2010/HLRT/021 Asia in 2030: Long-Term Economic Outlook and Challenges

Transcription

1 21/HLRT/21 Asia in 23: Long-Term Economic Outlook and Challenges Purpose: Information Submitted by: Japan APEC Growth Strategy High-Level Policy Round Table Beppu, Japan 7-8 August 21

2 Asia in 23: Long-term Economic Outlook and Challenges August 21 Cabinet Office Government of Japan

3 Asia in 23:Long-term Economic Outlook and Challenges Section 1 Asia s Growth Pattern and its Problems in the 2s The international division of labor in Asia has developed through a regional production network. Export expansion in recent years is due largely to the expansion of intraregional trade, which is mainly of intermediate goods. has rapidly become a center for processing and exporting final goods as indicated by the remarkable increase in intraregional exports of intermediate goods to and s export of final goods to the U.S. and Europe. 4 Figure 1 (Billion dollars) Exports from East Asia (by Destination and Category) (1) From Non-intra exports Intra-exports Final goods Intermediate goods Primary goods U.S. EU Korea, Taiwan and ASEAN (Year) (2) From Korea, Taiwan and ASEAN (Billion dollars) Non-intra exports Final goods Intermediate goods Primary goods Intra-exports U.S. EU Korea, Taiwan and ASEAN (Year) (Note) Source: Research Institute of Economy, Trade and Industry Database "RIETI-TID29." As population increase and income level rise, a so-called middle class defined as those with certain level of spending has formed in Asia. Accordingly, there is a great potential demand of consumers in the future. It is necessary to solve structural problems that restrict consumption, such as income inequality and insufficient social security systems so that the expansion of individual consumption can lead to sustainable economic growth in Asia. *This document is an excerpt from World Economic Trends: Spring Report in 21 published in May, 21, by the Cabinet Office, Government of Japan. 2

4 Figure 2 Projection of the Global Middle Class by Region (1) Shares of middle class population (2) Middle class consumption billion people North America 7% 2% 6% 1% 28% Sub-Saharan Africa Latin 2% America 6% Europe 14% 36% 18% Middle East and North Africa 5% Asia Pacific 66% 8% billion people 2% 5% 22% 1% 53% billion people (Trillion dollars) (1%) 1.5 (7%).8 (4%) 8.1 (38%) 5.6 (26%) 5. (23%) 2.3 (7%) (4%) (1%) Middle East and North Africa 2.(4%) 1.3 (29%) 5.9(17%) 14.8 (42%) 11.3 (2%) 5.9(1%) 32.6 (59%) $21.3 trillion $35.1 trillion $55.7 trillion Sub-Saharan Africa.8(1%) Latin America 3.1(6%) Europe North America Asia Pacific (Notes) 1. Source: OECD. 2. The sum may not match the total due to rounding off. In Asia, income inequality has tended to widen as the economy grows more rapidly. Purchasing power is restricted by the sluggish income growth of low and middle income class which account for the overwhelming majority of consumers. Appropriate redistribution of the income might stimulate potential demand and broaden the range of personal consumption. It is also important in terms of expanding consumption to improve the social security system and the financial system in order to dispel people s anxieties for the future and their precautionary savings to fall. Figure 3 (Yuan) 25, 2, 15, 1, 5, Income Levels of Urban and Rural Areas in income in rural area (in the % of income in urban area, right scale) Per-capita net income in rural area Per-capita disposable income in urban area 48 Household consumption (in the % of GDP on the right scale) (Year) (Note) Source: National Bureau of Statistics of Household disposable income (right scale) Household consumption expenditures (right scale) Figure 4 Household Saving Rate (1) (urban areas) (2) Philippines (Yuan per household) (1, peso per household) 2, % Household consumption Household expenditures (right scale) saving rate 15, Household saving rate 1, Household income (right scale) , % (Year) (Notes) 1. Source: National Bureau of Statistics of and National Statistics Office, Philippines. 2. Data for the Philippines is from the Family Income Expenditure Survey conducted every three years. (Year)

5 Section 2 Asia s Long-Term Economic Outlook 1. Population and Economic Growth (1) Present situation in Asia and the future outlook The birthrate is declining and the population is aging in Asian countries, where both the birthrate and infant mortality are becoming lower. The total fertility rates for, Korea, Singapore, Thailand, etc., are below the replacement level of 2.8. On the other hand, those of the Philippines,, etc., which are declining slowly, are now around 2.5. Along with the decline in the birthrate, the proportion of the population under 15 years old is shrinking. Partly because average life expectancy is becoming longer due to the development of medical technology, the population is aging in every Asian country. Since baby boomers who were born after World War II will be 65 years or older in the near future, the aging of the population is expected to continue. Table 1 Total Fertility Rate is on the Decline (1) Present birthrate Indonesia Japan Malaysia Philippines Korea Singapore Thailand Vietnam (Notes) 1. Source: UN Demographic Yearbook 27 (Malaysia and Philippines), World Bank World Development Indicators 29 (,, Indonesia, Thailand and Vietnam), MHLW Annual Estimates of Vital Statistics of Japan 29 (Japan), materials of the National Statistical Office of Korea (Korea), Statistics Singapore (Singapore). 2. Data for Japan, Korea and Singapore are those of 28, data for the Philippines, of 25, and other data, of Philippines (2) Medium-variant assumption Vietnam Projection 6 5 Malaysia Indonesia 4 Korea 3 Singapore 2 1 Thailand Japan 2.8 (Replacement level) 1.85 (UN estimate of convergence) (Year) (Notes) 1. Source: UN World Population Prospects. 2. The medium variant case is based on the assumption that the birthrate will converge on 1.85 in the long term. The low variant case is based on the assumption that the birthrate will converge on 1.35 in the long term. 3. The National Institute of Population and Social Security Research states that the actual fertility rate for Japan was 1.37 in 28. 4

