Are the “Asian Tigers” Hamstrung by Hidden Flaws?

Amidst recurring bullish predictions and rhetoric of Asia’s rise we should be careful of falling into complacency. Despite years of high economic growth, Asia faces many serious challenges. Regional political relations, economic health, water-security and demographic trajectories will push many key Asian nations towards instability.

Western leaders have watched, with envy and concern, the rapid growth rates of countries in Southern and Eastern Asia.  Many commentators agree that the Asian Century is upon us, and merely debate whether it will be Chinese or Indian.  The balance of power is certainly adjusting.  Last December, China seized a US monitoring drone  in the international waters of the South China Sea, with impunity; an act unimaginable two decades ago.  However, for all their bluster, the continued rise of the Asian Tigers is far from assured. A great many problems remain which could undermine their growth.

On July 24th, Vietnam pulled the plug on a $300 million gas-drilling expedition in a disputed area of the South China Sea after China threatened to attack Vietnamese bases in the Spratly Islands.  Setting aside these familiar tensions in the South China Sea, Asia has many other serious territorial disputes affecting most Asian nations.  Japan has disputes with all of its neighbours, and China is engaged in 13 territorial disputes with 8 neighbours.  These disputes impact business and investment and can spark conflict-generating economic and political instability.  Concerningly, despite improving multilateral cooperation over the last two decades, there is still no effective regional political community and there are few political mechanisms to manage crisis.  These disputes also become scapegoats for a host of domestic problems – such as slowing economies, water-security, and demographic problems – which constitute de-stabilising threats in their own right.

Faltering economic health

Asia’s economic health should be watched as growth slows, particularly in China.  Slowing growth has led to unsustainable debt increases in many countries, such as Singapore and Taiwan.  Japan’s aging population and weak productivity have generated a 234.7% GDP-to-debt ratio; the highest in the world.  Beijing’s repeated use of cheap credit to stimulate growth caused China’s gross debt to surpass 304% of GDP in May 2017; links between state-owned companies and banks heighten the economic risk inherent in this debt.  A default in the heavily indebted corporate sector could send shockwaves through state-owned banks and trigger a systematic crisis.  Further, China’s efforts to transition from an export-led economy to one driven by domestic spending, has had limited success.  This is clearly reflected in economic statistics – consumer spending only makes up 37% of China’s GDP, far below the United States (68.1%), Japan (58.6%), or even Russia (51.9%).

Populous and thirsty

Asian water-security is being pressured by climate change, water management, and economic and population growth.  Water shortages disrupt economic production and generate political unrest.  Given their economic and demographic significance, scarcity in India and China are particularly concerning.  Between 2003 and 2009, northern India lost water at the fastest rate in the world according to NASA.  The livelihood of 600 million Indians depends on agriculture and almost 2/3 of India’s cultivated land relies on rainfall rather than irrigation. India is also uneconomic with its water, using 28% more freshwater than China despite a smaller population and economy.  India’s water stress explains, in part, the tension between India and Pakistan in Kashmir in which major rivers – namely the Punjab – begin.

There is also a growing water-security crisis in China.  The glaciers that feed the Yangzi and Yellow River are melting, even as experts predict that Chinese water demand will outstrip supply by 2030.  As of 2014, North China holds two thirds of Chinese agriculture but only one fifth of its water, and 45% of GDP is in regions with a similar water resource per capita as the Middle East.  China’s water issues will inevitably drive it to strengthen control over its watershed.  The major rivers that feed the Asian sub-continent and South East Asia start in the Tibetan Himalayan glaciers; dashing any hopes of an independent Tibet.  Chinese exploitation of Tibetan water will create conflict with downstream nations; in the Indian subcontinent and Southeast Asia which rely on these rivers.

Depressing demographics

After World War II,  commentators thought the Japanese economy would soon dominate the world as its equity market soared and Japanese businessmen purchased US trophy properties such as Pebble Beach.  Yet, in the 1990s, Japan’s economy stagnated, due in part to the burden posed by its aging population.  Most developed Asian countries, such as Japan, South Korea, Taiwan, and Singapore, are facing aging populations which will increase dependency ratios and dampen economic performance.

In particular, China will likely become old before it becomes rich.  China’s One Child Policy enabled a ‘demographic dividend’ by decreasing the amount of dependents average earners needed to support. This has underpinned China’s economic rise, and accounted for up to one quarter of China’s per capita GDP growth since the mid-1970s as the working share of the population rose from 55% to 73%. But this rise has now peaked and China’s developing economy now faces a glut of aging workers without the affluence to support strong social care.  This will cause economic and social stress as a smaller working share of the population will yield a lower per capita living standard, and savings and investments will fall.  Huge economic gains have helped the Chinese Communist Party to contain dissent, yet China already suffers 200,000 protests a year of varying sizes. China is perhaps less stable than many realise.

Given Asia’s importance, the diversity of risks that face it must be understood.  Asia could dominate the 21st century for the wrong reasons – as a source of political turmoil and economic instability.

This article was originally published on Global Risk Insights, and was written by Ban Abbs.