Asia needs to focus on productivity to lead global growth
1 min read 30 May 2023, 11:07 PM ISTIt should devise policies for the fair sharing of technology-driven gains and make Keynes’ call come true.
PremiumChina’s recent economic indicators confirm it’s too early to say if its reopening and growth rebound can re-establish its global leadership. The pick-up in its consumption in the first quarter has not led to a broader manufacturing and construction boom, and investment has fallen short of expectations. Is this indicative that Asia cannot drive the global economy, whose growth is seen slowing to 2% with recession risks rising for the US and EU?
After the global financial crisis (GFC), emerging markets in Asia led the global recovery. But, over the past decade, Asia’s growth prospects were successively lowered. China became the largest country by purchasing power parity and India took over periodically the status of the fastest-growing major economy. Both also became the subject of growth uncertainties. The revisions to growth reflected falling productivity fundamentals amid rapid technological change.
Weaker capital accumulation is accounting for much of the slowdown, followed by falling total factor productivity (TFP) and labour supply growth. Capital accumulation has slowed in China and private investment has been trending lower in India. More generally, this reflects the rise of financial vulnerabilities, with debt levels having risen in many Asian economies since the GFC.
Excess credit deepened distortions in the pricing of labour and capital that have driven credit largely to unproductive corporate and state-owned enterprises. In many countries, this also diminished their research and development (R&D) spending. Hence, emerging markets in Asia have experienced a productivity slowdown since the GFC.
A well-targeted reform agenda is imperative to reignite productivity growth. Technological factors have accounted for a large portion of productivity variation. TFP measures the efficiency with which all factors are employed, and it has become symbolic of the technology behind the production process—that has now been uplifted by the transformative rise in artificial intelligence.
Sustained productivity growth would be better driven by technological capital-deepening, with related organizational changes and increased competition that can result in more efficient methods of production.
This requires building globally competitive innovation capabilities by long-term R&D spending, with complementary investments in related skills and infrastructure.
There is large variation in Asia in these areas, as a result of high country variation and concentration in R&D spending. Despite the contradictions from its financial leverage, China has made innovation the “first driving force to lead development," and has quickly moved up in the World Intellectual Property Organization’s Global Innovation Index (GII) to rank 11, slightly ahead of Japan, and behind Korea and Singapore. But there are few other Asian countries in the top 50. China has now caught up with the OECD in R&D spending of about 2.5% of GDP—close to the US and Europe in purchasing power parity terms. R&D growth in software, computer, and electronic technology lead.
A closer look at the sources of R&D spending shows the bulk of it is accounted for by the private sector. However, in China, its state-run industrial policy also provides significant state spending—this may be aided by the establishment of the centrally-run Central Science and Technology Commission. Although India is in the top 40 countries in the GII, India’s spending on R&D is relatively very low, as assessed by the Niti Aayog. Only a fraction of it is done by Indian industry. However, the focus on innovation is building, with rising competition between the states, as demonstrated by India’s own innovation index.
India’s potential growth could benefit from accelerated implementation of an already-ambitious reform agenda, and leadership in digital infrastructure. Reforms are planned to further rationalize the role of public banks, ensure a more level playing field in the banking sector, and fast-track the development of capital markets.
Looking ahead, technology will continue to be the major driver for building and sustaining productivity, opening a new pandora’s box domestically and internationally.
Keynes told us that employment tends to fall after technology-driven productivity improvements, at least initially, and would be “followed by golden eras of human liberation." The first part of his prediction is now a global reality, making it imperative to develop policy options to achieve his second prediction. For more equitable sharing of technology-driven growth, this must include better diversification of skills and training in areas that complement the new technologies. It will require bringing the private sector, startups, research institutes and universities together to better leverage the public infrastructure.
Globally, the overdue need for a multilateral governance and regulatory response to the new frontiers of digital trade and AI is reaching a crisis point. In its absence, global competition to de-risk in these areas is leading to protectionist and discriminatory steps that are fragmenting the new areas of global trade with serious knock-on effects on innovation and related growth drivers.
The G-20 should make this a critical part of its assessment and advice. It should set out a sequenced agenda to establish a new multilateral and rule-based regulatory system in the technology frontiers of trade and growth, and consistent with broadening the role of the World Trade Organization.