6 Figure 5 Proportion of People Aged 65 or Over: Population of Almost All Countries will be Aging by 23 4 Japan %-:Super-aged society 14-21%:Aged society Singapore Korea Indonesia Thailand Vietnam %:Aging society Malaysia 5 Philippines (Year) <Proportion of the Population Aged 65 or Over in 25> Indonesia Japan Malaysia Philippines Korea Singapore Thailand Vietnam (Notes) 1. Source: UN World Population Prospects. 2. The figure above is based on the assumption that the birthrate will converge on 1.85 in the long term. 3. The National Institute of Population and Social Security Research states that the actual proportion of the elderly population in Japan was 22.1% in 28. In Asia, the total population of many countries including Japan,, Korea, Singapore and Thailand (except and the Philippines) will have started decreasing by 25 due to their declining birthrate and aging population. In particular, Japan and Korea will face a considerable decline in their population. Japan: million (29) 11.7 million (25) (-2.3%) (The National Institute of Population and Social Security Research estimates as follows million in 25 (-25.4%) million in 255 (-29.5%)) Korea: 49.5 million (225) Population starts decreasing in million (25) (-1.9%) : billion (23) Population starts decreasing in billion (25) (-3.1%) 5

7 Figure 6 Total Population of Asia: toward Decline in Many Countries (Million) 25 1,8 1,613.8 million 1,6 1,4 1,2 1, (peak) 23 1,462.5 million 25 1,417 million Indonesia million (Year) (Million) 16 Philippines million Japan (peak) million Vietnam million Japan (UN estimate) million 1 8 Thailand (peak) million Japan (IPSS estimate) million Thailand million 6 Korea (peak) million Korea million 4 2 Singapore (peak) million Singapore million Malaysia million (Year) (Notes) 1. Source: UN World Population Prospects, and the National Institute of Population and Social Security Research (IPSS). 2. The figure above is based on the assumption that the birthrate will converge on 1.85 in the long term. 6

8 (2) Demographic bonus period and onus period The demographic bonus period means when the total dependency ratio (the sum of the elderly (65 years old or over) and child population ( to under 15 years old) divided by the number of people of working age) is declining while the demographic onus period means when the total dependency ratio is increasing. In the bonus period, the population structure has the effect of increasing per-capita economic growth owing to the substantial labor force and the relatively lower burden of supporting the dependent population. In contrast, in the onus period, the population structure has the effect of decreasing per-capita economic growth. The relationship between changes in the population pyramid and the advent of the demographic bonus and onus periods is explained in the following way. In the process whereby the shape of the population pyramid changes from a pyramid to a cylindrical bell or barrel-shaped curve, the bonus period begins since the child population decreases compared with the working-age population. Later, while the shape of the population pyramid changes from a cylindrical bell or barrel shape to an inverted pyramid, the onus period comes due to the increase in the elderly population and the decrease in the working-age population. It is expected that Asian countries will shift from the bonus period to the onus period in the order of Japan first, then, the NIEs and the ASEAN countries since the total dependency ratio starts to increase along with a declining birthrate and an aging population Figure 7 Trends in the Total Dependency Ratio in Asian Countries: The Proportion Starts to Rise in One Group after Another along with a Declining Birthrate and an Aging Population and Asian Countries Enter the Onus Period (1) Group 1 (Japan) Japan (Year) (2) Group 2 (Korea,, Thailand and Singapore) Singapore Korea Thailand (Year) (3) Group 3 (Vietnam, Malaysia, Indonesia) Indonesia Vietnam Malaysia (Year) (4) Group 4 (, Philippines) Philippines (Year) (Notes) 1. Source: UN World Population Prospects except for the data for Japan in and before 195, which is based on materials of the National Institute of Population and Social Security Research. 2. The figure above is based on the assumption that the birthrate will converge on 1.85 in the long term. 3. The shaded areas indicate the transition stage from a bonus period to an onus period. 4. Total dependency ratio = (child population + elderly population) / working-age population 7

9 In developed European countries, the birthrate kept declining over such a long period from the first half of the 19th century that the rate of change in the population structure was moderate and the demographic bonus period lasted for a long time. In contrast, the birthrate has declined so sharply in Asia that the bonus period is expected to end in a much shorter time. The bonus period is expected to last for 45 years in, Singapore and Thailand, which represents the shortest period, and for 75 years in the Philippines and, which represents the longest period. Asian countries will move from the bonus period to the onus period one after another in 215 and subsequent years. It is imperative for Asian countries to prepare for the onus period since many of them have not fully established social security systems and some other reasons. Figure 8 Length of the Demographic Bonus Period: It Is Short in Asian Countries Japan Singapore Thailand Korea Vietnam 193 Bonus period Onus period Indonesia Malaysia Philippines (Year) (Notes) 1. Source: UN World Population Prospects (data in 195 and after), and the National Institute of Population and Social Security Research (data for Japan in 195 and before). 2. The figure above is based on the assumption that the birthrate will converge on 1.85 in the long term. 3. In Japan, the bonus period started around 193 and lasted for about 65 years. However, the substantial start was 195 since Japan experienced World War II after entering the bonus period. 8

