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What Asia’s economic revolution means for the world

The Economist | September 21, 2023

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The phrase “factory Asia” describes one of history’s most impressive economic achievements. Over the past half-century Japan, South Korea, Taiwan and, more recently, China became bustling hubs for manufacturing goods, which they then exported to the rest of the world, especially the well-off West. Millions of Asians escaped poverty by making stuff; many grew prosperous. Now the region’s economic model is shifting again, with consequences for Asia and for the world.

Asia’s long manufacturing boom fostered a wave of trade integration. In 1990, 46% of Asian trade took place within the region. By 2021 that figure had risen to 58%, making it the most integrated continent after Europe. As Asia has become richer and its firms more muscular, investment flows are becoming more regional, too.

Over the past decade Asian firms have been enthusiastic investors in their own neighbourhood. Foreign direct investment into Asia by other Asians has grown almost twice as quickly as that by Western investors. Much of it has come from rich and ageing Japan and South Korea, as well as from China, and has gone to poorer, younger places. As a result, in 2021 Asians owned 59% of the stock of foreign direct investment in Asia (excluding the financial hubs of Hong Kong and Singapore), up from 48% in 2010. The West’s share, meanwhile, has fallen.  A similar picture emerges from other financial flows.  And Asian integration is likely to deepen.

More important, Asia’s rising consumers should turbocharge integration. For now a large share of intra-Asian trade is in intermediate inputs, used to produce finished goods, rather than consumer items. But over the next five years, the imf predicts, emerging and developing Asian economies are likely to grow by 4.5% a year, three times as quickly as advanced countries. As consumers get richer they will buy more from their neighbours.

The economic implications are exciting. Europe catch up with those in the west, so too integration in Asia should lift incomes in the south and south-east. The savings of richer, ageing Asian countries are being put to good use in poorer and younger ones, where they are helping to spread prosperity while generating healthy returns for investors. Increased trade should reduce prices for consumers, and more investment should bring down the cost of capital.

What of the political consequences? Unlike in Europe, deeper economic ties in Asia do not herald political integration. The European project was propelled by a desire to avoid another continental war; in Asia today there is no similar impetus. Asian countries are fiercely independent, and their political systems are too varied—from liberal democracy to war-scorched tyranny—to make an Asian Union feasible. An Asian mosaic is more likely, with several powers vying for influence.

Although America remains an important investor in the region, its economic and political sway will be diminished.  Yet this does not mean that the region will be dominated by China, the regional heavyweight. True, China has gained influence through its huge trading heft and the Belt and Road Initiative. But many Asian countries are wary of China.  Rich, mature Asian democracies such as Japan and South Korea will be an important counterweight to China.

3 key takeaways from the article

1. The phrase “factory Asia” describes one of history’s most impressive economic achievements.  The region’s economic model is shifting from export to rest of the world to serving their regional markets.  In 1990, 46% of Asian trade took place within the region. By 2021 that figure had risen to 58%, making it the most integrated continent after Europe.
2. The economic implications are exciting. Integration in Asia should lift incomes in the south and south-east. The savings of richer, ageing Asian countries are being put to good use in poorer and younger ones, where they are helping to spread prosperity while generating healthy returns for investors. Increased trade should reduce prices for consumers, and more investment should bring down the cost of capital.  
3. What of the political consequences? Unlike in Europe, deeper economic ties in Asia do not herald political integration.  An Asian mosaic is more likely, with several powers vying for influence.

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Topics:  Asia, Development, USA, China