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Resurgent AsiaDiversity in Development$

Deepak Nayyar

Print publication date: 2019

Print ISBN-13: 9780198849513

Published to Oxford Scholarship Online: November 2019

DOI: 10.1093/oso/9780198849513.001.0001

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Asian development and the world economy

Asian development and the world economy

(p.201) 8 Asian development and the world economy
Resurgent Asia

Deepak Nayyar

Oxford University Press

Abstract and Keywords

During the post-colonial era, the relationship between Asia and the world was shaped by a geopolitics in which economics and politics, juxtaposed with history and geography, were closely intertwined. East and Southeast Asia became the main arena for contesting political ideologies—capitalism versus communism—in the Cold War, while West Asia was the stage where strategic interests driven by oil played out. Both were associated with conflicts and wars that shaped trajectories of development. Rapid economic growth in Asia has implications, both positive and negative, for the world, industrialized countries, and developing countries, which are analysed in the chapter. The international economic and political architecture for global governance was created around 1945. Asia had no voice in that process. The shifting balance of power provides Asian countries with an opportunity to exercise collective influence now, but co-ordination and co-operation among them has not surfaced yet, possibly because of economic and political rivalry.

Keywords:   capital account liberalization, Cold War, geopolitics, global economic crisis, history and geography, imperialism and nationalism, internationalization of Asian firms, intra-Asian trade, multilateral rules and global governance, political challenges

This book began with a historical perspective on Asia in the world economy, to set out the initial conditions for development that existed in Asian countries in the early post-colonial era. It then outlined the broad contours of the rise of Asia in the world economy during the past fifty years. Thereafter, it sought to focus on critical issues to analyse the economic transformation of Asia with reference to selected countries—the Asian-14—essentially because, given the enormous diversity of Asia, such an analysis of the development process is possible only at country-level.

It is time to return to the big picture for two reasons: the whole could be different from the sum total of its parts, and economics needs to be situated in the wider context of not just politics but also history and geography. The object of this chapter is to address three broad questions. What has engagement with the world economy meant for Asian development over the past five decades? What are the possible economic implications of this Asian development for the world economy in times to come? What does a transformed Asia imply for international institutions, multilateral rules and global governance? In doing so, it begins with a discussion on the evolution of the relationship between Asia and the world in retrospect, and ends with some reflections on how the present global economic and political conjuncture might shape the relationship between Asia and the world in prospect.

Section 1 considers the evolution of the relationship between Asia and the world during the post-colonial era, in which economics and politics were closely intertwined with geography and history. Section 2 highlights the profound change in the economic significance of Asia and its engagement with the world economy through international trade, investment, and finance to analyse its impact on Asian development. Section 3 examines the possible economic implications, both positive and negative, of rapid growth in Asia for the world economy, industrialized countries, and developing countries. Section 4 explores how the discernible shift in the balance of economic power towards Asia might, or might not, influence structures of governance in the global context. Section 5 touches upon the growing economic problems and mounting political challenges in a changing world that could affect the future prospects of Asian development.

(p.202) 1. Asia and the world

The connections between Asia and the world outside the continent go back at least a millennium if not longer. For our purpose, it would suffice to focus on the historical evolution of this relationship during the period 1500–1950. This could be divided further into two periods: the pre-colonial era (1500–1850), and the colonial era (1850–1950). The earlier period is important as a point of reference and comparison for considering the post-colonial era, beginning circa 1950, which was characterized by change and continuity, during the second half of the twentieth century.

The pre-colonial era witnessed two phases.1 In the first phase (1500–1650), there was a European intrusion into Asia, by Portugal, Holland, England, and France. The Voyages of Discovery—Christopher Columbus to America in 1492 and Vasco da Gama to India in 1498—so described from a European perspective, were a critical turning point. The colonization of the Americas was followed by the age of mercantilism in Europe that witnessed an expansion of trade. Old World trade and New World silver turned out to be powerful complements in stimulating trade flows as Europe paid for its imports of textiles, spices, porcelain, and silks from Asia by imports of silver obtained from America. It was not long before the Portuguese, Dutch, British, and French East India companies integrated Asia into global trade, slowly extending the geographical spread and economic profitability of their operations. Yet, until 1650, Mughal India, Qing China, and Tokugawa Japan were strong centralized states that exercised complete control within their borders. This changed slowly but surely over the next two centuries as the sea power of the European intruders exerted mounting pressure on the land-based Asian economic systems. The European trading companies, confined to the coastal peripheries and their trade to start with, made gradual political intrusions and succeeded in destabilizing the great Asian empires in India and China, threatening and eroding their sovereignty, while the American gunboats of Commodore Perry imposed free trade on an autarchic Tokugawa Japan.

By the mid-nineteenth century, European economic and political intrusions into Asia ultimately transformed a de facto colonization into a de jure colonial era. There were two sets of factors that drove this process. The first, which exercised a strong influence over the period 1800–1870, was made up of the Industrial Revolution in Britain which spread to Western Europe, the evolution of colonialism in Asia, rather different from that in the Americas earlier, facilitated by the revolution in transport and communication which shrank the world. The economics of colonialism might have begun with the object of extracting the resources for capital accumulation necessary to finance industrialization in Europe. But it was not long before Asia became a source of primary commodities and a market for manufactured goods. The second set, which exercised a strong (p.203) influence over the period 1870–1914, was made up of the politics of imperialism and the economics of globalization, where the imposition of free trade was followed by a subordination of structures of production.2 The influence of these factors possibly waned over the period 1914–1950, interspersed as it was by two World Wars and the Great Depression, but the inherent logic of colonialism and imperialism remained unchanged. In this era, there was intense competition among European countries—Britain, France, Holland, and Portugal—in their quest for empires in Asia. Ultimately, Britain captured most of the spoils, but the political rivalry between European powers continued. It extended to the conflicting interests of the British and Russian empires in Central Asia, manifest in ‘The Great Game’, throughout the nineteenth century.