10 2. Asia s Long-Term Economic Outlook In Asia, problems caused by the shrinking and aging of the population will become more serious and economic growth in almost all Asian countries is expected to slow down. Accordingly, it is extremely important to analyze how much impact the shrinking population will have on the economic growth of each country when forecasting Asia s economies in the long-term. Though it has certain limitations that it is based on the assumptions that the growth rate of total factor productivity and the ratio of investment to GDP will remain at the same trends as in the past, the following analysis presents quantitatively the impact of a shrinking and aging population and a declining birthrate on each country s GDP as much as possible and the prospect of the position that Asian economies will occupy in the world in the future. The estimation of the potential growth rate up to 23 under the above assumption shows that the GDP growth rate for each country will generally slow down compared to the previous one, partly because the contribution of labor input to growth declines due to the decline in the labor force. However, the estimate above should be evaluated as a kind of baseline allowing some latitude since factors of production other than labor input are calculated on the assumption that the past trends will continue for the future. It is estimated that major Asian countries and regions will enjoy higher growth than that of other major countries although the pace of growth will slow down. However, the growth rates of Korea, Taiwan, Singapore and Hong Kong will drop significantly. In Japan, the contribution of labor input was already negative in the 2s and it is also expected to become negative in the NIEs and Thailand in the 22s. will see a significant decline in growth, where the contribution of labor input will become negative in the 22s as well. In contrast, the decline in growth rates is expected to be relatively small in Indonesia, Malaysia and the Philippines where the estimated labor force keeps increasing and the contribution of labor input remains positive even in the 22s. In, the labor force keeps increasing but the rate of increase will decline, and the contribution of labor input will diminish, so that the decline in the growth rate will be greater from the 21s to the 22s. 9

11 Table 2 Potential Growth Rate in Major Countries and Regions: High Growth Rate in Asia <On the Assumption that Past Trends Continue> Real GDP growth rate in the 2s (a) Potential growth rate in the 21s (b) Potential growth rate in the 22s (c) Change (2s- 21s) (b-a) Change (21s- 22s) (c-b) Asia (-.8) (-1.2) (-.3) (-1.3) Indonesia (.5) (-.7) Malaysia (-.2) (-.4) Philippines (-.) (.) Thailand (.1) (-.3) Singapore (-.9) (-1.9) Hong Kong (-1.1) (-.9) Korea (-.5) (-1.1) Taiwan (-1.8) (-.5) Japan (-.7) (-.3) North and Latin Americas Argentina (.4) (-.9) Brazil (-.3) (-.8) Mexico (-.6) (-1.1) Canada (-.5) (-.9) U.S (-.2) (-.6) Europe UK (-.6) (-.6) Germany (-.5) (-.9) France (-.8) (-.4) Italy (-.7) (-.4) Others South African Republic (-1.1) (.1) Australia (-1.3) (-1.1) (Note) Figures shown for the 2s are annual averages of the real GDP growth rate between 2 and 28. When viewing changes of the sizes of the GDP, which are obtained from the trial calculation in dollar terms on a market rate basis based on the estimated result, the increase in the share held by Asian countries is outstanding, backed up by their high growth. On the other hand, the GDP of Japan and other developed countries will expand moderately, but their shares will decline. As for the share of each country in the world, the top four countries were the U.S., Japan, and Germany in 29, while the top four countries in 23 are expected to be, the U.S., Japan and in descending order. 1

12 Figure 9 Long-Term Outlook for the GDP (on a Market Rate Basis) (Billion dollars) 16, 14, 12, Estimates Others 1, 8, 6, North and Latin Americas except for the U.S. Japan Other Asia 4, 2, (Year) (Notes) 1. Source: IMF World Economic Outlook (Oct. 1, 29), Table (potential growth rates). 2. The countries and regions shown in the figure above accounted for 97.% of the world GDP in Other Asia refers to Indonesia, Malaysia, the Philippines, Thailand, Singapore, Hong Kong, Korea and Taiwan. North and Latin Americas except for the U.S. refers to Argentina, Brazil, Mexico and Canada. Other regions refers to the South African Republic and Australia. U.S. Germany UK France Italy Other regions Figure 1 Changes in the Shares in the world GDP (on a Market Rate Basis) 29 (IMF) 23 (Estimates) Other regions 2.1% Italy 3.7% France 4.6% UK 3.8% Germany 5.7% Others 21.3% North and Latin Americas except for the U.S. 7.9% 8.3% (Total) 55.5 trillion dollars 2.2% Japan 8.8% Other Asian nations 5.4% U.S. 24.9% Other regions 1.6% Italy 1.6% France 2.6% UK 2.9% Others 23.2% Germany 3.1% North and Latin Americas except for the U.S. 6.5% (Total) 17. trillion dollars 23.9% U.S. 17.% 4.% Other Asia 6.8% Japan 5.8% (Notes) 1. Source: IMF World Economic Outlook (Oct. 1, 29), Table (potential growth rates). 2. The countries and regions shown in the figure above accounted for 97.% of the world GDP in Other Asia, North and Latin Americas, Other regions include the same countries and regions as shown in Figure

