be partially offset by productivity growth. But it is historically very difficult to sustain high levels of productivity improvement for very long.

A smaller employment base and an ageing society also translate into a slower consumer engine for the economy.

If India can get its infrastructure and regulatory framework in order, its youthful population can push the country ahead as a manufacturing, services and knowledge engine. Workers for skilled and knowledge-based jobs can generate a mass middle class, driving consumption and balancing out India’s current investment-driven economy.

Although China is now the world’s second largest economy, it faces several systemic risks which must be addressed if it is to ensure its future growth.

China needs to increase productivity and move away from an over-reliance on investment-led growth, rebalancing its economy towards greater domestic consumption. The dramatic growth of credit also poses potential dangers. Private sector debt is over 130 percent of GDP, and an unregulated and largely opaque shadow banking sector is about 60 percent of GDP.

Finally, the political leadership has to deal with simmering discontent over the widespread corruption, pollution and land grabbing from peasants. The success of economic and political reforms will be vital not only to China’s future but also to Asia.

Like China, India faces several systemic challenges. India needs to upgrade its public infrastructure. Despite a thriving information technology services sector full of skilled professionals, much of India is still rural, backward and under-served by public services. India’s political leadership needs to start delivering reforms and effective action for future growth.

There is considerable scope for India and China to form mutually advantageous economic and financial linkages, solving their political problems through diplomacy rather than military contests, thereby leading to a more secure and stable Asia.

The United States’ security footprint has been the abiding geopolitical reality in Asia over the past six decades. America’s influence as a superpower has been uncontested in this region until now.

Today, China’s economic clout has given it diplomatic currency. Its burgeoning military strength and sophistication are watched with caution by its neighbors and the U.S., for example, in the recent dispute over the Senkaku/ Diaoyu islands in the East China Sea.

The U.S. and China will have to spend the next decade establishing new “rules of the game,” as the evolving geopolitical scene has a lot of room for missteps.

International forums are important proxy arenas to work out disputes and to test political will. The United Nations, the World Bank and the International Monetary Fund require reform to reflect changing economic and political weights on the global stage. Giving greater voice to Asia will enable them to function effectively as stages for dispute resolution and crisis intervention.

For now, the tight economic and financial linkages that bind China and the U.S. together are the best reassurance to avoid escalating tensions.

Within the next two decades, the world may witness two revolutions in global supply chain dynamics, as both the Suez and Panama canals did before in shaving thousands of miles off sea travel.

The opening of the Northern Sea Route, or NSR, will cut 2,500 nautical miles off a journey between Shanghai and Northern Europe. The potential payoff and impact of using the route is high for most Asian economies, not just China. The NSR development will redraw supply chains in a persistent fashion, affecting all these ports and their parent economies.

The other significant realignment of supply chains will be the Pan-Asia Railway. This high- speed network will not only link all the tier 1 and 2 cities in China with one another, but also China with other Asian economies to its south. The line will break down geographical boundaries and shape economic change in Asia.

First, taken together, it is clear that Asia’s future economic well- being is contingent on China and India successfully undertaking systemic reform. If these are done, then Asia will be better placed to take advantage of its own potential.

Second, political tensions should be kept within certain limits. How those limits are decided will occupy the next decade and more.

Third, global and regional supply chains are going to be redrawn. The new tributaries will greatly affect trading economies such as Singapore. The dynamics of growth will be rearranged as the full significance of these new sea and land routes make themselves known.

Finally, as attractive as the Asia story may seem to be, it is still a big world out there. It will be important to also look elsewhere for growth opportunities ― for instance, in Central Asia and Africa ― to hedge against the limiting factors and risks in Asia.

The future of Asia will be reinvented. In the “New Asia,” one needs be bold to be prosperous and be wise to remain so.

By Devadas Krishnadas

Devadas Krishnadas is the founder and director of Future-Moves, Southeast Asia’s first dedicated foresight consultancy established in 2012. ― Ed.

(The Straits Times/Asia News Network)