The end of the Second World War was the beginning of the end for colonialism in Asia, as nationalist movements and revolutionary struggles brought independence to countries. But the economic interests of European countries in the erstwhile colonies—access to resources and markets—remained alive and strong in the post-colonial era, as their governments sought to protect European capital and firms in Asia. The British did not give up hope of superpower status until the Suez crisis of 1956. The French also had illusions until their empire in Africa was intact. However, the pretence was hollow. The outcome of the Second World War led to a recognition, followed by an acceptance, of United States leadership, as both Britain and France relied on its support to manage conflicts that arose in Asia. Apart from vested economic interests of its colonial past, Asia also became the main arena for contesting political ideologies—capitalism versus communism—in the Cold War between the US and the then USSR, as both sought to protect and extend their spheres of influence.

During the post-colonial era, the relationship between Asia and the world was thus shaped by a geopolitics in which economics and politics, juxtaposed with history and geography, were closely intertwined. This had two manifestations: the Cold War in East and Southeast Asia, and the strategic interests in West Asia driven by oil in the Middle East. The political contest between capitalism and communism coincided with the anti-imperialist sentiment of decolonization in Asia.3 These two political undercurrents shaped each other in a dialectical manner. It evolved into a new relationship between imperialism and nationalism that worked almost in parallel across the ideological superpower divide, since it accommodated decolonization, multiculturalism, and nationalism as much as different shades of ideologies.4 In this context, it is worth noting that the United States was somewhat different from its European partners, insofar as it had long practised imperialism without colonialism, except in the Philippines, perhaps because it was conscious of its own colonial past. But it was not new to imperialism, as it had created a network of client states in Central America and the Caribbean in the early twentieth century.

(p.204) The Cold War era witnessed many conflicts and wars in Asia. It began with the war in the Korean peninsula, with support for North Korea from USSR and China and support for South Korea from the US cloaked as a United Nations force, which lasted three years, cost 2.5 million lives, and ended with an armistice that preserved the status quo with a marginally modified divide along the 38th parallel. The First Indochina War between the Viet Minh in the North supported by the USSR and the South supported by France backed by the US, stretched almost eight years, ending with the defeat of the French at Dien Bein Phu in 1954. The Second Indochina War, known as the Vietnam War, began soon after in late 1955, across Vietnam, Cambodia, and Laos, with the South supported by the US and the North supported by the USSR and China, spanned two decades and came to an end with the fall of Saigon in 1975, leading to the unification of Vietnam and the re-emergence of Cambodia and Laos. The First Malayan Emergency during 1948–1960, a war between Commonwealth, essentially British, forces and the Malayan Communist Party, lasted twelve years. A Second Malayan Emergency, an armed conflict between Malaysian federal security forces and the communists, which dragged on from 1968 to 1989, followed. In Indonesia, the largest non-ruling communist party in Asia (PKI), was simply wiped out in an anti-communist purge by the Sukarno government during 1965–1966.5 Most of these political conflicts in Asian countries, which originated in their own histories of anti-imperialist movements, were driven and sustained by superpower rivalry between the US—supported by Europe, and the USSR—supported by China. The later USSR–China rift also had significant consequences. The Cold War era came to an end during the early 1990s, in politics with the collapse of communism in the USSR, and in economics with the ascendance of the Washington Consensus that led Asian countries to a much greater reliance on markets and openness, although the pace and sequence of economic liberalization differed across economies.

The strategic interests of the US, Britain, and France, driven by the massive oil reserves in the Middle East, shaped geopolitics in West Asia during the post-colonial era. This has been so for seven decades. In the early Cold War era, the US–Britain alliance with Turkey and Pakistan was part of the same geopolitics. Other than that, the old superpower rivalry surfaced only in Afghanistan. The turbulent relationship with Iran provides the most striking example. It began with the coup that overthrew Prime Minister Mossadegh in 1953, who had nationalized oil, and resumed after the Shah of Iran was exiled in 1979, leading the US to impose a trade embargo on Iran from 1995 to 2015, lifted in 2016 and reimposed in 2018. The reprisals against Iraq began with its invasion of Kuwait in 1990, as hostility mounted over time, culminating in the invasion of Iraq by the US, supported by Britain, in 2003, which led to the overthrow of Saddam Hussein who was executed in 2006, and the withdrawal of US forces in 2011, leaving Iraq in complete disarray. Both Iran and Iraq are essentially Shia-muslim countries, whereas Saudi Arabia, which has had strong and consistent support from the (p.205) US, is an overwhelmingly Sunni-muslim country. The Sunni–Shia muslim divide is at the core of political conflict in West Asia.