13 When there is a downturn or decline in the growth of the labor force, the economic growth rate inevitably slows down if other conditions are unchanged. However, the expectation of economic growth depends on many factors, such as changes in the labor participation ratio, the domestic saving rate and the availability of foreign savings, and changes in total factor productivity. The effects of aging and the shrinking population on economic growth cannot be regarded as definite and determined. The strategies to prevent economic growth from declining will vary from country to country. Such strategies include, for example, improvements in human capital through investment in education, the steady accumulation of good quality capital stock, the promotion of technological innovation through the activation of R&D investment, and technology transfers from multinational companies through direct investment. It is important to take a policy approach as stated above for the improvement of labor productivity. «Reference» Changes in Asia s GDP Compared with the World Economy in the Past 1, Years (Value, Year 1-187) (Billion dollars) 1,2 1, Asia: 59.2% (incl. (Ching): 32.9%) -The U.S. and Europe: 36.3% -Africa: 4.5% 187 -Asia: 38.3% (incl. (Ching): 17.2%) -The U.S. and Europe: 58.1% -Africa: 3.6% Africa Other American and European nations U.S. Former Soviet Union East Europe Asia: 65.3% (incl. (Ming): 25.%) -The U.S. and Europe: 27.3% -Africa: 7.4% Whole world West Europe Other Asia (Year) Japan The first industrial revolution The second industrial revolution (Notes) Source: OECD The World Economy: A Millennial Perspective (21) 12

14 Section 3 Asia s Growth Strategy: Need to Change the Growth Model 1. Asia s Growth Strategy in the Future Points to remember in forecasting the Asian economy in the future After the global financial crisis occurred, the Asian economy plays the role of the engine of global economic growth by recovering ahead of other regions. The following issues are regarded as having a significant effect on stable and sustainable economic growth in the future in the short, medium and long-term. A risk of sluggish markets in the U.S. and Europe in the short-term Global rebalancing in the medium-term Aging and shrinking populations in the medium and long-term Quest for a new growth strategy For the further development of the Asian region, it is absolutely necessary to change the growth model that depends on the U.S. and Europe markets, as well as the structures that widen current account imbalances, which have formed after the Asian currency crisis. Specifically, the actions stated below are important. (i) A new direction should be given to the current export-led growth model The latest crisis exerted its effect on Asia mainly through the channel of international trade. The multilayered production networks established throughout the Asian region are a source of Asia s competitiveness. It is important to lower dependence on the U.S. and European markets, and convert to a structure that is resilient to external shocks for Asia s stable and sustainable economic growth. In particular, the Asian market, which is now on a major scale, is expected to further expand when income levels rise. When Asia develops not only as a World Factory but also as a World Market, and trade structures are adjusted from ones centered on intermediate goods to ones centered on final goods, Asia is expected to grow further. The expansion of Asia s domestic demand will bring about more stable, self-sustaining and sustainable growth without depending only on the U.S. and European markets (Balanced Growth). (ii) Reduction of risks associated with current account imbalances The current account imbalance itself is not always a negative factor, and it will possibly diminish due to changes in the demographic structure in the long run. However, it is necessary to watch if the imbalance reflects some market distortions or will cause some risks in the future. In order to prevent a current account imbalance, which may cause a risk in the future, from becoming a factor for instability in the world economy, it is important to aim to reverse the underlying causes of imbalance and reduce the potential risk. Asia is also required to correct the imbalance by itself since Asia eventually helped to support the imbalance. It is important to improve social security systems and promote intraregional demand. (iii) Response to drastic changes in the demographic structure Economic growth is going to be substantially restricted by the declining working age population, the decline in saving rates and for other reasons due to the contraction and aging of the population. Improvements in labor productivity have become a fundamental strategy. Policy approaches are also important, such as improvements in human capital through investment in education, the 13

15 steady accumulation of good-quality capital stock, the promotion of technological innovation through the activation of R&D investments, and technology transfers from multinational companies through foreign direct investment. A stable macroeconomic environment, the accumulation of good quality human capital, the development of an environment suitable for business, proper redistribution, etc., are still important aspects that have to be maintained and strengthened for future growth. These factors have been evaluated as providing the impetus for rapid economic growth in East Asia. 2. Challenges in Realizing a Growth Strategy In order to realize a growth strategy, it is necessary to tackle the structural problems of each Asian country. The basic policies for tackling problems are described below. Challenges regarding domestic demand stimulation (formation of middle-income class and the lessening of income inequality) Distortions have been caused by development that puts priority on growth. Some distortions are made apparent in the form of a widening income inequality. In order to stimulate Asia s intraregional demand and to make it a new growth axis, it is important to lessen income inequality and especially to encourage consumption by the middle-income class. To this end, income redistribution through social security benefits and the lessening of regional inequality through regional development are necessary (Inclusive Growth). Challenges as to the improvement of productivity Foreign direct investment will continue to be regarded as having an important role now and in the future as an engine of Asia s economic growth. In order to maintain and develop growth based on foreign direct investment, it is necessary to further improve the environment for business. Accordingly, development of human resources with special skills, which especially lags behind other regions ( Innovative Growth ) and the rapid development of the institutional infrastructure are indispensable for Asia s sustainable growth, in addition to improvements in the quality and quantity of the hard infrastructure. Interregional cooperation for strengthening Asia s competitiveness is also important, which includes the liberalization of trade and investment and Asia s institutional integration (Deepening Intraregional Cooperation). Maintenance of a stable macroeconomic and financial environment Although there is excessive savings in Asia, the money is invested, instead of being circulated in Asia, into the developed countries. This situation is due to the deficient financial system in Asian countries and could be the result of market distortions based on the asymmetry of information that may exist. Since there is much need for development in Asia, it is necessary to consider how to arrange risk transfers as to the money accumulated within Asia, and how to circulate the money and use it for mutual development. Long-term self-sustaining growth requires the development of a foundation in domestic financial markets. Based on a recognition above, a detailed analysis is given below as to (i) the improvement of social security systems, (ii) the lessening of income inequalities, (iii) improvements in the quality of the labor force, (iv) development of the infrastructure, (v) improvements in total factor productivity and (vi) the maintenance of a stable macroeconomic and financial environment, which are all indispensable to a growth strategy for Asia s long-term self-sustaining growth. 14

