by Parag Khanna
Asians view the remaining poverty in their midst as an opportunity to continue the mission of eradicating it through infrastructure investment, urbanization, economic growth, education, financial inclusion, and digitization. Ever more of Asia is joining in the largest-scale case of what economists call the advantage of late development, or “second-mover advantage”: leapfrogging over traditional technologies and behaviors to the newest standards. Mobile phones come before landlines, digital banking before ATMs, cloud computing before desktops, electronic road payments before toll booths, and solar and wind power instead of oil and gas. Asian countries are going from no ID cards or taxes to biometric IDs and digital tax collection. The tidy historical sequence of catch-up growth as countries climb the ladder from agriculture to manufacturing to services has been disrupted by the sweep of financialization and digitization that has allowed even underdeveloped Asian nations to leapfrog through mobile banking, e-commerce, peer-to-peer services, and other innovations. In fact, both the old and new drivers of economic growth are prominent across Asia today.
Myanmar, one of Asia’s poorest countries, is a good example of how the hard and soft aspects of late but accelerated development come together. Rather than fumbling through a thicket of haphazard regulations, Myanmar established a one-stop investment portal for rapid approvals. The country went from 1 percent to 90 percent mobile phone penetration in just five years. Given its archaic financial system, mobile banking is spreading before bank branches and ATMs—and eventually, once the whole population gets banking apps, demonetization (removing physical currency altogether) as its larger neighbor India has done. With their low wages, Myanmar, Cambodia, and Laos are also attracting their share of light manufacturing activity, helping them climb toward middle-income status.40
Consumption levels tend to take off once GDP per capita hits $3,000, which Pakistan has now crossed in terms of purchasing power parity (PPP). In Pakistan, the average disposable income doubled between 2010 and 2017, making the country the world’s fastest-growing retail market, with the number of retail stores expected to double to 1 million between 2010 and 2020. Two-thirds of the country’s 210 million people under the age of thirty, many of them joining the urban consumer class en masse, are benefiting Western brands from McDonald’s to Dutch Boy paint. The overflowing street-side cafés of Lahore and Karachi represent the onset of what the Pakistani novelist Mohsin Hamid describes as “infinite demand.” E-commerce is also growing along with 4G and broadband connectivity. Alibaba launched a national AliExpress.com shopping site for Pakistan in 2017.
The Hong Kong–based global supply chain manager Li & Fung is a superb proxy for South Asia’s thriving logistics and retail sectors. In the words of the company’s CFO, Spencer Fung, the company’s size makes it a “bowling ball amidst grains of sand.” As Li & Fung shifts from simple wage arbitrage (cost optimization) toward geographic arbitrage (speed optimization), it is becoming ever more a global company first and a Chinese company second. While China represents about half its production activity, it now has manufacturing activity in sixty countries and distributes through 8,000 retailers in a hundred countries. The more Li & Fung builds out its distribution network in India and Southeast Asia, the more Western companies such as Zara and H&M depend on it to penetrate those populous and rapidly urbanizing nations. Pakistan and Bangladesh are now its fastest-growing and highest-margin markets. From cotton fields to garment factories, Li & Fung helps turn analog countries into digital ones by applying efficient agricultural and manufacturing processes: digital games to train workers, 3D digital design to reduce the need for sending physical samples to vendors via couriers, and drones for delivery. To take advantage of Pakistan’s booming logistics industry, the United States’ UPS has teamed up with Pakistan’s logistics leader, TCS, and Unilever has made a fresh investment of $150 million in the country to cope with the growing demand for its household products.
As Li & Fung has built out its range to sell everything from medical devices to clothing direct to consumers online, it has acquired dozens of local Asian brands selling in more than three thousand stores across Asia—putting it in direct competition with its own Western clients, who depend on it for retail distribution.
After decades of neglect, India is now spending up to 20 percent of its budget on infrastructure, from railways to sanitation. A trillion dollars in urban and transport investments has been projected for 2015–2035, and in the first three years of Modi’s administration, 50 million toilets were installed, mostly in rural areas. After decades of unchecked sprawl, India’s infamous slums such as Mumbai’s Dharavi are shrinking dramatically as real estate developers have been offered zero tax on the construction of affordable housing. Much as Vietnam has done, India is seeking to lure investment away from China toward its own coastal special economic zones for manufacturing exports.41 Whereas for decades Mumbai was India’s only significant economic hub, today the states of Andhra Pradesh and Tamil Nadu are major commercial centers. The Bangalore-Chennai-Hyderabad industrial triangle in southern India has become the country’s Pearl River delta, with 30 million people contributing 80 percent of the country’s IT services, plus innovative clusters around biomedical engineering and digital finance. India’s fastest-growing states in the past decade have been some of its most remote and backward, such as Sikkim and Bihar. Driven by construction, power generation, and manufacturing (and tourism in Sikkim’s Himalayan region), both states have been growing by 12 percent to 25 percent per year. Goa has also grown by double digits on the back of mining and tourism.
