As we settle down for the year end, the picture on the economic front seems to be a bit clearer, although on the political front, the Paris attacks, the downing of a Russian jet by Turkey and continuing refugee migration into Europe have escalated the geopolitical risks. 

By spreading the war on terror from 9/11 in New York to Paris, consumer confidence in Europe is likely to suffer, depressing already a weak recovery in Spain, Italy and Ireland.

Fed Vice-Chairman Stanley Fischer, one of the wisest and most experienced central bankers, gave a speech earlier this month in San Francisco on “Emerging Asia in Transition.” His view was surprisingly upbeat but clear-eyed, noting that a slowdown in Asia was not slow but still impressive. The pattern of growth in Asia has been quite consistent — a period of fast growth before deceleration to a moderate level, and when the economy reaches maturity, as in the case of Japan, a phase of slow growth or stagnation.

Fischer explained the growth through two major drivers — trade and demographics. One of the reasons for the Asian success story was the rise of export-driven manufacturing, creating the Asian global supply chain. But after the global financial crisis of 2007, imports from the advanced countries declined, which was compensated by China’s imports of commodities from the commodity producers.

But once the investment―led cycle in China turned, commodity prices declined sharply and today, demand from the emerging markets also came down. On top of weak demand in the advanced economies, this meant real weak aggregate demand in the world, facing a situation of huge excess capacity in manufacturing and commodity production. Basically, despite massive monetary creation, the world is facing slower growth with very little inflation in sight, namely, secular stagnation.

The second factor for the current situation is demographics. East Asia had a demographic dividend, as a floodtide of young labor emerged even as global exports took off. But the advanced economies of East Asia are aging, just like the advanced countries of Europe. The 2015 U.N. World Population Projections show these trends starkly.

The two manufacturing powerhouses, Japan and Germany, have the highest median population age of 47 and 46, and by 2030, just under one in 3 persons will be over the age of 65. By that time, Korea, Hong Kong and Singapore population would have one in four over the age of 65. China and the U.S. share roughly the same population profile, with the median age of 37 and 38 respectively, but by 2030, 21 percent of the U.S. population would be over the age of 65, still higher than the 17 percent in China.

On the other hand, the younger populations in India, Bangladesh, Philippines, Indonesia, and Malaysia still enjoy potential for high growth, with a median age of not more than 29 years and by 2030, less than 10 percent of the population would be more than 65. These large population countries, with the right infrastructure and policies, have the potential to grow above 5 percent per annum, with India leading the charge at 7.5 percent.

We cannot underestimate power of these emerging population giants as new engines of grow. India is today a $2 trillion GDP economy, one fifth the size of China, with roughly the same population. When Philippines and Vietnam (100 million and 91 million population respectively) reach the same per capita income as Malaysia, their economy would be in the $1 trillion class, roughly 3 times the size of either Singapore or Hong Kong today. On the same basis, Indonesia would be a $2.8 trillion economy, roughly the same size as France today.

One of the factors weighing down markets is the trajectory of interest rates, which are still historically low. The Fed may be interested in raising them back to normal, but the European Central Bank and the Bank of Japan are still committed to quantitative easing. Emerging market interest rates and corporate borrowing rates have already started rising worldwide and this is, in the short run, negative to growth recovery.

However, getting these population giants to move beyond the middle-income trap requires huge reforms in many areas, including the power to put in infrastructure, educate the labor force and deal with structural impediments. Countries like Philippines and Vietnam are using external pressure, such as signing up to the Trans-Pacific Partnership, to push through reforms even as opportunities for more trade appear.

But the headwinds against such reforms are not small. Each country faces its own set of internal obstacles. In some countries, it is antiquated labor and land laws, in others corruption, inefficient state-owned enterprises, and lack of much needed infrastructure. In many, the transaction costs of doing business remain too high to compete effectively. In others, domestic giants resist competition from foreign multinationals that can bring in new know-how and markets. At the same time, labor unions and fear for jobs resist the introduction of new robotics and labor and resource-saving technology.

All these risk factors collectively produce a global secular stagnation trap, very much like the 1930s, when no single government was strong enough to pull the world out of the global depression.

The U.S. today is no longer in the position to be the lead engine. Even though she is recovering, U.S. consumers are spending less on hardware imports and more on domestic services. Hence, even if emerging markets cut exchange rates to defend their trade positions, the exorable rise in dollar exchange rates spell future trouble because there are limits to the growing size of U.S. trade deficits.

What can Asian countries do to get out of the secular stagnation?

The answer lies in the willingness to reform and to restructure the current overdependence on exports, debt and manufacturing/resource exploitation. The willingness to bite the bullet will produce a J-shaped recovery, rather than the current L-shaped stagnation.

But every leader knows that reform is politically unpopular because it hits various vested interests. So all pundits deplore the lack of leadership.

Leadership in these times of transition requires guts and will. The only problem is that it often takes someone else’s guts and the need to write the reformer’s own political will.

By Andrew Sheng

Andrew Sheng is an adjunct professor at Tsinghua University, Beijing and the University of Malaya. He was formerly the chairman of the Securities and Futures Commission in Hong Kong. — Ed.

(Asia News Network)