There are three ironies of history embedded in the Cold War era and the political engagement of the Western world with post-colonial Asia that are worth noting. First, while the US and its European allies waxed eloquent about democracy and freedom as their objectives, their patronage was extended mostly to dictators, oligarchies, monarchies, or military regimes, who were not only undemocratic but also neglected the rights, concerns, and aspirations of ordinary people. Second, in East and Southeast Asia, some economies on opposite sides of the ideological divide, which were a part of the conflict in the Cold War era—South Korea, Taiwan, and China—turned out to be star performers, while Malaysia and Vietnam also emerged as success stories in Asian development. But that is not all. The US détente with China in the 1970s began as a counterpoint to Soviet influence in Asia. Four decades later, as China aspires to superpower status, it is perceived as a threat by the US. Third, the strategic geopolitics of the US and its allies in West Asia, which led to interventions in, embargos on, or invasions of, sovereign countries, has ended up in a globalization of Islam, which questions Western hegemony.6

2. Asia’s engagement with the world economy

The economic transformation of Asia in just fifty years, which is a short timespan in history, has been remarkable. Its growing engagement with the world economy has been an integral part of the process, while the dramatic increase in its relative importance for the world economy is an outcome of that process.

Table 8.1 sets out evidence on the rapidly changing economic significance of Asia in the world during the period 1970–2016, outlining broad contours to sketch the big picture. Its share in world population, always large, ranged between one-half and three-fifths throughout. But its share of world GDP in current prices at market exchange rates more than trebled from less than one-tenth to three-tenths. This increased share in world output was distributed across sectors. Between 1970 and 2016, the share of Asia in world value added in agriculture increased from 40 per cent to 55 per cent. The most striking change was in the sphere of industrialization, as Asia’s share in world manufacturing value added, and in world exports of manufactured goods, multiplied tenfold from 4 per cent to 40 per cent.

Table 8.1 Economic significance of Asia in the world: 1970–2016 (as a percentage of total for the world economy)





















Value added in agriculture







Manufacturing value added







Manufactured exports







Merchandise exports







Merchandise imports







Exports of services






Imports of services






FDI inward stock





FDI outward stock











Foreign exchange reserves







Source: See Appendix.

The increasing relative importance of Asia is also reflected in its engagement with the world economy. Between 1970 and 2016, its share of world merchandise trade, exports, and imports, rose from one-twelfth to one-third. During 1980–2016, its share in world exports of services increased from one-tenth to one-fourth and in world imports of services from roughly one-sixth to three-tenths. In foreign direct investment, between 1990 and 2016, Asia’s share in the world inward (p.206) stock remained almost unchanged around 15 per cent, while its share in the world outward stock increased from 3 per cent to 19 per cent. Asia’s significance in the sphere of international investment was clearly far less than in international trade, and its relative importance increased only as a continent-of-origin but not as a continent-of-destination. The story of remittances was similar to other spheres, as Asia’s share in world remittances rose from 30 per cent in 1980 to 45 per cent in 2016. For a continent that was traditionally foreign-exchange-scarce, the rise in Asia’s share of world foreign exchange reserves from one-tenth in 1970 to more than one-half in 2016 is striking. Much of this accumulation occurred, as a strategic form of self-insurance, after the Asian financial crisis in 1997, because countries sought to reduce their vulnerability to international financial markets and dependence on multilateral financial institutions like the IMF.

In the past century, no country on the path to development has industrialized without manufacturing steel, cement, and automobiles. Table 8.2 presents evidence compiled from different sources on the top ten producing countries of motor vehicles, motorcycles, steel, and cement in the world in 2016. It shows the emergence of Asian countries as major producers in each of these sectors. In motor vehicles, China, India, and South Korea are among the top ten,7 whereas in motorcycles nine among the top ten are Asian countries. In steel, China, India, South Korea, and Turkey are among the top ten. Japan (an industrialized country in Asia, hence not part of this study) is also among the top ten in motor vehicles, motorcycles, and steel. In cement, China, India, Iran, Turkey, Vietnam, Indonesia, and Saudi Arabia are among the top ten. Of course, large countries such as China and India have large markets. Yet, in 1970, it would have been difficult to imagine (p.207) (p.208) that, in less than fifty years, so many Asian countries, even China and India, would be among the top ten producing countries of the world in these manufacturing sectors. This is another dimension of Asia’s increasing relative importance in the world economy.

Table 8.2 Top ten producing countries in the world for selected sectors, 2016


Motor Vehicles





Number Millions


Number Millions


Million Tons


Million Tons











United States















United States







United States














South Korea




South Korea







Taiwan *













Saudi Arabia




















Sources: See Appendix.

(*) Taiwan, Province of China

The earlier chapter on openness and industrialization has already analysed several aspects of Asia’ engagement with the world economy. Therefore, to avoid repetition, the discussion that follows in this section will focus only on the aspects of international trade, international investment, and international finance not considered so far.

During 1970–2016, the increase in Asia’s share of world merchandise trade, both exports and imports, was phenomenal. This was an outcome of increasing openness that was also conducive to industrialization and development wherever it was a part of co-ordinated trade policy and industrial policy that used openness in a strategic manner. Asia was always an importer of traditional services such as shipping, transport, and insurance, which were closely associated with merchandise trade, but there was an expansion in financial, communication, business, and technological services driven by the needs of industrialization and development. The quarter century starting 1990 witnessed the emergence of Asia as an exporter of services, in both traditional and non-traditional domains (particularly software and information technology but also business and financial services) as countries diversified structures of production. The same period witnessed an integration with global production networks that was reflected in trade flows.