India is expanding its tax base from the paltry level of 10 percent—just in time as its working-age population expands (and is not expected to peak until 2030). The combination of the goods and services (GST) tax and demonetization has formalized much of the gray economy and weakened the black market. With a stable currency and inflation in check, India has lowered its current account deficit to just 1 percent of GDP. Its stock exchange is one of the world’s best performing, and Indians are pouring into it as much as foreigners, especially as the country weighs moving the rupee toward full capital account convertibility. India’s per capita income has crossed about $7,000 in PPP terms, indicating that the phase of development consumption is complemented by financialization. While Indian citizens have historically been the world’s largest hoarders of physical gold, the percentage of household savings represented by gold has dropped from 15 percent in 2013 to 5 percent in 2016 as families invested more in education, health care, and insurance products.42 Asia’s insurance market has witnessed enormous growth, with Asians buying life, property, automobile, and other insurance products.
The combination of digitization and demonetization has meant that Indians are becoming data rich before they are financially rich. Thanks to large-scale investments by corporates such as Reliance Jio Infocomm, all of India will be covered by 4G phone service by 2020.43 Jio’s rival Airtel signed up 170 million new customers during a 100-day campaign in early 2018. Already 1 billion Indians (almost 100 percent of adults) have been issued the Aadhar universal ID card. Together with demonetization and the mandatory linkage of Aadhar IDs to bank accounts, well over $100 billion has been brought into the banking system in a year. Aadhar has also enabled rapid digital transfers of subsidies to the poor, with mobile wallets eliminating the need for bank branches and e-payments reducing transaction costs and corruption. Then there is IndiaStack, which brings together employment, medical, address, tax, and other records onto one platform accessed through fingerprints and, soon, retinal scans. India is set to export these digital innovations all across developing Asia. Bangladesh is now installing one-stop community centers to process everything from birth certificates to business licenses and minimize corruption. Such technological approaches to financial inclusion, especially for women, have pushed Bangladesh’s growth rate higher than even India’s or Pakistan’s.
Indonesia is Southeast Asia’s archetype of a country with a huge population, low income
, and abysmal labor productivity—yet rapid growth. As in India, Singapore leads all foreign investors in Indonesia, where high-quality industrial parks make the country more attractive for global investors looking to diversify production away from China. Indonesia is also forcing foreign investors to transfer technology to its mining companies. Foreign investment raises labor productivity in both industrial and services sectors, such as telecoms and hospitality, that employ more than 60 million people and represent half the country’s GDP growth. Taking advantage of Jakarta’s 500,000 informal motorcycle taxis, Go-Jek leveraged Singaporean and US investment to professionalize into a full-scale logistics operation with integrated mobile payments (GoPay). Not only did the company beat its five-year growth forecast in less than a year, but a half-million drivers joined the formal economy and tax base. In 2017, Gojek was valued at $3 billion. In 2018, it announced plans to spread across Southeast Asia.
The key areas of Asia’s digital integration—social media, payments, e-commerce, and ride sharing—have been on a steep ascent since 2015, growing by more than 30 percent per year in terms of user base and revenues. Given the significant cross-border population movements across Asia, migrant laborers have been among the first to benefit. Malaysia’s Maybank has partnered with the Singapore blockchain start-up Crosspay to enable hundreds of thousands of unbanked Indonesian and Burmese migrants to receive payments. In Malaysia, nearly 100 percent of the population has bank accounts and mobile phones—and as in South Korea and China, mobile banking is far outpacing Internet banking in terms of subscriber growth. Across these middle- and low-income countries, the penetration of fintech products around lending and insurance is less than 5 percent, promising an enormous pool of nearly 2 billion customers ready to leapfrog. About $50 billion in fintech investment is expected every year until 2025 to upgrade Southeast Asia. Mobile banking is also taking off in Asia’s poorest countries. By 2025, there may not be any more “unbanked” Asians.
China’s fintech leadership is an important reason why. Chinese invest more than $100 billion per year in fintech products (far ahead of Americans at $35 billion).44 The People’s Bank of China (PBOC) already has a digital currency running parallel with the renminbi between government and banks to help scale traceable and secure financial transactions. And the $3 trillion in mobile payments made in China each year is far more than in any other country.45 Chinese finance and lifestyle apps by Alibaba, Tencent, Baidu, and Ping An Insurance are more comprehensive than those of their Western counterparts Microsoft, Amazon, Facebook, and Google, providing payment, insurance, loan, and credit-rating services, as well as money market funds, wealth management, crowdfunding, and currency exchange. These Chinese platforms are also spreading more rapidly across Asia through joint ventures. Alibaba owns 80 percent of the Southeast Asian e-commerce marketplace Lazada Group, while Alibaba’s Ant Financial has partnerships with Korea’s KakaoPay, Thailand’s Ascend Group, Mynt in the Philippines, Emtek in Indonesia, and Telenor Pakistan. Tencent’s funding of the Singapore-based Garena (now Sea) has propelled its growth at faster rates in Southeast Asia than even Tencent achieved in its early years in China. Sea is now the region’s largest gaming platform, its online marketplace, Shopee, leads the region in the number of vendors and buyers, and its Airpay branchless banking service dispenses mobile credits at nearly 200,000 locations. In 2017, SEA Group listed on the NYSE. China therefore is using technology not to conquer its neighbors but to finance their success.
