Pinpointing the power shifts in Asia Since the beginning of the new millennium nobody doubts anymore that the 21st century is the Asian century.

Shibuya crossing in Tokyo

Numerous assessments focus on the economic risks and opportunities this new age will provide to the world economy. Two trends, however, do not get enough attention, demography and geopolitics. Both will have a powerful impact on Asia’s national economies as well as on the intra-Asian flows of trade and finance.

Japan has a rapidly aging population and in the forthcoming decades it is projected to lose over twenty percent of its population. As the country does not intend to compensate this negative domestic demographic trend through immigration, its impact on the economy is likely to be dramatic. Most Japanese companies have realized that in order to grow they must go abroad. Already we are witnessing a massive increase of Japanese overseas investment in South East Asia and in India. This trend will accelerate in the foreseeable future.

China, too, faces a demographic trap, primarily due to the legacy of its one-child policy, which was implemented in the late-1970s to control population growth. Currently, Beijing is modifying the implementation of this policy in order to animate people to have more children. However, massive socio-economic changes, notably rapid urbanization, are accentuating the trend towards nuclear families and the deferring of having children until later in life, with considerable consequences for social security. Urgent action is required, as long-term projections suggest that at the current rate of childbirth and the expected rate of aging, China’s population will reduce dramatically during the century.

In South East Asia, the most populous countries, Indonesia, the Philippines and Thailand have been growing rapidly during the past forty years. However, in all these countries the growth rates have gone down significantly. At present these countries do not face the challenge of a rapidly aging populace as is the case in Japan and in Europe. For the coming decade, South East Asia will not only have rapidly growing middle classes, the region will also provide labor markets with a substantial and well qualified workforce.

For several reasons related to its democratic constitution and with the religious and ethnic diversity of its population, India has not adopted compulsory population measures, such as the one-child policy in China. On the one hand, this has resulted in substantial and continuous population growth, which will lead to India’s population overtaking China’s by the end of the 2020s. However, today, India is one of the few major countries with a sound population pyramid.

A young population puts a lot of pressure on the government to provide employment, but a sound age structure in the population is also an economic asset. It will contribute to India becoming a preferred location of industrial production and to India’s domestic markets receiving substantial boosts from rapidly growing urban middle classes. And as India gains economic strength, its geopolitical weight, even beyond the Indian Ocean, will increase.

Further insights within this article

From the poverty line to super power
Within half a generation China has risen from being a slowly developing country with a large percentage of the population living below the poverty line to the world’s second largest economy. This has implications that reach far beyond trade, investment and business. Today, China is once again a world power and the strategic pillar economy in Asia, a position it has traditionally occupied alongside India. Of course, the rise of a big country always creates geopolitical repercussions. Although the Chinese leadership repeatedly emphasizes its commitment to the peaceful rise of the country toward global superpower status, there are genuine concerns particularly amongst China’s immediate neighbors.

There are a number of open and hidden conflicts in East Asia whose importance is both regional and global. They range from a highly unstable Korean Peninsula to the many island disputes in the South and East China Seas; from Beijing’s claims regarding sovereignty of Taiwan to the profound distrust between Beijing and Tokyo that is the result of an unresolved wartime past. When looking at the prospect of regional economic integration in East and South East Asia, we recognize a number of historic disputes and rivalries that were successfully put aside during the process of the unification of Europe.

The Association of South East Asian Nations, ASEAN, has done a remarkable job in integrating the economies in South East Asia. It is no mean achievement that the world today looks at South East Asia as a comprehensive economic region with huge potential, both because of its more than 600 million strong population and because of its rapidly growing urban middle classes. On the other hand, the security infrastructure of East and South East Asia still leaves a lot to be desired. At present there is no regional security architecture beyond the bilateral alliances and security treaties the United States has with some East Asian countries.

In the past forty years, Asia’s crisis spots have largely been kept under control. Frequent tensions and belligerence on the Korean Peninsula have not led to open war. Border conflicts between India and Pakistan remained local issues. Although reconciliation is still missing, Sino-Japanese relations have been shaped by pragmatism on both sides.

Some analysts believe that the rapid growth of regional economic integration ensures that governments will restrain from warfare. It is interesting that both in China and in Japan, voices that are concerned about increased chauvinism have warned that World War I was unleashed by the very same European powers who had the most to lose from a collapse of international order. Economic interests are obviously not always strong enough to prevent military adventurism.

In particular, Japan and India are observing China’s rise with great concern, as for its own reasons does the United States. President Obama has made clear that the US is not only an Atlantic but also a Pacific Ocean power. Consequently, important elements of the US fleet have been transferred from the Atlantic to the Pacific coast.

The counterbalancing force of trade and investment
Geopolitical shifts do not occur in an empty space. They imply significant changes in the global economy and in the flow of trade and investment. Recently we have been witnessing these developments in South East Asia. South East Asian countries observing the rise of China want to diversify their economic links with the outside world. They want more trade with and investment from Japan and India to counterbalance China’s influence.

At the same time as South East Asia seeks to diversify with the help of Japanese investment, Japanese companies are being forced by a protracted domestic market slowdown to go overseas in search of new options for growth. Furthermore, the rise of the new middle classes not only in South East Asia but also in China results not only in an increase in quantitative consumption. When people get richer, have more financial means than are needed for survival, they look for more quality and prestige.

It is no coincidence that in China, and in many other Asian countries, people are more concerned about environmental and pollution concerns, clean energy and food safety than ever before. And this presents a moment of opportunity for developed countries such as Japan, South Korea and Taiwan, which have the advanced technological prowess to provide sustainable solutions to these issues.

The complex interplay of demography, geopolitics and economics is often overlooked, but it helps to explain many of the unfolding opportunities and challenges faced across Asia.

Urs Schoettli, Asia specialist and journalist
Urs Schoettli

Urs Schoettli is one of Switzerland’s most renowned specialists on Asia. He is based in Tokyo and Mumbai, and comments on development trends in Asia for leading Swiss newspaper, Neue Zürcher Zeitung.

Asia in numbers

Asia data 2014