Open markets key to Asian growth

Further economic integration will sustain regional prosperity and peace despite some Western calls to reverse globalization

The United Kingdom's vote to exit the European Union and the election of Donald Trump as president of the United States are clear manifestations of a backlash against globalization in some advanced economies. The benefits of economic integration and globalization are increasingly being questioned.

So far, Asia has escaped this tendency and continues to believe in the advantages of open markets. We argue that this stance is the outcome of an overall positive experience with globalization. Asia's export-oriented growth strategies helped to generate sustained economic growth that lifted hundreds of millions out of poverty.

However, recent trends in Asia, such as an aging population and the move toward services, might come at high costs and lead to various frictions that might also raise doubts about the benefits of globalization. Unless Asia manages the upcoming adjustments carefully, we will see tendencies similar to those in Europe and the US.

A recent Pew Research Center poll shows that 86 percent of people in Asia believe that growing trade is positive for their country. The proponents of free trade are particularly numerous in developing Asian countries. A large majority in Malaysia and Vietnam believe that trade is good and that it creates jobs.

This globalization-embracing stance is the consequence of positive experience with trade opening. Since the late 1980s, many Asian economies started to implement an export-oriented growth strategy. Paired with large investments in human capital and structural reforms, Asia was successful in integrating into the global economy and achieving sustained economic development that lifted millions out of poverty.

This process, however, comes at considerable costs for the governments as well as people. Millions of people had to adapt to new economic realities. For example, in China some 470 million people moved from rural areas to urban centers from 1990 to 2010, leaving millions of children behind.

All across Asia, millions of workers switched from agriculture to manufacturing jobs. Rapid urbanization further helped to achieve gains in economic efficiency. While being costly, the globalization of Asia yielded enormous benefits, not only in terms of economic welfare but also social advances.

The most striking example is the number of people that escaped poverty. In 1990, 56 percent of people in East Asia and 54 percent in South Asia lived in extreme poverty. By 2010, these percentages had dropped to 12 percent and 31 percent, respectively.

Asia's positive experience with globalization, however, may be reversed in the near future. While Asia has been able to quickly adjust trade openings in the past, in the future it might be less capable of reaping its benefits.

The reasons are multiple.

First, almost all emerging Asian economies are aging fast. One-third of the population in both South Korea and Singapore is projected to be over 65 years old by 2040. China and Vietnam are following this trend. Aging societies are more difficult to retrain and show less labor mobility.

Second, Asia's success has been mainly based on putting farmers into low-skilled manufacturing jobs. The skill level for manufacturing has not been high and retraining therefore simple.

As Asia's economies develop and move toward services, different skill sets are required. Vocational training is not the rule in most Asian countries. Further, whereas the number of enrolled students has increased, the quality of education is low in large parts of Asia.

Third, Asia's economic potential is held back by the presence of state-owned enterprises (SOEs). In several large Asian economies, SOEs dominate various economic sectors and their special status allows them to thrive and stifle competition at the expense of the private sector.

Several governments in the region have tried to reduce the role of SOEs in the economy, but with mixed results. A further integration into global markets will require bold reforms to ensure that SOEs are fully subject to market forces.

Fourth, Asia's success in expanding its business globally will also depend on its ability to provide access to financial services. About two-thirds of the population in the Philippines and Vietnam do not have bank accounts.

The lack of access to financial services has multiple consequences: Households cannot easily save money and prepare for uncertain economic times; savings cannot be easily channeled to finance startup companies and SMEs; and the availability of trade finance is limited.

Fifth, Asia has been able to substantially expand its social safety nets. Many countries in the region have rolled out health insurance plans. In Vietnam, over 80 percent of the population is covered by a basic health insurance plan.

Despite this progress, the social safety nets are rudimentary. For example, the majority of Asians are not insured against unemployment. If an economic shock hits the region, many could face the risk of falling into poverty.

In summary, Asia's positive stance on globalization should not be taken as a given. Several structural trends will make it increasingly difficult for Asia to quickly adjust to trade openings and to reap its benefits.

The quick gains of the past will be very difficult to repeat in the future. Further, the protectionist movement in the US might trigger calls for similar action by Asian countries. It might then become politically more difficult to defend freer trade.

However, there is also hope that Asia's economic integration will continue and help the region to further prosper. The main reason is that Asia's regional integration is far from complete. For example, even though the Association of Southeast Asian Nations started 50 years ago, it has not reached a level of economic integration that the EU achieved.

Apart from opening up goods trade, Asia needs to substantially ease the exchange of goods and people across borders. The positive welfare effects of further trade opening will be considerable.

Governments, however, need to ensure that the benefits are distributed fairly across all income groups. Finally, we also need to keep in mind that economic integration is not only a tool to foster economic prosperity, but an important contribution to build a more peaceful region.

Naoyuki Yoshino is dean of the Asian Development Bank Institute (ADBI) and professor emeritus at Keio University, Tokyo. Matthias Helble is a research economist at ADBI.

The views do not necessarily reflect those of China Daily.