16 Section 4 Conditions for Asia s Long-Term Self-Sustaining Growth 1. Improvement of Social Security Systems The average life expectancy is increasing significantly and Asian countries are becoming longevity society. Urbanization is also advancing along with industrialization. At the same time, families are becoming more nuclear, with the average number of people per household decreasing. Under these circumstances, the function of support for the elderly, which has been carried out by families or communities seems to be deteriorating. It is imperative for Asian countries to improve social security systems, including pension schemes and health insurance, in order to prepare for the aged society that will come in the near future. These actions are necessary to ensure that there is a safety net and to cope with the changing social structure. Figure 11 Life Expectancy at Birth: an Increase in Longevity (Year) Thailand Malaysia Indonesia Philippines Vietnam Japan (Note) Source: World Bank World Development Indicators 29. Figure 12 Average Number of People per Household: Decreasing Trend in Every Country (Number of People) Malaysia, 4.3 (rural), Indonesia, Thailand, 3.3 (urban), 2.9 Japan, (Note) Source: National statistics. (Year) 15

17 (1) Overview of a pension system in Asian countries Although Asian country has some sort of public pension system, limited coverage is a big problem for the present systems. Some countries have institutional problems, for example, lack of lifelong income security or automatic adjustment of the value of the pension. Since governments are expected to bear a heavier financial burden in the future due to an increase in the elderly population, it is necessary to review some points of the current system such as comparatively high income replacement rates and the early age to receive a pension are appropriate for the improvement of the system. Thailand Malaysia Indonesia Philippines Table 3 Outline of the Pension Systems of Asian Countries System Coverage Urban Basic Pension Insurance (Defined benefit (DB)) Employees of companies and self-employed workers in urban areas (compulsory) Rural Basic Pension Insurance (Defined contribution (DC)) Residents of rural areas (voluntary) Employees Provident Fund Scheme (EPF) Employees Pension Scheme (EPS) Social Security Fund (old age benefits) (DB & DC) (Defined benefit (DB)) Government Pension fund (DB & DC) Civil servant Employees of a company that employs 2 workers or more, and those whose monthly wage is 6,5 rupees or less (compulsory) Notes National pension system for the elderly (a system that provides a monthly pension for the elderly aged 65 or over who do not have a minimum regular income) Employees aged 15 or over and those under 6 who work for a private company A system that provides welfare Farmers and self-employed workers are not obliged to benefits of 3 baht per month to join it low-income elderly people Employees of a private company Employees Provident Fund (EPF) (Defined contribution (DC)) Self-employed workers are not obliged to join it Civil Service Pension System (Defined benefit (DB)) Civil servant Employees Social Security System (JAMSOSTEK) (Defined contribution (DC)) Civil Service Pension System (Defined benefit (DB)) Civil servant Social Security System (SSS) Government Service Insurance System (GSIS) (Defined benefit (DB)) (Defined benefit (DB)) Establishments that employ 1 workers or more, or those that have an income of one million rupiahs or more per month Employers other than those above are not obliged to join it Workers in private companies up to the age of 6, selfemployed workers (monthly salary is 1, pesos or more), etc. Civil servant Social Security Benefits (old age Vietnam (Defined benefit (DB)) Civil servants, employees of private companies benefits) (Note) Source: OECD Pension at a glance Asia/Pacific, the Ministry of Health, Labour and Welfare Report on Conditions Overseas, the National Institute of Population and Social Security Research The Review of Comparative Social Security Research No. 15, materials of JETRO, etc. Figure 13 Coverage of the Public Pension System: Low in Many Countries Percentage of members in the labor force Percentage of members in the economically active population Thailand Malaysia Indonesia Philippines Vietnam OECD (Note) Source: OECD Pensions at a glance Asia/Pacific, World Bank World Development Indicators

