8/10/2019 SOE2014 Policy Insights - 'Rising Asia: Opportunities and Challenges for Sri Lanka'

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POLICY INSIGHTS30 OCTOBER 2014

INSTITUTE OF POLICY STUDIES OF SRI LANKA

RISING ASIA OPPORTUNITIES AND CHALLENG ESFOR SRI LANKA

Asiascontribution tothe worldeconomy hasgrown from one-fifth in 2000 toabout one-thirdof world GDP at

present, and isexpected toincrease furtherto over 50 percent by 2050.

It is now generally accepted that the 21 stcentury will see Asia continue to emerge asthe power house of the global economy,building on the remarkable socio-economicprogress seen in the region over the last 50

years. Asias rise is exemplified by itsincreasing contribution to the world economywhich has grown from one-fifth to about one-third of world GDP at present, and isexpected to increase further to over 50 percent by 2050 1. Some have called thispossibility the Asian Century.

The region is already the most populous inthe world, and in the 21 st century, it isexpected to be home to the largest middleclass in the world, providing much of themomentum for the global GDP growth 2. Asiawill not only be the largest consumer ofgoods, but also the largest producer ofgoods and services, influencing global

trends. These developments are likely tohave profound implications for countries rightacross the world, including Sri Lanka. As thecentre of global gravity shifts to Asia, SriLanka strategically located in Asia next tothe Indian subcontinent, and in closeproximity to Southeast Asia will havesizable economic opportunities to explore inits own backyard.

A Rising Asia in the Global Economy

On many dimensions, Asia is booming. Asiasperformance has been the best in the 21stCentury with the incomes of developing Asiaat nearly US$ 5,000 (PPP) in 2010, growing by

9.4 per cent between 2000 and 2010.Investment rates reached a high of 35 percent of GDP over the last decade, while theexports grew by 11.4 per cent. Net inflowsof private capital averaged US$ 83 billion ayear, while external debt fell to 14.5 of GDP.

Asia has accumula ted huge foreignexchange reserves in excess of US$ 3.5trillion.

Asias growth is increas ingly being driven bythe large economies of China and Indiawhich have emerged as the worlds secondand third largest economies on a purchasingpower parity (PPP) basis. Asias contributionto world output growth will largely be theresult of sustained growth by China andIndia. They are expected to grow rapidly,albeit at a slightly slower pace compared tothe past decade.

Consequently, world output which waslargely dominated by advanced economiesis shifting to emerging and developing Asia,with the Asian region catching up in terms ofboth PPP and current US dollar terms, andaccounting for an increasing share of worldoutput. Asias share of global output hasincreased from 7.5% in 1980 to 23% by2010, and is expected to reach around 30%by 2019. If the region continues to grow onits present trajectory, Asia could account formore than a half of global GDP by 2050 1.

Per capita GDP in emerging and developing Asia too has recorded high growth ratesduring the past three decades. It increasedfrom US$ 411 to US$ 5,227 over the period1980-2010 2. With rising in incomes and

people escaping poverty, Asias low incomeearners have been gradually progressing tothe middle income class over the past coupleof decades. Although the proportion isrelatively small compared to other parts of theworld, Asias middle class (defined as thoseconsuming on average between US$ 2-20 perday), has grown from 21% of the regionspopulation in 1990 to 56% by 2008 3.Consequently, Asia has emerged as a regionwith the largest number of a middle classpopulation in 2008 with 1.9 billion of emerging

Asias populat ion in the middle classcategory. The figure is projected to expand to59% by 2030. The rising middle class isexpected to bring about higher expenditureand consumption patterns.

8/10/2019 SOE2014 Policy Insights - 'Rising Asia: Opportunities and Challenges for Sri Lanka'

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30 OCTOBER 2014 POLICY INSIGHTS

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As Asia continues to grow and converge withaverage global living standards, there will berisks and challenges the region will have toovercome to sustain its growth momentum torealize the Asian Century. The notion of the

Asian Century assumes that Asianeconomies can maintain their present growthmomentum for another 40 years, whilst

adapting to changes in global economic andtechnological environment, and recreatecomparative advantages on a continuousbasis. Alternative scenario to the AsianCentury is the Middle Income Trapscenario, where countries will fail to make atimely transition from resource-driven growthwith low cost labour and capital toproductivity-driven growth. Under thisscenario, Asia would fall far short of the AsianCentury and the costs would be staggering;total GDP in 2050 would reach only US$ 61trillion and not US$ 148 trillion, and GDP percapita (PPP) would be only US$ 20,300, asopposed to US$ 38,600 1.

This article is based on the comprehensive chap-ter on 'Rising Asia: Opportunities and Challengesfor Sri Lanka' in the 'Sri Lanka: State of theEconomy 2014' report - the flagship publicationof the Institute of Policy Studies of Sri Lanka. Thecomplete 'State of the Economy 2014' reportcan be purchased from the publications sectionof the IPS, located at 100/20, Independence Av-enue, Colombo 7. For more information, contactthe Publications Unit on 0112143100.

