Recovery from the Global Crisis has been notably slow in the European economy, with growth rates for 2010-2013 steady at 0.4% per annum. In contrast, the US has managed to raise its growth rate to 2.0% per annum, and is beginning to return to its long-term growth track. The Asian economy, which has become increasingly autonomous from the Western economies and even contributed to stabilising the global economy at the time of the Global Crisis, has been maintaining a stable economic growth of on average 5.4% per annum since 2010. Yet, it has slowed down by one percentage point from the level recorded in the late 2000s. The main factor is the end of China’s economic boom. This article explains recent productivity trends across the Asian region, based on the APO Productivity Databook 2015, published by the Asian Productivity Organization (APO) in September 2015.1
Economic slowdown in East Asia
According to growth accounting analysis, the slowdown of China’s economic growth from 10% per annum in the 2000s to around 7% is largely due to the reduction in the rate of total factor productivity (TFP) growth.2 The latecomer advantage that China enjoyed with its economic growth model built around manufacturing expansion materialised in the 2000s in the form of a more than 4% TFP growth per annum, which, in turn, can be attributed to around 40% of the nation’s economic growth rate. Today, the rate of increase has halved to 2%, and approximately 70% of the country’s growth depends on capital stock. The trend of losing high TFP growth recorded in the economic boom and increasing the role of capital stock while suffering a decline in its investment efficiency appears similar to the trend experienced by the Japanese economy during the 1960s and into the 1970s.3
The recent slowdown in productivity has notably hit Taiwan and South Korea, which had been increasing their reliance on the Chinese economy. In the late 2000s, Taiwan and South Korea achieved annual TFP growth of 2.2% and 2.5% per annum, respectively, a level higher than the average figure for the last 40 years. That was the main engine that drove these countries’ labour productivity higher to 3.9% and 4.8% per annum, respectively. However, their rate of TFP growth tumbled to an average of 0.7% per annum in 2010-2013, and the rise of labour productivity also slowed down substantially to 1.1% and 2.2%, respectively. In South Korea, in particular, the rate of return on capital dropped significantly to the level experienced by Japan in the early 1990s.
In Mongolia, the two world class large mines (coal and copper) started production in 2010, sparking a resources boom. The country’s capital investment ratio jumped from 30% of GDP in 2009 to 58% in 2011, accelerating the rate of economic growth from 2010 to 2013 to 12.9% per annum. Of this number, 6.1 percentage points are attributed to the major TFP increase, but it is only a temporary surge resulting from resource development. The slowdown of the Chinese economy applied a sudden brake to Mongolia, which is now working on rebuilding its economy under the new government formed in November 2014.
In contrast, Japan’s economic productivity is on the recovery. The TFP growth rate reached 1.0% per annum in 2010-2013, the highest rate of increase seen during Japan’s secular stagnation (the so-called ‘two lost decades’). This is virtually the only engine for growth amid the reduction in labour input and stagnation in capital stock over the last 20 years. Yet, the labour productivity growth stood at just 0.8% per annum due to minor capital shallowing.4 The long-term economic stagnation has reduced nominal wages since the late 1990s, but this factor by itself could serve as a driving force for future growth. It is now the moment of truth as to whether Abenomics can expand production and investment.
Centre of gravity in productivity growth shifting to Southeast Asia
The centre of gravity in productivity growth is beginning to shift to the Association of Southeast Asian Nations (ASEAN). The rate of TFP growth in ASEAN improved from 1.3% per annum in the late 2000s to 2.1% per annum in the 2010-2013 period.5 TFP in the Philippines, in particular, grew strongly at 3.0% per annum. While the level of capital deepening remains low, the Philippines saw TFP improvement directly boost labour productivity (3.7% per annum). Since the early 1990s, income transfer from abroad (remittances from overseas Filipino workers to the country) has expanded to reach as much as 32% of GDP in 2013. While stable domestic demand continues to support growth, labour productivity has also improved, mainly in the service industry. Yet, there are concerns about the sustainability of demand-driven improvement in productivity. The key challenge is to transfer that productivity improvement to one achieved through manufacturing expansion, and to develop the environment for investment.
The Thai economy, which was relatively to a large extent impacted by the Global Crisis, made a steady recovery in 2010-2013 as seen by the improvement of TFP by 2.3% per annum and the improvement of labour productivity by 3.7% per annum. These are at the level surpassing the nation’s past figures in long-term productivity increase.6 They are now entering the peak period of enjoying population bonus until 2020. Amid the anticipation of stable growth in both demand and supply, Thailand has made a smooth start toward achieving its TFP growth target (3%) under the 11th National Economic and Social Development Plan (2012-2016).