18 (2) Overview of a healthcare system in Asian countries Many Asian countries have developed a public healthcare system to some extent, except for and other countries where such systems are hardly developed. However, the proportion of private expenditures in total health expenditure is high in many countries, which indicates that people pay substantial healthcare costs privately. It will be necessary to increase the coverage of the public healthcare system and to reduce the burden on the people, however, the burden of healthcare expenses on governments is already heavy in and Thailand. Therefore, it is necessary to improve the current system paying attention to fiscal sustainability. Table 4 Outline of the Public Healthcare Systems of Asian Countries System Coverage Notes Thailand Malaysia Urban Employees Basic Medical Care Insurance Urban Resident Basic Medical Care Insurance New Rural Cooperative Medical System Central Government Health Scheme (CGHS) Employees' State Insurance Scheme (ESIS) Civil Servant Medical Benefit Scheme (CSMBS) Social Insurance System (medical benefits) National Health Security System: People can receive healthcare services for free in a hospital they are registered with in advance. People can receive healthcare services at a low cost in public medical institutions. Low-income earners and government employees can receive services for free. Employees of companies in urban areas (compulsory) If they are self-employed workers or employees of town and village enterprises, whether they can join the insurance system is up to the local government. Non-employees (dependents, etc.) in urban areas Rural residents (voluntary) Employees of the central government, governmental organizations, etc., and their dependents Employees and their dependents of the following: (1) non-seasonal factories using power and employing not less than 1 persons, or factories not using power and employing not less than 2 persons, (2) shops, hotels, restaurants, etc. employing 2 or more persons Civil servants Employees of private companies who are 15 years old or over and under 6 (benefits are provided only to the employees themselves) Self-employed workers, farmers, etc. (people not covered by the two systems above) Whole nation In 27, a scheme was started that provides health insurance services to workers below the poverty line. Health insurance for working and retired civil servants Employees Social Security System (JAMSOSTEK) Indonesia Health Maintenance Security System (JPKM): Health maintenance security business provided by government-licensed bodies Healthcare expenditure exemption system for the poor and the residents living in poverty Philippines Healthcare Insurance System (Philippine Health Insurance Corporation) Civil service employees Employees of a company that employs 1 workers or more can join the system. The system covers establishments that employ 1 workers or more, or those that have an income of one million rupiahs or more per month (voluntary). Employers of establishments other than those above are not obliged to join the system. Voluntary The whole nation is required to join it. Central and local governments pay insurance premiums for the poor. Vietnam Social Security Compensation (sickness benefits) Civil servants, waged workers, pensioners, the poor, etc., are obliged to join the system. Farmers, dependents, etc., are not obliged to. (Note) Source: Ministry of Health, Labour and Welfare, Report on Conditions Overseas, National Institute of Population and Social Security Research, The Review of Comparative Social Security Research No. 15, and materials of WHO, JETRO, etc. Figure 14 Proportion of Public and Private Expenditures in Total Health Expenditures (26): the Proportion of Private Expenditures is High in Many Countries Thailand Malaysia Indonesia Philippines Vietnam Private expenditure General government expenditure (Note) Source: WHO World Health Statistics

19 2. Necessity of Reducing Income Inequality In recent years, Asian countries have achieved remarkable economic growth, but the growth-oriented development policies have caused some distortions, which has resulted in large income inequality. An absolute requirement for Asia s further development is the expansion of intraregional demand. It is expected that the reduction in income inequality will enhance the purchasing power of middle-income class and contribute significantly to the expansion of an Asian market. At present, the inequalities among regions within each country are generally expanding. Compared with Japan, Korea, etc., other countries have greater regional inequalities, which are generally greater than the inequality that Japan experienced in its period of high economic growth. In the early 2s, started to develop inland areas that lagged behind, which has yielded some results. As for incomes, the gap between the highest and lowest level is very large. In and, comparing the average real income growth rate per capita by income group, the average income growth rate for the high-income group is greater than that of the low-income one, which means that the income gap is widening. In Malaysia and Thailand, on the other hand, the income growth rate of the low-income group exceeds that of the high-income group, which means that income is being redistributed better. In Japan and Taiwan, which have developed further, there is no significant difference in income growth rates by the income group. Figure 15 Regional Inequality in Asian Countries Comparison of the Gini Coefficient for Per-Capita Gross Regional Domestic Product (GRDP).5.4 First half of the 2s Second half of the 2s Widening Narrowing. Japan (1965) Japan (-7) Korea (-5) Malaysia (-7) Thailand (3-8) Philippines (4-8) Indonesia (2-7) (3-8) (-9) Maximum-to-minimum ratio Japan (-7) Korea (-5) Malaysia (-7) Thailand (3-8) Philippines (4-8) Indonesia (2-7) (3-8) (-9) First half of the 2s Second half of the 2s (Notes) 1. Source: Cabinet Office Prefectural economic accounts, National statistical data. 2. The number of regions selected is the 47 prefectures for Japan, 16 provinces and cities for Korea, 14 states for Malaysia 7 regions for Thailand, 17 regions for the Philippines, 3 states for Indonesia, 31 provinces, government-ruled cities and autonomous regions for, and 27 states for. 3. Data of the First half of the 2s and Second half of the 2s refers to that for the years shown in parentheses abo 4. The Gini coefficient is calculated by weighting the population of each region. 5. The max-to-min ratio is the ratio of the per-capita GRDP of the region with the highest per-capita GRDP to the per-capit GRDP of the region with the lowest. Japan s max-to-min ratio in 1965 was

