A review of Asian economic development from 1995 to 2015, sponsored by Aberdeen Asset Management.

1. A report by The Economist Intelligence Unit
Contrasts and contradictions:
A review of Asian economic development from
1995 to 2015
Commissioned by

2. 1© The Economist Intelligence Unit Limited 2015
Contrasts and contradictions: A review of Asian economic development from 1995 to 2015
Contents
2
3
4
5
6
8
9
Then and now
The elephant in the room: India
A regional trading hub
The ASEAN economic community
Development of capital markets
Asia’s magnetic middle class
From the world’s factory to the world’s mall: the digital future of retail in Asia
Conclusion 10

3. 2 © The Economist Intelligence Unit Limited 2015
Contrasts and contradictions: A review of Asian economic development from 1995 to 2015
Then and now
1
The everyday sensory experience of Asia’s
emerging cities over the past two decades has
been a combination of the constant noise and
upwards growth of a vast building site, and
the buzz created by young people in pursuit of
unprecedented opportunities for education,
economic activity and social freedom.
In 1995, if a Western student hoped to have
a business career in Asia, they were probably
taking classes in Japanese—the language of
the economic powerhouse of Asia. China had
yet to join the World Trade Organisation and its
international relations were still reeling from the
Tiananmen Square crackdown of 1989. India had
only recently shed its notorious “Licence Raj”
system, a hotbed of bureaucratic corruption,
which had sprung out of that country’s severe
approach to central planning. As Indonesia’s
authoritarian president, Suharto, prepared to
celebrate 30 years of his New Order, citizens
across East and South-east Asia were starting
to tire of the heavy-handed regimes—whether
of communist or nationalist origin—that had
emerged in the process of decolonisation, and
were looking for more liberal, pluralistic systems.
As a confident middle class emerged on the back
of export-oriented industrialisation, winds of
change were blowing from Mongolia and South
Korea in the north to Thailand and Indonesia in
the south, destined to be whipped up further by
the 1997-1998 Asian financial crisis.
Twenty years on, a Westerner circulating at
a conference in Shanghai and conversing in
fluent Mandarin is not unusual enough to turn
heads. China has leap-frogged Japan in terms of
economic output shifting the centre of gravity
of global trade in the process. China has become
one of the world’s most sought-after markets,
with interest also growing in the nearby bloc
of fast-developing economies known as the
Association of South-East Asian Nations (ASEAN).
These, along with the developed Asian economies
of Japan, South Korea, Hong Kong, Taiwan and
Singapore, form a dynamic and increasingly
integrated trading network—and a vital hub
within global supply chains.

4. 3© The Economist Intelligence Unit Limited 2015
Contrasts and contradictions: A review of Asian economic development from 1995 to 2015
During its 1991 balance-of-payments crisis,
India’s government flew the country’s entire gold
reserves to Europe as collateral—and committed
to a reform programme—in exchange for an IMF
bail-out. The resulting changes led to a decade of
optimism about India’s growth prospects, but in
2013 another balance-of-payments crisis loomed
large as the rupee plummeted against the US
dollar and the cost of importing foreign oil once
again threatened economic stability. This shock
prompted a re-examination of India’s economic
fundamentals.
India still faces many of the same challenges
as in the early 1990s: energy shortages, an
inefficient state-run banking sector, a narrow tax
base, tensions between its diverse communities,
regional insurgencies, endemic poverty and
corruption and inadequate access to education.
However, the size of its economy has also more
than quadrupled over the past 20 years, and the
Reserve Bank of India (the central bank) has
accumulated a healthy stash of foreign-exchange
reserves. This puts India in a better position
to cope with unexpected external shocks, and
the country’s youthful population and broadly
positive trajectory are causes for optimism. Yet,
even with the current reform-minded prime
minister, Narendra Modi, at the helm, India’s
economic future remains uncertain.
India’s development path is often compared—
unfavourably—to that of China. In the early
1990s both countries faced the challenge of
lifting hundreds of millions of their citizens
out of poverty, but only China has come close
The elephant in the room: India
2
to eradicating this problem in the years
since. When drawing contrasts between
China and India, two features stand out: their
governance and their economic structure. The
ruling Chinese Communist Party has linked its
political legitimacy to economic growth and
social stability, and the careers of party cadres
have long hinged on their ability to hit growth
targets. This has provided an incentive for rapid
development—often at a high cost to civil rights
and the environment. India, meanwhile, is a
participatory democracy whose socialist roots
are proving more resilient. Illegal land grabs for
development cannot easily be swept under the
rug—although the flipside of this is that even
more reasonable efforts at acquiring land tend
to be strenuously resisted. As a result of these
differences in governance, the two countries’
economic structures have diverged.