The Vietnamese economy also saw TFP and labour productivity rise by 1.1% and 4.3% respectively (2010-2013). TFP, in particular, is a comeback from negative growth that continued from the mid-2000s. It has contributed to around 20% of the nation’s economic growth in recent years. The Vietnamese government has set the goal of increasing the TFP contribution share in economic growth to at least 35% in 2015-2020, and revamped its initiatives for boosting this ratio by improving production processes and the quality of products.
South Asia and its large room for improvement
India, which surpassed Japan based on GDP adjusted for purchasing power parity (PPP) in 2008, has maintained a strong increase in labour productivity (6.6% per annum) since the mid-2000s. The country, whose per-capita GDP does not even reach half of that of China, faces the key policy task of creating employment even if that means sacrificing the increase of average labour productivity to some extent. The long-term output of the manufacturing sector has been expanding at the rate of about 6% per annum, but its effect of boosting employment has been marginal since 2000. The government’s ‘Make in India’ initiative is aimed at expanding the manufacturing sector even further, so as to lay the foundation for enjoying population bonus, promised for the 2030s-2040s.
Pakistan’s rate of TFP increase reached 1.9% per annum (2010-2013), establishing a long-term positive trend. This country’s challenge lies in the dwindling capital stock. In the Indian economy, the expansion of capital input supports 60% of its economic growth. Yet, the ratio is less than 10% in Pakistan. It should be noted that the rate of return on capital has made a recovery from 5% to the current 10%. The country must improve the investment environment for capital deepening so as to accelerate the rate of labour productivity increase, which is currently hovering around 1.7% over the same period.
In Bangladesh, the rate of TFP growth has been almost steady or even negative since the late 1990s. The manufacturing sector’s share of TFP growth is higher in Bangladesh than in India. However, since about half of it is attributable to textile and apparel manufacturing, productivity is on a downward trend. In the 2010s, the rate of TFP growth made a positive turn to 0.8% per annum, with the nation’s labour productivity also improving to 2.8% per annum. This is about double the rate of Bangladesh’s long-term trend. The capital investment share of GDP was only about 17% until the mid-1990s but increased to almost 30% including infrastructure development. Since Bangladesh’s current level of investment ratio and per-capita GDP are about the same as those of India in the mid-2000s, the country is expected to follow a similar growth track to what India subsequently underwent.
Increasing Asia’s rate of TFP growth to 2.0%
The Asian Productivity Organisation is considering an annual average of 3.6% improvement in labour productivity as its target for productivity improvement by 2020 for the entire Asian member economies. The annual average growth rate of TFP and labour productivity for this region was 1.3% and 3.0%, respectively, in 2010-2013. All of Asia including China experienced TFP increase of 1.7% per annum and labour productivity increase of 5.0% over the same period. Beyond the period of recovery from the Global Crisis, the Asian region must take on initiatives for achieving sustainable improvement of TFP by around 1.5%-2.0% per annum across the region.
Table 1. Output growth and contributions of labour, capital, and TFP, 1970–2013 (click image for larger version)
Unit: Average annual growth rate (percentage), contribution share in parentheses.
Source: APO Productivity Database 2015.
Editor’s note: This column was reproduced with permission from the Research Institute of Economy, Trade and Industry (RIETI).
APO (2015) APO Productivity Databook 2015, Keio University Press, September. http://www.apo-tokyo.org/publications/ebooks/apo-productivity-databook-2015/
OECD (2015) OECD Compendium of Productivity Indicators 2015, May. http://www.oecd.org/std/productivity-stats/oecd-compendium-of-productivity-indicators-22252126.htm
1 In addition to research on national accounting in Asian countries, the APO has worked on a project to compile comprehensive productivity statistics since 2007, in which I am involved as the project manager. This region, which includes numerous developing countries, has many challenges in terms of national accounting. Cross-regional coordination is being explored as much as possible while efforts are made to establish common methodology for data measurement to boost data comparability. Highly consistent with the productivity statistics of the Organisation for Economic Co-operation and Development (OECD 2015), it enables productivity comparison.
2 This refers to the amount of increase in output (real GDP) that cannot be explained with contributions from increase in input of production factors such as labour and capital. Quality change in labour input is currently being developed in the APO project, but it is included in the rate of TFP growth in APO (2015).
3 However, there is strong concern about a hard landing by China, induced by excessive investments in both public and private sectors. This was strongly recognized as a destabilizing factor in the capital markets this summer, and is beginning to affect the real economy.
4 Capital deepening is the increase in capital input per labour volume, and the opposite is capital shallowing. In APO (2015), it is measured as the amount of capital input (capital service) per hour worked.
5 Eight ASEAN nations excluding Myanmar and Laos.
6 When the working age population (15-64 years old) is approximately twice or more of the dependent population (0-14 years old, 65 years old and older).