20 Figure 16 Trends in Per-Capita Real Income by Income Group (Dollars) 25, 1 (Dollars) 25, 1 2, 15, Average income growth rate (right scale) 8 6 2, 15, Average income growth rate (right scale) 8 6 1, 5, , 5, Low income group High income group Low income group High income group (Dollars) 5, 4, Malaysia Average income growth rate (right scale) 1 8 (Dollars) 25, 2, Thailand , 2, 1, , 1, 5, Average income growth rate (right scale) Low income group High income group Low income group High income group (Dollars) 5, Japan 1 (Dollars) 5, Taiwan 1 4, 3, Average income growth rate (right scale) , 3, Average income growth rate (right scale) , 4 2, 4 1, 2 1, Low income group High income group Low income group High income group (Notes) 1. Source: IMF (27), World Bank World Development Indicators 29, Penn World Table 6.3, United Nations University World Income Inequality Database V2.C May The figures on a horizontal axis refer to the income groups (quintiles). The population is arranged in order of the value of the income and is divided into quintiles from the lowest fifth to the highest fifth. The first one is the lowest-income group and the fifth one is the highest-income group. 3. The bar refers to the real per-capita income of each income group, calculated by per-capita real GDP(Base year: 25), according to IMF World Economic Outlook The average income growth rate refers to the average growth rate between the income of the 199s and that of the 2s in each income group. 19

21 3. Improvements in the Quality of the Labor Force Although the proportion of people who attend secondary education schools is increasing in Asian countries, the proportion of students who have received higher education is still low, except for Thailand. Accordingly, it is necessary to increase the proportion of the labor force that has received higher education. It has been pointed out that companies that advanced into Asia have difficulty in securing engineers with professional skills or personnel who have managerial ability in many countries. Although the quality of the labor force has recently been improving rapidly in Asian countries, development of human resources is insufficient to cope with the demands of sophisticated industries or meet the requirements of companies. For future development, it is necessary to further improve the quality of education and to develop a labor force that can satisfy the needs of more and more sophisticated industries. Figure 17 Level of Educational Achievement: Enrollment Rate at Secondary Education Schools is Increasing (1) Enrollment rate at secondary education schools (2) Enrollment rate at higher education institutions Thailand Vietnam Hong Kong Thailand Vietnam Hong Kong Philippines Indonesia Philippines Indonesia Malaysia Malaysia (Notes) 1. Source: World Bank. 2. The secondary education schools correspond to junior high schools and high schools in Japan. Higher education refers to education at universities, colleges, and other professional or vocational schools. 3. As for the data of 27, s data is that of 26, Malaysia s that of 25 and Vietnam s that of 21 due to certain limitations on data collection Figure 18 Asia s Labor Force Demand: a Lack of Workers with Professional Skills 7.1 (1) Hard to secure engineers with professional skills Thailand Indonesia Malaysia (2) Hard to secure personnel who have managerial ability (Notes) 1. Source: Japan Bank for International Cooperation, Survey report on overseas business operations by Japanese manufacturing companies. 2. Questionnaire to manufacturing companies that have three or more overseas affiliated firms Thailand Indonesia Malaysia 2

22 4. Capital: Development of the Infrastructure The inadequate infrastructure is pointed out as an obstacle to investment in Asia. As for and Indonesia, in particular, more and more companies point out the inadequacy of the infrastructure as a problem and the number of such companies has not decreased for the past decade. In, the proportion of companies that point out this inadequacy as a problem has been decreasing. In Thailand, the proportion was small. As for, etc., electricity supply and roads are pointed out as the type of infrastructure that requires development. Since transmission and distribution losses are around 25% in, development of the electricity supply infrastructure is particularly urgent. Figure 19 Infrastructure for which There is a Demand for Development (Percentage of Companies that Want the Development): the Development of Roads and the Electricity Supply Infrastructure are Necessary Roads Electricity Water supply Communications Railways Ports Airports Roads Electricity Water supply Communications Railways Ports Airports Indonesia Vietnam Roads Electricity Water supply Communications Railways Ports Airports Roads Electricity Water supply Communications Railways Ports Airports (Notes) 1. Source: Japan Bank for International Cooperation Survey report on overseas business operations by Japanese manufacturing companies. 2. Questionnaire to manufacturing companies that have three or more overseas affiliated firms. 21

23 5. Improvement of Total Factor Productivity In order to increase the productivity of the whole economy, it is necessary to improve various factors that play an important role in promoting the efficiency of the whole economy through competition among companies, as well as to achieve technological progress. For example, it is important to conclude free trade agreements (FTAs), which promote free trade and bring about competition among companies, and to develop a business environment that helps to improve the efficiency of the whole economy. The number of R&D personnel and amount of R&D expenditures are still low in Asia. In the future, it is also important to make sufficient investments in R&D activities according to the stage of development. Figure 2 R&D in Asia: Investment still at a low level (Per million of the population) 6, 5,713 (1) Number of R&D researchers 5,546 5, 4, 4,162 3, 2, 1, Singapore Korea Malaysia Thailand Indonesia Vietnam Japan (2) R&D expenditures as a percentage of the GDP Korea Singapore Malaysia Thailand Vietnam Philippines Indonesia Japan (Note) Source: World Bank World Development Indicators. 22