However, it is seldom recognized that a significant proportion of merchandise exports and imports were trade within Asia rather than trade with the rest of the world. Table 8.3 disaggregates the merchandise exports and imports of Asia into primary products and manufactured goods, making a distinction between country-groups as destinations for exports and sources of imports, for three selected years: 1995, 2005, and 2016. It shows that, between 1995 and 2016, the share of intra-Asia trade rose from 45 per cent to 63 per cent in total exports of primary products and from 41 per cent to 50 per cent in total exports of manufactured goods, so that there was a corresponding decline in the share of trade with the rest of the world, which was the residual. Over the same period, the share of intra-Asia trade remained unchanged at 46–47 per cent in total imports of primary products, but rose from 36 per cent to 56 per cent in total imports of manufactured goods leading to a sharp decline in the corresponding share of the rest of the world which was the residual. A further disaggregation of the rest of the world into other Asia (made up of Japan and Israel, the industrialized countries in the region) and the non-Asian rest of the world is also revealing. It shows that during 1995–2016, the share of other Asia (essentially Japan) dropped from 37 per cent to 15 per cent in total exports of primary products and from 20 per cent to 11 per cent in total exports of manufactured goods. There was little change in the share of other Asia (essentially Japan) in total imports of primary products, but this (p.209) (p.210) share dropped sharply from 40 per cent to 17 per cent in total imports of manufactured goods. It is clear that Japan was the hub for, and at the apex of, trade within the Asian continent in 1995. But its significance diminished rapidly over the next two decades. Table 8.3 also confirms that the decline in the share of the rest of the world in the trade of Asian developing countries was attributable to the contraction in the share of Japan. It would be reasonable to infer that China has replaced Japan as the hub of intra-Asian trade in the period from 1995 to 2016, while intra-Asia trade has become more significant. It is possible that intra-Asia trade is overestimated by the double-counting implicit in the assembly operations of global value chains, for which China is the important hub, as the final goods are exported from Asia largely to industrialized countries.8

Table 8.3 International trade within developing Asia and with the rest of the world: 1995–2016 (in percentages)




Intra-Developing Asia Trade

Trade with the rest of the world

Of which, Other Asia

Total Trade

Intra-Developing Asia Trade

Trade with the rest of the world

Of which, Other Asia

Total Trade

Intra-Developing Asia Trade

Trade with the rest of the world

Of which, Other Asia

Total Trade

Merchandise Exports

Primary products













Manufactured goods













Merchandise Imports

Primary products













Manufactured goods













Note: Primary products are defined as SITC 1+2+3+4+68. Manufactured goods are defined as SITC 5+6+7+8 less 68. Other Asia is made up of Japan and Israel, the industrialized countries in Asia, which are included in the rest of the world.

Source: United Nations, UNCTAD Stat.

It is not possible to distinguish between foreign direct investment that is intra-regional within developing Asia and outside with the rest of the world because statistics are unavailable. Foreign direct investment in Asia induced manufactured exports and supported industrialization, particularly in Southeast Asian countries and China, especially where there was integration into global production networks, but this was not so everywhere as it was shaped by the decisions of transnational corporations together with policies in host countries. In a few countries, such as Singapore, Malaysia, Thailand, and Vietnam—somewhat less in Indonesia and Philippines—this importance was reflected in magnitudes of the inward stocks of foreign direct investment as a proportion of GDP, and inward flows for foreign direct investment as a proportion of gross capital formation. In other Asian countries, the significance was more qualitative and quantitative. In any case, Asia’s modest share of inward stocks of foreign direct investment in the world changed little during 1990–2016.

Foreign direct investment by Asia is the more interesting story. The outward stock of foreign direct investment by Asian countries rose from $67 billion in 1990 to $4960 billion in 2016, while average outflows rose from $45 billion per annum during 1991–2000 to $342 billion per annum during 2009–2016.9 This was concentrated mostly in six economies—China, Singapore, South Korea, Taiwan, India, and Malaysia—in descending order of magnitudes of both stocks and flows. Taken together, the six accounted for about three-fifths of both the outward stock in 2016 and the average annual outflow during 2009–2016 for Asia.10 It would seem that these countries created their own transnational corporations. Among the top 100 non-financial multinational enterprises from developing countries and transition economies ranked by value of financial assets, in 2016, as many as sixty-seven were from Asia, once again dominated by the aforesaid six.11 Of these, the distribution was twenty-two from China, twelve from Hong Kong, eight from Singapore, six each from India, South Korea, and Taiwan, five from Malaysia, with one each from Philippines and Thailand. Among the top twenty, there were thirteen from Asia, of which the distribution (p.211) was four from China, two each from India, South Korea, and Singapore, and one each from Taiwan, Hong Kong, and Malaysia.12 In contrast, among the top 100 non-financial multinational enterprises from all economies in the world, in 2017, ranked by the value of their financial assets, there were only eight from Asia, of which four were from China, two from South Korea and one each from Taiwan and Hong Kong, but there were none in the top twenty while there were only four in the top fifty.13