Asian countries have no reservations about copying one another’s best practices. As Japan and South Korea have gone cashless, China has followed suit. The UAE and Iran are both copying the contactless payment systems of Hong Kong, Taipei, and Singapore. The Jakarta One Card is a Chinese-style all-in-one identification card that supports public transport payment, retail banking, social security insurance, and car toll fees. Asia’s enormous population size and economic growth mean that the commercial pie is growing. In China, only 15 percent of retail sales are through e-commerce, and only half of those are mobile. In the rest of Asia, the room for growth is even greater. Asian companies are most likely to capture Asia’s digital upside given the massive customer base they have yet to fully integrate. Amazon and Alibaba each has about 40 percent market share in its home market—but Alibaba is growing far more quickly worldwide than Amazon is. Jack Ma points out that Alibaba is not just a company but an economy. Its electronic world trade platform (e-WTP) links suppliers and vendors around the globe in a borderless marketplace; its Tmall combines the marketplace of eBay with the infrastructure of Amazon, and its Alipay ecosystem keeps money within its orbit. Alibaba Cloud wants to take on Amazon Web Services in the global cloud computing market, with plans to leverage its hard infrastructure investments into “One Belt, One Road, One Cloud.”
Building and Manufacturing Growth
Masses of farmers and peasants are moving into Asia’s thriving cities. From Pakistan to Vietnam, another 1 billion Asians are expected to urbanize by 2040, equivalent to the entire urban population of Europe and North America today. Asia accounts for about 60 percent of the world’s infrastructure spending, building out cities to absorb the influx of rural and migrant labor. Urban development in Asia is a self-fulfilling prophecy: the more cities are upgraded, the more people they attract, and the more that must be spent to upgrade them to accommodate yet more migrants. At the same time, urbanization promotes services instead of manufacturing as people’s principal livelihood. Asia’s cities are where the demand for construction workers, doctors, nurses, and teachers is the highest. Whereas China’s elderly are concentrated in the countryside, its megacities are teeming with youths. The Philippines’ “Build Build Build” Initiative has created a huge demand for skilled workers to manage construction projects and work in massive casinos, so much so that companies are raising wages to convince Filipinos not to go abroad for work. From Oman to Myanmar, rising tourism has created many new jobs in the hospitality industry, making it a crucial component of Asian countries’ economic diversification strategies.
Across Asia, one sees jealous rivals actually copying each other in their urban and economic master plans. India wants efficient industrial zones like China’s, Pakistan wants to be a tech hub like India, Uzbekistan wants shiny new cities like Kazakhstan’s, Malaysia wants automated ports like Singapore’s, Doha wants to be a glittering financial center like Dubai, and so on. The urbanization race is helping Asia build its way beyond the dreaded “oil curse,” the historical phenomenon by which resource-rich countries stagnate politically and economically because they fail to invest outside their energy sectors. Asia already has a positive track record of beating the oil curse. Malaysia has diversified its economy and achieved relatively high income. Saudi Arabia and Kazakhstan are doing the same. Azerbaijan, the oil-rich Muslim republic on the western shore of the Caspian Sea, has spent the nearly three decades since gaining independence from the Soviet Union pumping oil to Europe via Turkey. But with oil prices (and its own oil reserves) declining, it is welcoming Chinese and Indian investors into its ports and other infrastructure to become a hub for Eurasian cargo transit. As Baku transforms from a city reeking of oil wells to a modern metropolis with a breezy corniche, Europeans, Russians, and Gulf Arabs have made it a tourism hot spot known for authentic Turkic hospitality, halal food, and therapeutic stone saunas.
STRIVING FOR SERVICES
Even as Asia remains the world’s factory floor, its service sectors are growing far more quickly, representing an ever larger share of GDP for most Asian economies. This process is crucial in adjusting the rapid automation of factory labor.
Asia’s developing urbanization is evidence of one important strategy for confronting the threat of premature deindustrialization—the theory that not enough high-wage jobs are being created by the services economy to propel countries out of the so-called middle-income trap. But Asian industry is hardly disappearing, either. There may be fewer jobs in industry relative to the size of the labor force
than a generation ago, but there are still more than 100 million manufacturing workers across Asia. Countries climbing toward middle-income status such as India and the Philippines are grabbing all possible industrial activity for their workers. As India allows greater foreign ownership in aviation, rail, finance, and construction, it has become the world’s top destination for greenfield foreign investment, with more than $60 billion per year pouring into transport, information technology, electronics, and clean tech. The twin Invest India and Make in India campaigns direct investment into manufacturing and are coupled with a Skill India campaign that aims to train more than 2 million new labor force entrants every year for various industries. Importantly, in India services already represent 55 percent of GDP and industry only 30 percent. The country’s trade-to-GDP ratio has fallen as rapidly as it has in China, from 55 to 40 percent. The Philippines, too, has plans to boost industries such as shipbuilding—and in 2017, industrial contribution to GDP was higher than ever. With Western and Asian companies pouring $150 billion per year in FDI into Southeast Asia (more than China), we have not seen the end of manufacturing outsourcing.46