ASEAN countries could succumb to ‘developed country diseases’ before becoming developed
Before they become developed countries and as their population bonus period runs out, ASEAN countries should work towards increasing total factor productivity, says Japanese academic Sukegawa Seiya.
The term “developed country” usually refers to countries with high levels of income, education and social welfare, but there is no clear international definition. Japan’s Cabinet Office defines “developed countries” as OECD members. However, this classification encompasses not only economic indicators but also considers political stability and social maturity markers.
As ASEAN nations embark on a path of economic development similar to that of developed countries, they face new challenges such as ageing populations and rising social security costs, increasing the risk of “developed country diseases”. These challenges, predominantly seen in mature capitalist nations, stem from prolonged low growth driven by demographic shifts, expanding social welfare expenses, and industrial hollowing.
Currently, the only Asian OECD members, often referred to as the developed country club, are Japan and South Korea. Indonesia and Thailand are currently in the process of joining, but these countries will need to substantially overhaul their domestic laws and regulations to meet OECD standards, and it will take a considerable amount of time for them to become members. However, before these countries can become developed countries, the “developed country disease” is approaching.
However, it is worth noting that for half of ASEAN’s member countries, the population bonus is likely to have ended.
‘Population bonus’ periods end one after the other
There is a concept in population economics called the “population bonus”. The population bonus period typically refers to a phase where economic growth is boosted through various channels and increases in proportion to the rise in the working-age population (over 15 and under 65).
As the working-age population ratio rises, the potential economic growth rate increases due to higher domestic savings, bolstering a country’s capital stock. Moreover, the declining fertility rate, a consequence of economic development, further boosts household savings by alleviating the expenses of raising and educating children.
As the burden on the household budget decreases, the government will be able to redirect its fiscal resources away from people’s daily lives and towards infrastructure development. In addition, the expansion of the labour force is directly linked to an increase in consumer spending.
However, it is worth noting that for half of ASEAN’s member countries, the population bonus is likely to have ended.
As a region, ASEAN’s population bonus ended in 2023, as measured by the United Nations’ World Population Prospects (2022 edition). Singapore led the way, with its population bonus period ending in 2010, followed by Thailand, Vietnam, Brunei, and Malaysia. Indonesia, which has the largest population in the region, is also expected to end its population bonus period five years from now in 2029.
In Thailand, for example, the working-age population began to decline in 2018, and the pace of economic growth has slowed. There are concerns that a decline in the labour force may have an impact on both consumption and investment.
APO’s growth accounting analysis clearly shows that TFP is the second largest growth driver after capital accumulation in China. In ASEAN, however, its contribution is limited.
Transition to a TFP-driven economy
In 1994, Nobel Prize winner Paul R. Krugman’s article “The Myth of Asia’s Miracle” was published in Foreign Affairs magazine. He warned that economic growth in Asia could be explained only by factors of production, such as increases in capital and labour inputs. He also noted that growth without technological progress or improvements in production efficiency would not last.
Thirty years after Krugman’s sound of alarm, growth accounting analysis by the Asian Productivity Organization (APO) shows that the biggest contributor to ASEAN’s growth has been the accumulation of “capital”. However, ASEAN’s capital input is significantly dependent on foreign capital.
The recent rise in geopolitical risk is a potential challenge to the region’s economic stability, prompting the need to explore strategies for bolstering economic management. Meanwhile, labour input has been a drag on economic growth in recent years, with the working-age populations of Singapore and Thailand experiencing declines since 2018.
To tackle these challenges, it is essential to increase total factor productivity (TFP), rather than simply increase capital and labour inputs. Improvements in TFP will be driven by technological innovation, efficient resource allocation, and improving the quality of the workforce through education and training.
In particular, improving productivity through the introduction of digital technology and artificial intelligence (AI) will be the key to moving ASEAN countries to the next stage of growth. Governments should aim to improve productivity by increasing investment in education and technological innovation, and promoting the adoption of digital technology and AI.
APO’s growth accounting analysis clearly shows that TFP is the second largest growth driver after capital accumulation in China. In ASEAN, however, its contribution is limited. If TFP does not improve, economic growth will inevitably stagnate.
Without immediate and decisive action, they will surely succumb to challenges well before achieving developed status.
Time is running out swiftly
ASEAN countries must embrace strategic reforms without delay to preempt the severe consequences of contracting “developed country diseases”. Without immediate and decisive action, they will surely succumb to challenges well before achieving developed status.
In emerging countries with weak financial foundations, the situation will undoubtedly be even worse than in developed countries. An underdeveloped social security system is the root cause of poverty among the elderly. If they try to improve their social security system to avoid this, they will find themselves in a dilemma. They will not be able to invest sufficiently in public works and industrial policy, which contribute to economic growth.
In addition, prolonged low economic growth can lead to a decline in domestic and foreign investment, hinder the development of new industries and technologies, and threaten to sink the economy itself.
ASEAN needs to move towards a TFP-driven economy before the disease worsens.