The economic stimulus and strategic motive for the internationalization of firms from Asia were provided by a wide range of underlying factors driving the process, which differed across countries, sectors, and firms. There were two paths—foreign direct investment and acquisitions of firms—in host countries. The liberalization of economic policy regimes and a greater access to financial markets were enabling developments. But Asian firms could not have become international without the capacity and the ability to compete in the world market. The attributes of Asian firms that created these capabilities were embedded in their past and emerged over a much longer period of time while learning to industrialize. Traditional foreign direct investment was motivated either by sourcing for primary commodities or by seeking market access for manufactured exports. But the motives for mergers and acquisitions were different. The conventional literature argues that mergers or acquisitions are driven by the oligopolistic or monopolistic power of firms, which seek to source inputs or capture markets through ownership and control rather than trade. However, Asian firms often used this path not as a means of exploiting existing comparative advantage but as a means of realizing or augmenting potential comparative advantage. In fact, the objectives ranged from sourcing raw materials and market access for exports, to horizontal or vertical integration, delivery of services, capture of international brand names, and access to technology in the world of manufactured goods.14 Such outward foreign investment has implications, both positive and negative, for firms at a micro-level, industries or sectors at a meso-level, and home countries at a macro-level.15 There also exists a literature on transnational corporations from developing countries.16 It would mean too much of a digression to enter into a discussion here. Yet, it is clear that outward foreign investment by Asia, which was concentrated in six countries, reflected their success in industrialization.

In contrast with international investment, however, Asia’s engagement with the world economy, through international finance, did more harm than good and, on balance, its consequences for development were negative. Capital account liberalization meant an integration into international financial markets that was premature. Governments were tempted by the prospects of capital inflows in the form of portfolio investment, which could finance current account deficits and help accumulate foreign exchange reserves, or short-term and medium-term (p.212) borrowing abroad by domestic firms, which could finance investment at low interest rates. But the fact that such capital flows could be withdrawn on demand, making them footloose and volatile, was just ignored, while the underlying macroeconomic dilemmas fraught with risk were simply not recognized. An economy needs a high interest rate with a strong exchange rate to sustain portfolio investment in terms of profitability and confidence. This erodes the competitiveness of exports over time and enlarges the trade deficit. Larger trade deficits and current account deficits require larger portfolio investment inflows, which beyond a point undermine confidence and create adverse expectations even if the government keeps the exchange rate pegged. But when a stifling of exports does ultimately force an exchange rate depreciation, confidence may simply collapse and lead to capital flight. This can precipitate a crisis leading to a run on domestic currencies.

The frequency and intensity of such crises in countries that are integrated into international financial markets has increased with the passage of time.17 The Asian financial crisis in 1997–1998 had nasty consequences that imposed huge social costs on economies and people in East and Southeast Asian countries.18 Its implications persisted long after the crisis. Capital account liberalization reduced degrees of freedom in the use of macroeconomic policies, which could not be deployed to maintain levels of output and employment. Expansionary fiscal and monetary policies, large government deficits to stimulate domestic demand, or low interest rates to stimulate investment, could no longer be used because of an overwhelming fear that such measures could lead to speculative capital flight and a run on the national currency. Thus, there were longer-term consequences too, as growth slowed down and investment levels slumped. In fact, Indonesia, Malaysia, Philippines, Thailand, success stories in Asian development until then, had not quite recovered even a decade later; to some extent, even South Korea, Taiwan, and Singapore lost their earlier momentum.19

3. Economic implications for the world

Asian development over the past fifty years is likely to have significant implications for the world in many spheres. The following discussion simply seeks to focus on the possible economic implications of rapid growth in Asia, if it is sustained, which is bound to exercise considerable influence—positive or negative—on future prospects for the world economy, industrialized countries, and developing countries.

Growth in lead economies drives growth elsewhere in the world by providing markets for exports, resources of investment, finances for development, and technologies for productivity. Britain in the nineteenth century and the United States in the twentieth century are classic examples of these transmission (p.213) mechanisms that worked as engines of growth for the world economy. And, despite its diminished dominance, the United States continues to perform that role.20

It is simply not possible, at least not yet, to think of Asia as an engine of growth in the four dimensions mentioned above, except perhaps as a market for exports. Its economic size is not as large as its population suggests, since income levels are relatively low. The Asian giants—China and India—do have a potential. However, China cannot stimulate growth elsewhere even as a market for exports because of its big current account surplus and massive trade surplus, which have diminished now but are still in surplus. India cannot do so, despite it substantial current account deficit and large trade deficit, because its share of world GDP is much smaller than that of China.21 For this reason, contrary to the belief of some who propagated the decoupling hypothesis, Asia could not drive world economic recovery in the aftermath of the global financial crisis despite the resilience of its larger economies. In fact, South Korea, Taiwan, Malaysia, Thailand, and Singapore witnessed a sharp slowdown in growth during the Great Recession in industrialized countries. Even so, in future, implications for the world economy could be positive if, as the old engine of growth slows down, Asia emerges as a supporting driver of growth. China, which supports but does not yet lead growth in the world economy,22 obviously has the potential to stimulate growth.

The impact of rapid growth in Asia on the industrialized countries could be either positive or negative. The focus is often on the negative. But there is also the positive.

