Recovery from the global financial crisis has been notably slow in the European economy, with its growth rate for 2010-2013 steady at 0.4% per annum on average. In contrast, the United States 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 stabilizing the global economy at the time of the global financial crisis, has been maintaining a stable economic growth of 5.4% per annum on average 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 (Note 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 (Note 2). The latecomer advantage that China enjoyed with its economic growth model built around manufacturing expansion materialized in the 2000s in the form of a more than 4% TFP growth per annum, which, in turn, 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 (Note 3).
The recent slowdown in productivity notably has 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' labor 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 labor 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 the figure, 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 in Japan's secular stagnation (so-called "two lost decades"). This is virtually the only engine for realizing growth amid the reduction in labor input and stagnation in capital stock over the last 20 years. Yet, the labor productivity growth stood at just 0.8% per annum due to minor capital shallowing (Note 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.
Center of gravity in productivity growth shifting to Southeast Asia
The center 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 (Note 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 labor 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 gross domestic product (GDP) in 2013. While stable domestic demand continues to support growth, labor 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 received a relatively large impact from the global financial crisis, made a steady recovery in 2010-2013 as seen by the improvement of TFP by 2.3% per annum and the improvement of labor productivity by 3.7% per annum. These are at the level surpassing the nation's past figures in long-term productivity increase. They are now entering the peak period of enjoying population bonus until 2020 (Note 6). 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 labor 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 labor 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 labor 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 labor 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 labor 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 APO is considering an annual average of 3.6% improvement in labor productivity as its target for productivity improvement by 2020 for the entire Asian member economies. The annual average growth rate of TFP and labor 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 labor productivity increase of 5.0% over the same period. Beyond the period of recovery from the global financial 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: Output Growth and Contributions of Labor, Capital, and TFP, 1970-2013