5. 4 © The Economist Intelligence Unit Limited 2015
Contrasts and contradictions: A review of Asian economic development from 1995 to 2015
The past two decades have seen Asia’s emerging
markets grab a larger and larger share of world
trade, with China overtaking the US as the
biggest trader in 2013.1
The East Asian trading
hub has gained a unique status in global value
chains: whereas the NAFTA and EU manufacturing
hubs largely serve their own regions, East Asia
supplies the entire globe.2
This remarkable
success owes in no small part to the intra-
regional trading dynamic that has emerged, in
the so-called flying geese formation.
Manufacturers in the first economy in this
formation, Japan, recognised the benefits of
outsourcing labour-intensive parts of their
supply chains to cheaper locations as far back
as the 1960s, and the recipient “Asian tiger”
economies of Hong Kong, Singapore, South
Korea and Taiwan demonstrated during the 1970s
and 1980s that it was possible to move up the
value chain at an eye-watering rate from this
A regional trading hub
3
starting point. Over the past 20 years China and
the ASEAN economies have sought to emulate
these achievements, vying to position themselves
as the most investment-friendly environments in
the next wave of outsourcing.
The result of this highly complementary trading
network has been a vertiginous rise in the value
of East and South-east Asian intra-regional trade
(see chart below). The value of total trade more
than quadrupled between 1995 and 2014. The
share of the region’s total trade, which is intra-
regional, has not changed significantly since
1995, and has even declined slightly since 2009.
At 45%, it is well below the EU’s level of intra-
regional trade, which stands at 65%.3
A question mark remains with regard to whether
Asia’s less-developed economies will be able
to join the flying geese formation with the
same degree of success as the Asian tigers and
Rise in value and share of Asian (ASEAN+3) intraregional trade, 1995-2014
Source: ADB Asia Regional Integration Centre; IMF Direction of Trade Statistics.
0
1,000
2,000
3,000
4,000
5,000
6,000
38
40
42
44
46
48
50
Trade share (%); right scaleTotal trade; (US$ bn) left scale
14131211100908070605040302012000999897961995
1
World Trade Organisation
(2014), ‘World trade report
2014’. China’s share of the
world’s exports and imports
reached 11% in 2013,
compared with the US’s
10.4%.
2
Lejour, A., Rojas-
Romagosa, H. and
Veenendaal, P. (2014)
‘Identifying hubs and
spokes in global supply
chains using redirected
trade in value added’.
European Central Bank,
Working Paper No. 1670,
April 2014.
3
IMF Directions of Trade
Statistics; ADB Asia
Regional Integration Cente

6. 5© The Economist Intelligence Unit Limited 2015
Contrasts and contradictions: A review of Asian economic development from 1995 to 2015
China. Two main factors are contributing to the
“stickiness” of China as a manufacturing location.
First, China’s size and potential as a consumer
market mean that producers are keen to be there,
developing and distributing products tailored to local
consumers—and at the velocity required to maintain
competitiveness. Second, the Chinese government
is going to great pains to future-proof the country’s
industrial base by promoting automation on a grand
scale. If it succeeds, many low-skilled manufacturing
jobs may well go to robots, rather than workers in
Myanmar or Laos—though this will only apply to
certain industries.
ASEAN’s response is to increase its value proposition
through further economic integration. The ASEAN
Economic Community is being established with a view
to creating a single market that encourages trade by
lowering barriers, and is large enough to divert the
attention of global investors away from neighbouring
behemoths China and India.
The vision
l Investors no longer face non-tariff barriers
l Standards are harmonised
l Tax regimes are co-ordinated
l Skilled labour can move around freely
The ASEAN economic community
Population
(m)
Nominal GDP
(US$ bn at PPP)
Source: The Economist Intelligence Unit.
0
200
400
600
800
1,000
1,200
1,400
1,600
20192014
ASEANIndiaChina
0
5,000
10,000
15,000
20,000
25,000
30,000
20192014
ASEANIndiaChina
The potential: ASEAN as a single market
ly