There are three reasons why the impact may be negative. First, rapid economic growth in Asia may worsen the terms of trade for industrialized countries. The burgeoning demand in China and India could drive up the prices of primary commodities in the world market. At the same time, rising wages in Asia could drive up prices of labour-intensive manufactured goods in the world market. Both could turn the terms of trade against industrialized countries. However, the consequences would be easy to absorb since the process would be spread over a long period of time.23 Second, for the industrialized countries, Asian countries could emerge as potential locations to compete for investment. This may happen if firms from the industrialized countries, whether the United States or Europe, relocate production in Asia. But this is not likely to happen on a significant scale, for such investment is not a zero-sum game in an expanding world economy and technological change might even reverse the process. Third, the economic rise of Asia may lead to a downward pressure on employment levels and real wages in the industrialized countries. It needs to be said that this concern is somewhat exaggerated. It is important to recognize that the stagnation in real wages and the high levels of unemployment in the industrialized countries are attributable to the nature of technical progress, which has replaced several unskilled workers with a few skilled workers, the reduced bargaining power of workers (and trade unions) because of labour market deregulation, and the impact of macroeconomic policies (p.214) which have sought to maintain price stability at the expense of full employment. The source of these problems lies within the industrialized countries and not in their trade with developing countries.24 Moreover, in the long run, productivity increase in Asia would be followed, after a time, by a commensurate increase in real wages,25 as it has in many of these countries.

It is just as important to recognize that rapid economic growth in Asia may have a positive impact on the industrialized countries.26 First, starting from low levels of income per capita and high income elasticities of demand, higher incomes associated with rapid growth would create expanding markets for exports from industrialized countries. Second, Asian supplies of cheap manufactured goods could help reduce inflationary pressures in industrialized countries, thereby enabling them to maintain higher levels of output and employment than would otherwise be possible. Third, Asia could be a source of new technologies that could help extend production possibility frontiers and consumer possibility frontiers in the industrialized economies. In fact, this is already happening in mobile phones, solar panels, high-speed trains, and possibly in artificial intelligence and nano-technology.

Rapid economic growth in Asia could have a positive impact on developing countries elsewhere if it improves their terms of trade, provides appropriate technologies, and creates new sources of finance for development, whether investment or aid.

It is clear that, for some time to come, the positive impact on developing countries would be transmitted through an improvement in their terms of trade.27 Rapid economic growth in China and India, is bound to boost the demand for primary commodities exported by developing countries. The reasons are simple enough. Both China and India have large populations. Further, in both countries, levels of consumption per capita in most primary commodities are low, while income elasticities of demand for most primary commodities are high. The commodities boom might have come to an end, for now, but this underlying factor remains. In the long run, such burgeoning demand will almost certainly raise prices of primary commodities in world markets and thereby improve the terms of trade for developing countries.

The positive impact of Asia on developing countries through the other potential channels of transmission is not as clear. In principle, it is possible that Asia would develop technologies that are more appropriate for the factor endowments and the economic needs of developing countries. But it is too early to come to a judgement on this matter. Similarly, some Asian countries—China, India, and South Korea—are already sources of finance for development. Their foreign aid programmes, particularly those of China and India in Africa, are significant but not without their problems.28 Their contribution in terms of foreign direct investment in developing countries was, to begin with, limited mostly to strategic sourcing of oil and minerals, especially for China, but this is not so for South Korea and India.29

(p.215) The emergence of Asia in the world economy could also have a negative impact on developing countries if it provides them with competition in markets for exports or as destinations for investment. At this juncture, China is clearly the largest supplier of labour-intensive manufactured goods in the world market. Other Asian economies also sell such manufactures, even if they are not as large as China. There can be little doubt that manufactured exports from Asia span almost the entire range, including resource-based manufactures, in which other developing countries could have a potential comparative advantage. Hence, it is plausible to argue, though impossible to prove that, on balance, Asia could possibly have a negative impact on manufactured exports from other developing countries, particularly in Africa, which have to compete with them for export markets in industrialized countries.30 This can change if and when China, followed by India, Thailand, Indonesia, and Vietnam vacate their space in the international trade matrix, in much the same way as other latecomers to industrialization in Asia—South Korea, Taiwan, and Singapore—vacated their space in the market for simple labour-intensive manufactures for countries that followed in their footsteps. It is not likely, at least in the medium term, because these countries have large reservoirs of surplus labour at relatively low wages not only in the rural hinterlands but also in the urban informal sectors that might continue for some time to come.31 Of course, this is no more than a plausible hypothesis about possible future developments, which cannot be tested. Given that Asian countries are now among the most attractive destinations for transnational firms seeking to locate production in the developing world, it is once again plausible to suggest, though impossible to prove, that foreign direct investment in these economies might be at the expense of developing countries elsewhere.

The less discernible but more significant negative impact of Asian development on developing countries lies in barriers to change in the traditional specialization in production reflected in the existing patterns of trade between industrializing Asia and the rest of the developing world that are dominated by an exchange of manufactured goods for primary commodities. This is, in fact, characteristic of China’s pattern of trade with countries in Africa and Latin America, which are predominantly sources of primary commodities, or natural resources, and markets for manufactured goods, for China. Such traditional patterns of specialization might even have been a source of deindustrialization in Africa and Latin America.32 Indeed, this could perpetuate the dependence of some African and Latin American countries on exports of primary commodities without creating possibilities of increasing value added before export or entering into manufacturing activities characterized by economies of scale. Such path-dependent specialization can only curb the possibilities of structural transformation.33 Asia can support industrialization in developing countries only if there is a successful transition from a complementary to a competitive (p.216) pattern of trade, so that inter-sectoral trade is gradually replaced by intra-sectoral or intra-industry trade.