Developing Asias rapid economic growthhas also raised the regions importance inworld trade, FDI and aid. Asias share inworld trade has been growing vigorouslyover the years; exports and imports from theregion have grown at twice the rate of the restof the world over the past three decades.

Asias economies are increasingly vital notonly to the world but to each other. As Asiaseconomies have grown larger, they also havebecome more integrated through trade,financial flows and direct investment.

However, increasing integration in the regionis mostly confined to East Asia.

With regard to FDI, Asias role as a source ofinvestment as well as a destination has beenstrengthening. Both inward and outwardflows in advanced economies have slowedduring the past three decades, while FDIflows to developing Asia have picked up. Infact, FDI inflows to the Asian region nowaccount for 15% of total global inflows, upfrom 11% in 1980 1. Similarly, FDI outflowsfrom Asia have grown but at a faster paceafter 2005, and the region has increased itsshare to almost 10% of outflows in 2012.

Aside from trade and FDI, emerging Asiancountries have become important sources ofaid and development finance as countries inthe region compete for natural resources andregional and global influence.

Major Challenges ConfrontingEmerging and Developing Asia

While Asias rapid growth in recent decadeshas lifted hundreds of millions out of extremepoverty, the region still remains home to two-thirds of the worlds poor, with more than 800million Asians still living on less than US$ 1.25a day and 1.7 billion surviving on less thanUS$ 2 a day 2. Moreover the gap between

Asias rich and poor has widened alarminglyin the past two decades. In many countries,the richest 1% of households account forclose to 10% of total consumption, and thetop 5% account for more than 20%. Hence,

the opportunities generated by rapideconomic growth have not been equallyshared by all, and could threaten socialcohesion and political stability withincountries.

Another most visible side-effec t of Asiasrapid growth has been issues related toenvironmental degradation and urbanisation.Over-exploitation of natural resources, suchas water, land, energy, forestry, andfisheries, has resulted in degrading air qualityand eco-systems, reducing the supply ofclean water, and creating significant healthhazards. The detriments of urbanization in theregion has included pollution, congestions,waste management, housing issues andover-burdened infrastructure.

Implications of Emerging Asia forSri Lanka

With Asia becoming not only the largestconsumer, but also the largest producer ofgoods and services, Sri Lanka should seizenew and expanding opportunities that willcome with it opportunities in trading goodsand services that would benefit Sri Lankanbusinesses and consumers alike. Moreover,it will provide an opportunity for Sri Lanka todiversity its dependence away from industrialeconomies, reducing its susceptibility to

developments and imperatives in thesemarkets. Sri Lanka stands to benefit fromstrengthening trade relations with Asiaconsidering the demand prospects for itsmajor exports to the region, combined with itsgeographic proximity. The country not onlyhas a potential to expand trade in goods withthe rest of the Asian region, but also inservices where Sri Lanka has a comparativeadvantage in producing and exporting travel,transportation, computer and information,communication, and insurance services.

While Sri Lankan businesses should take thelead in reaping the opportunities of emerging

Asia, the government should also support

such efforts by reducing the cost of doingbusiness at home, removing unnecessarybarriers to trade, attracting foreign invest-ment, and better integrating the country with

regional markets. In this context, it is vital thatSri Lanka deepens and broadens itsengagement with Asia in the years to come.Sri Lanka should engage with the region notonly economically, but also politically,culturally and socially. Improving people-to-people contacts could unlock large economicgains.

1 ADB (2011), Asia 2050: Realizing the Asian Century, AsianDevelopment Bank, Manila.

As Asia contin-ues to grow andconverge withaverage globalliving standards,there will berisks and chal-lenges the regionwill have to over-come to sustainits growth mo-

mentum to real-ize the AsianCentury.

2 Lee Kuan Yew (2014), Congratulatory Remarks at the 20thInternational Conference on the Future of Asia Rising Asia -Messages for the Next 20 Years, 22-23 May 2014, Tokyo. Availableat: http://future-of-asia.nikkei.jp/asia2014/eng/message.html3 ADB (2011), Asia 2050: Realizing the Asian Century, AsianDevelopment Bank, Manila.4IMF, World Economic Outlook database available at: http://www.imf.org/external/pubs/ft/weo/2014/01/weodata/index.aspx5 Chun. N. (2010), Middle Class Size in the Past, Present, andFuture: A Description of Trends in Asia, ADB Economics WorkingPaper Series No 217, Asian Development Bank, Manila.

62 UNCTAD (2014, Global Investment Trends Monitor No.15,available at http://unctad.org/en/PublicationsLibrary /webdiaeia2014d1_en.pdf.7 ADB (2011), Asia 2050: Realizing the Asian Century, AsianDevelopment Bank, Manila.

83 Kuroda, H. (2013), Asias Challenges, OECD Forum, available athttp://www.oecd.org/forum/asia-challenges.htm