7. 6 © The Economist Intelligence Unit Limited 2015
Contrasts and contradictions: A review of Asian economic development from 1995 to 2015
Stockmarkets have become an important source
of capital for the 22,000 firms currently listed in
the Asia-Pacific region (excluding Australia and
New Zealand). Equity market capitalisation has
roughly trebled since 1995 and now stands at
over US$22trn—well ahead of the EMEA region, at
US$12trn, although still trailing the Americas at
US$30trn.4
However, Asia’s financial markets are far from
having reached their potential. Room for growth
can be seen in the relatively low level of market
capitalisation as a proportion of GDP (see first
chart below), and in the lack of diversity of
financial instruments in use (see second chart
below). Progress has been made in these areas,
particularly since the Asian financial crisis
demonstrated the danger of concentrating risks
in a bank-based financial system,5
but certain
Development of capital markets
4
asset classes such as corporate bonds are still not
widely used.
Another indication of the lack of maturity of
Asia’s financial systems is the very limited
presence of foreign firms. Singapore is a notable
exception, with 37% of the firms hosted on its
stock exchange being foreign. However, not a
single foreign firm is listed in mainland China
or Indonesia, while just one is listed on each of
India’s main exchanges.
Holding back participation and investment
in emerging Asia’s financial sector is a
perception—not entirely unjustified—that
the region’s markets function in a somewhat
opaque and idiosyncratic manner. Recent
research has shown that the pricing of Asian
stocks is less well correlated to economic and
corporate fundamentals than that of their G7
Emerging Asia's financial markets: Plenty of room for growth
(Debt and equities as % of GDP, 2Q 2012)
Source: McKinsey Global Institute Financial Assets Database; McKinsey Global Institute Analysis.
0
100
200
300
400
500
0
100
200
300
400
500
IndiaOther emerging AsiaChinaAdvanced economies
4
Data from World
Federation of Exchanges,
March 2015. Equity market
capitalisation of the Asia-
Pacific region (excluding
Australia and New Zealand)
in 1995 was US$7.7trn.
The data for the Americas
includes North, Central and
South America.
5
Singh, S. (2011) ‘Financial
market depth: friend or foe
when it comes to effective
management of monetary
policy and capital flows?’
in The influence of external
factors on monetary policy
frameworks and operations,
Bank for International
Settlements, 2011, vol. 57,
pp 231-237.

8. 7© The Economist Intelligence Unit Limited 2015
Contrasts and contradictions: A review of Asian economic development from 1995 to 2015
counterparts.6
In other words, Asian stock prices
are less predictable.
Better market regulation, including more
stringent requirements for transparent corporate
governance, tends to improve the accuracy
of pricing and therefore lessen the impact of
speculation on markets. The urgent need for
such regulatory improvements has been well
illustrated by China between mid-2014 and the
summer of 2015 (see chart below). A bull run
that added US$6.5trn to the value of Chinese
stocks over the course of a year was entirely
disconnected from trends in the real economy. In
June 2015 the bubble burst spectacularly, leading
the Chinese government to take extraordinary
intervention measures in July in an attempt to
restore stability to the market.
Besides improving regulation and transparency,
received wisdom holds that financial
diversification is key to reducing risk in a financial
system. However, valid questions have recently
been raised about the risks of overly rapid
financial market diversification and deepening,
as policymakers seek to learn the lessons of the
2008-09 global financial crisis—which after all
broke out in the world’s most highly developed
financial markets.7
During the last few years,
quantitative easing by central banks in the West
has caused investors to chase higher returns in
Asia’s emerging markets, pushing up domestic
debt levels and housing prices. Yet as the mid-
2013 “taper tantrum” showed, when it looks like
quantitative easing will be curtailed, investors
are quick to pull their money out of higher-risk
emerging-market locations.
Policymakers in Asia’s emerging markets
therefore face the challenge of balancing
development and opening up their financial
systems against the need for stability, and
many will understandably wish to proceed at a
measured pace.
China's GDP and stockmarket: a tenuous relationship
Source: The EIU; Yahoo Finance.
0
2
4
6
8
10
12
14
16
Real GDP (% change on previous year); left scale
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
CSI 300 index; right scale
151413121110090807062005
6
Lipinsky, F. and Ong,
Li Lian (2014) ‘Asia’s
Stock Markets: Are There
Crouching Tigers and
Hidden Dragons?’ IMF
Working Paper, February
2014.
7
See for instance Sahay,R.,
Čihák, M. et al (2015)
‘Rethinking Financial
Deepening: Stability
and Growth in Emerging
Markets’, IMF Staff
Discussion Note 15/08.