4. The global context

It is necessary to recognize that the importance of Asia in the world would be shaped not only in the sphere of economics but also in the realm of politics. Its emerging significance in the world economy is attributable in part to its share in world population and world income and in part to its engagement with the world economy through international trade, international investment, international finance, and international migration.34 Even so, in the economic sphere, Asia’s potential importance in the future far exceeds its actual importance at present. In the realm of politics, however, Asia’s importance is more discernible at the present juncture, which is attributable in part to its size and in part to its rise.

The beginnings of a shift in the economic and political balance of power in the world are discernible. This is partly a consequence of the increasing significance of developing countries in the world economy, during the last quarter of the twentieth century, driven largely by the rise of Asia (Nayyar, 2013). The process gathered momentum in the early 1990s and reached a critical threshold in the early 2000s. And rapid economic growth in Asia continued to outpace that in industrialized countries. This might not have been enough for cognition of a changing reality. It was the conjuncture that made an enormous difference. The financial crisis that surfaced in the United States in late 2008, and the Great Recession that followed in its aftermath, was the deepest crisis in capitalism since the Great Depression. This eroded the triumphalism of capitalism that followed the collapse of communism in 1991, and reinforced the shift in the balance of power somewhat more towards the developing world.

The international economic and political architecture for the world was created seventy-five years ago at the end of the Second World War by the victors. It was led by the United States, with support from Britain. The UN was born in 1945. The IMF and the World Bank were established in 1944 by the West. The GATT (the General Agreement on Tariffs and Trade)—a treaty among countries that were contracting parties, rather than an institution—was created in 1948, after the US Congress did not ratify the Havana Charter that had proposed an International Trade Organization with a comprehensive mandate. At the time, most Asian countries were European colonies. Japan was under US occupation forces. Asia, the poorest yet most populous continent in the world, had no voice, let alone influence, in shaping the international institutions and multilateral rules that were created for global governance.35

(p.217) It is no surprise that the system created then was born with a democratic deficit. In terms of representation, the principle of one-country-one-vote in the UN and the GATT was not the same as the principle of one-person-one-vote in a political democracy, but it was more representative than the principle of one-dollar-one-vote in the IMF and the World Bank. In terms of decision-making, the system was even less democratic. Where some countries had more votes than others, while some were not even represented, the system was obviously undemocratic. In a world of unequal partners, however, even one-country-one-vote cannot ensure a democratic mode of decisions. Much depends on how decisions are made. The right of veto in the UN Security Council is explicitly undemocratic. But decision-making by consensus, since voting is not the norm, as in the GATT, now the WTO, or the UN General Assembly, can also be undemocratic, if there is bilateral arm-twisting or if a consensus is hammered out among a small sub-set of powerful players, while most countries, often silent spectators, are in the end a part of the apparent consensus.36

The world has changed beyond recognition over seventy-five years. But these institutions are essentially the same apart from minor modifications or accommodations. In the UN, China alone is a permanent member of the Security Council with a right to veto. And it is also a member of the P-5. There is no such representation for any other country from the developing world, whether Asia, Africa, or Latin America, or even industrialized countries such as Japan and Germany. An expansion in the permanent membership of the UN Security Council, with or without a veto, is imperative. In the World Bank and the IMF, apart from Japan, only India and China from Asia are permanent members of their Executive Boards. The industrialized countries may be the principal shareholders but the developing countries are the principal stakeholders, interest payments from whom provide much of the income of the Bretton Woods twins. Of course, Europe was a stakeholder until around 1960, and became a stakeholder once again after the global financial crisis in 2008. The WTO, established in 1995, is better in terms of representation, but remains undemocratic in terms of decision-making.

Asia is home to almost 60 per cent of the people in the world and accounts for 30 per cent of world GDP. Of the 193 member countries in the UN, and 164 member countries in the WTO, excluding Japan, as many as thirty-six are from developing Asia, in addition to eight transition economies from Central Asia and West Asia that are also member countries. In the IMF and World Bank, developing countries from Asia have 21.6 per cent and 21.4 per cent, respectively, of the total voting rights. Of this, just four countries—China, India, South Korea, and Indonesia accounted for 10 per cent of the voting rights in the World Bank and 11.4 per cent of the voting rights in the IMF.37 Yet, Asia’s voice and influence in these international institutions is disproportionately small compared with its (p.218) present economic or political significance in the world. This inequity is embedded in history, but the time has come to reform existing institutions so as to reduce their democratic deficits and make them more representative of the present rather than the past world.

But that is not all. The existing institutions cannot suffice for global governance in this changed world. There are emerging needs like co-ordinating global macroeconomic management, regulating international financial markets, governing transnational corporations, and creating a framework for cross-border movements of people. In addition, it has become essential to promote ‘global public goods’ such as a sustainable environment, and to control ‘global public bads’ such as international crime or trade in drugs, arms, people, or organs, and international tax evasion. The necessary institutions, rules, or practices that are missing will need to be put in place sooner rather than later. Asian countries will have to be proactive, and not just reactive, in international negotiations to reform existing institutions and create missing institutions in the global context.