24 Viewing the environment for business in Asia, Singapore, Thailand and Malaysia have succeeded in creating a relatively effective environment for business. However, the environment for business in, Indonesia and the Philippines is not valued as much and needs improvement. Figure 21 Business Environment in Asia Closing a business Total evaluation 5 Starting a business Closing a business Total evaluation 5 Starting a business Enforcing contracts 1 15 Dealing with construction permits Enforcing contracts 1 15 Dealing with construction permits Trading across borders 2 Employing workers Trading across borders 2 Employing workers Paying taxes Registering property Paying taxes Registering property Protecting investors Getting credit Protecting investors Getting credit Korea Taiwan Closing a business Enforcing contracts Trading across borders Total evaluation Starting a business Dealing with construction permits Employing workers Closing a business Enforcing contracts Trading across borders Total evaluation Starting a business Dealing with construction permits Employing workers Paying taxes Protecting investors Getting credit Registering property Paying taxes Protecting investors Getting credit Registering property Singapore Thailand Closing a business Enforcing contracts Trading across borders Total evaluation Starting a business Dealing with construction permits Employing workers Closing a business Enforcing contracts Trading across borders Total evaluation Starting a business Dealing with construction permits Employing workers Paying taxes Protecting investors Getting credit Registering property Paying taxes Protecting investors Getting credit Registering property 23

25 Malaysia Indonesia Closing a business Enforcing contracts Trading across borders Total evaluation Starting a business Dealing with construction permits Employing workers Closing a business Enforcing contracts Trading across borders Total evaluation Starting a business Dealing with construction permits Employing workers Paying taxes Registering property Paying taxes Registering property Protecting investors Getting credit Protecting investors Getting credit Philippines Vietnam Closing a business Enforcing contracts Trading across borders Total evaluation Starting a business Dealing with construction permits Employing workers Closing a business Enforcing contracts Trading across borders Total evaluation Starting a business Dealing with construction permits Employing workers Paying taxes Protecting investors Getting credit Registering property Paying taxes Protecting investors Getting credit Registering property Japan Closing a business Enforcing contracts Trading across borders Total evaluation Starting a business Dealing with construction permits Employing workers Paying taxes Registering property Protecting investors Getting credit (Notes) 1. Source: World Bank Doing Business Evaluated by ranking among 183 nations. 3. Doing Business : Specialists prepare data as to ten items based on the laws and restrictions of each nation. The total evaluation for the business environment is calculated by taking an average of the ten items below (The reference below shows the details). (Reference) The ten items that constitute the total evaluation for the business environment and their sub-items in detail 1. Starting a business the number of steps required for the procedures, the costs required and the number of days, etc. 2. Dealing with construction permits the number of steps required for the procedures, the costs required and the number of days, etc. 3. Employing workers the difficulty of hiring, the rigidity of hours, etc. 4. Registering property the number of steps required for the procedures, the costs required and the number of days, etc. 5. Getting credit the strength of legal rights, the depth of credit information, etc. 6. Protecting investors extent of disclosure, etc., 7. Paying taxes the number of times of payment, the time required, the tax rates, etc. 8. Trading across borders the number of documents related to exports and imports, the cost per container, etc. 9. Enforcing contracts the number of steps required for the procedures, the number of days and costs required, etc. 1. Closing a business the number of days and the costs required, etc. 24

26 (Times) Maintenance of a Stable Macroeconomic Environment and Financial Environment Maintenance of a stable macroeconomic environment and financial environment is an indispensable prerequisite for Asia s long-term self-sustaining growth. (1) Changes in monetary policies after the Asian currency crisis and a review of the financial system Before the Asian currency crisis, the East Asian countries adopted the de facto dollar peg system with free capital mobility basically secured, and exchange rates became an anchor for monetary policies (a target used as a guideline in monetary policies). The de facto dollar peg system caused excessive capital inflows, which became one of the major causes of the currency crisis. Based on the lessons from this crisis, the exchange rate system was changed to a floating rate one and an inflation target was introduced as a monetary policy measure. These measures aim at ensuring the transparency of monetary policies and stabilizing expectations in the market. Before the Asian currency crisis, the East Asian countries had current account deficits at almost any time while there was an insufficient accumulation of foreign currency to cover short-term foreign debt. Therefore, rapid capital outflows make it difficult to maintain stable exchange markets, which can cause a currency crisis. In order to cope with such a critical situation, the East Asian countries started to reduce foreign short-term debt and accumulate foreign currency. Figure 22 Changes in Foreign Currency Reserves/Foreign Short-Term Debt: Significant Recovery toward 24 Indonesia Korea Thailand Figure 23 Scale of the Asian-Currency Bond Market: an Increase in the Amount of the Issuance of Mainly Government Bonds (Trillion dollars) 5. Government bonds Private bonds ASEAN (private) $.2 trillion Korea (private) $.6 trillion (private) $.5 trillion ASEAN (government) $.5 trillion Korea (government) $.4 trillion Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 (government) (Year/quarter). $2.2 trillion (Year) (By (Note) Source: Central banks. region) (Year) (Notes) 1. Source: Asian Development Bank. 2. Hong Kong is included in. ASEAN means the total value of the debt issued by Indonesia, Malaysia, Thailand, the Philippines, Singapore and Vietnam. The Chiang Mai Initiative (CMI) was established to accommodate foreign currency within the Asian region in an emergency. In order to enable cooperation to be swifter and smoother, the ASEAN +3 (Japan, and Korea) countries agreed to unify a network of bilateral currency swap agreements (multilateralization). In order to strengthen the financial system, the supervisory system was centralized by newly establishing a financial supervisory institution or the supervisory function of the central banks was strengthened. Soundness regulations have been strengthened through the partial application of Basel II, and a deposit insurance system was introduced. 25