9. 8 © The Economist Intelligence Unit Limited 2015
Contrasts and contradictions: A review of Asian economic development from 1995 to 2015
Asia is urbanising at an alarming rate, and mega-
cities are becoming the new norm. The emergence
of an affluent urban middle class has led
producers in the region to alter their strategies
from producing for export to focusing on local
consumers. Multinationals are increasingly
establishing their product development,
marketing and distribution functions in Asian
emerging markets, in order to tailor products to
local demand.
The rise of the Asian middle class will also
introduce new social and commercial pressures.
As people become wealthier, they also become
more discerning consumers with regard to
quality, safety and ethics. Widespread outrage
about tainted infant milk powder and other
scandals in China have already forced changes
in regulations and business strategies, with
some Chinese food companies partnering with
or acquiring Western competitors to build
trust. In future, better-networked and more
environmentally and socially conscious urban
consumers in Asia will impact not just the types of
products and services on offer, but how these are
produced and delivered.
Asia’s magnetic middle class
5
Consumer power in emerging Asia will equal that of Western Europe by 2019
(% of world total)
Source: The Economist Intelligence Unit.
0
5
10
15
20
25
30
35
40
0
5
10
15
20
25
30
35
40
Western EuropeUSChina, India and ASEAN Four
191817161514131211100908070605040302012000999897961995

10. 9© The Economist Intelligence Unit Limited 2015
Contrasts and contradictions: A review of Asian economic development from 1995 to 2015
Asia is redefining retail for the 21st century. In
towns that have yet to build a modern shopping
mall, street markets are giving way to e-, m- and
s-commerce as local firms create digital platforms
adapted to peculiarly local conditions. India’s
digital commerce market enjoyed average annual
growth of 35% between 2010 and 2014, although
with predicted sales of US$15bn in 20158
it still
lags far behind China, which had surpassed
US$300bn by 2013.
Indian firms are eager to emulate the success
of China’s Alibaba, whose IPO in the US last
year smashed global records. A challenge for
contenders is how to handle payments, with
consumer trust sorely lacking, debit- and
credit-card usage low and a clunky banking
system. Snapdeal, one of India’s leading digital
commerce firms, has followed the lead of China’s
Taobao in launching its own secure payment
service, TrustPay. A more basic response by
most e-retailers has been to offer a cash-on-
delivery option, accounting for around one-half
of transactions. In a smart domestic innovation,
Indian firms have also come to rely on networks
of local couriers to overcome logistical problems
and reduce delivery costs.
What is remarkable is how fast online retail is
growing in Asia’s emerging markets (albeit often
from a very low base)—despite lagging physical
infrastructure and financial services. According
to the 2013 ICT Development Index produced
by the ITU, a UN agency focused on information
and communication technology (ICT), China
scored 5.1 and India just 3.1 out of ten for access
to ICT, compared with the UK’s score of 9.2. The
experience of Asia’s e-retail pioneers—pushing
ahead while they wait for policies and systems to
catch up—demonstrates that where there’s a will,
there really is a way.
From the world’s factory to the
world’s mall: the digital future of
retail in Asia
6
8 Internet and Mobile
Association of India
(2014), 'IAMAI Digital
commerce report 2014.'

11. 10 © The Economist Intelligence Unit Limited 2015
Contrasts and contradictions: A review of Asian economic development from 1995 to 2015
Conclusion
Asia in 2015 is a region of contrasts and
contradictions. Smart business districts sit
uneasily alongside squalid slums. Even as living
standards soar for the urban middle classes,
quality of life is dragged down by pollution.
Apparently strong foundations of economic
interdependence are rocked by underlying
geopolitical fault lines. The economic outlook for
Asia is bright but contingent on smart domestic
and foreign policies. Will South Asia’s children get
access to the education they need to contribute
to their region’s future? Will China succeed in
transitioning away from inefficient, GDP-boosting
investments and towards a more balanced and
productive economy? Will diplomacy prevail in the
East and South China seas? Cause for optimism
is provided by the emergence of a generation of
well-educated, worldly and engaged citizens.

12. While every effort has been taken to verify the
accuracy of this information, The Economist
Intelligence Unit Ltd. cannot accept any
responsibility or liability for reliance by any person
on this report or any of the information, opinions
or conclusions set out in this report.

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