The economic rise of Asia, and the associated increase in its political significance, suggest that its quest for its place in the world is now more plausible than it would have been even twenty-five years ago. However, it is by no means either automatic or assured. It would require collective action because a large group of countries with mutual interests is much more likely to be heard in terms of voice, and to be effective in terms of influence, than single countries by themselves. There will always be some conflict of interest, particularly in economic spheres, among developing Asian countries, but there will also be areas where it should be possible to find a common cause and accept trade-offs. In this context, it needs to be said that intra-regional economic co-operation already in place, as in ASEAN, or in ASEAN partnerships with China, India, and South Korea in the form of free trade agreements, or in bilateral trade agreements, are useful stepping stones. So is inter-continental co-operation among developing countries and transition economies. For example, institutions such as the New Development Bank, established by the BRICS, which are a source of potential competition for multilateral financial institutions, might force them to be less coercive towards smaller or poorer countries in terms of conditionality imposed, but cannot be a substitute for reforming existing institutions. Similarly, arrangements for regional co-operation in Asia that create practices, frameworks, or rules in domains where there are missing institutions could be valuable building blocks, but these cannot be a substitute for international collective action.

On the whole, it would seem that Asia has a considerable potential for articulating a collective voice in the world of multilateralism. Co-ordination and co-operation among Asian countries carries significant possibilities for exercising influence on multilateral institutions, which could reshape rules and create policy (p.219) space for countries that are latecomers to development, and help create missing institutions. Such co-ordination and co-operation, which is in the realm of the possible, has not surfaced. There could be two reasons for the minimal co-ordination and co-operation so far. For one, in the early stages of change, these countries might not have recognized their potential for exercising collective influence. For another, their relationship with each other may be characterized more by rivalry, economic or political, and less by unity. There is a visible rivalry between the Asian giants, China, an aspiring superpower, and India, a large developing country. In addition, there are serious concerns among Asian countries about the phenomenal rise and growing power of an overwhelming China. It is obviously difficult to predict how reality might unfold in times to come. Even so, it is important to recognize that once large Asian countries become major players, which China already is, and India could join the league in times to come, there is a clear and present danger that they might opt for a seat at the high-table with industrialized countries, for the pursuit of national interest rather than the spirit of solidarity among developing countries or the logic of collective action. The way forward might be an Asian Union, a political formation that comes together for common political purpose in the global context, but does not engage with issues that could lead to a conflict of economic interests between countries. Of course, such a separation is easier said than done.

5. A changing world

As the second decade of the twenty-first century draws to a close, it is an awkward if not difficult economic and political conjuncture for the world, which makes the future uncertain. It provides a sharp contrast with the preceding twenty-five years, when the economic transformation of Asia gathered momentum. The world economy in that era of markets and globalization, which was conducive to, and supportive of development in Asia, was very different from what it seems now. And it is plausible to suggest that the unfolding realities discernible in the world are a consequence of seeds sown in the preceding era, which might be coming to an end.

Among countries, the benefits of prosperity created by markets and globalization accrued primarily to a small number of countries in the industrialized and developing worlds. In the former, it was the United States and a few countries in Western Europe, while Southern Europe and the transition economies in Eastern Europe lagged behind. In the latter, it was twelve from the Asian-14 that created the initial conditions, combined with institutions and policies. Even among this small group, some did better than others, while China was the star performer. Latin America stayed roughly where it was, but much of Africa experienced some regress. In countries that were winners, most of the benefits accrued to small (p.220) proportions of their populations. Hence this era witnessed a marked increase in economic inequality between people within countries, and between the rich and the poor in the world. There was an alarming increase in the share of the super-rich (top 1 per cent) and the ultra-rich (top 0.1 per cent) in national income everywhere, as income distribution worsened across the world. It is no surprise that inequality in wealth was even more pronounced as the distribution of assets became far more unequal.38 Such mounting inequalities, which are ethically unacceptable and politically unsustainable, are responsible for widespread discontents among people across the world.

The strains are beginning to surface as the world is confronted with increasing economic problems and political challenges. These have begun to disrupt the smooth sail of globalization. Economic growth has slowed down almost everywhere. Some exceptions apart, recovery from the global financial crisis and the Great Recession is slow, uneven and fragile. Unemployment levels in most industrialized countries are high, while there has been no significant increase in real wages for a large proportion of those employed. In many developing countries, poverty persists despite the reduction in absolute poverty, while economic inequality has been rising.

There is a political backlash. Economies might have become global. But politics remains national or local. Citizens want governments to be responsive to their concerns, instead of worrying about international financial markets or global economic obligations. And, in democracies, governments are accountable to their people. The most common manifestation of this political backlash is resurgent nationalisms riding on populist or chauvinist sentiments. Political processes and election outcomes across the world—United States, Europe, Latin America, and Asia—reflect this phenomenon. In industrialized countries, there is a growing disillusionment with mainstream political parties, challenged by populist anti-establishment movements, nationalist-populist political parties, or far-right xenophobic populist leaders, who exploit fears about openness in immigration and trade as a threat to jobs. The story is similar in developing countries as nationalist-populist political parties and leaders challenge or oust incumbent governments, exploiting religious beliefs, ethnic divides, or rampant corruption. Such political mobilization of economic discontents unleashes chauvinisms and nationalisms that seek to exclude the perceived other.

There is an irony in this situation. The political backlash in industrialized countries, in the perceptions of people excluded from prosperity, might be partly attributable to the rise of Asia in the world economy. It could be well among the factors underlying the mounting pressures for protectionism in trade and restrictions on immigration. The political backlash in Asia might also be partly attributable to the rising economic inequalities within and between countries. The future prospects of Asia in the world economy will be shaped, inter alia, by how this politics of discontents unfolds.



(1.) For a lucid analysis of the European intrusion into Asia during this era, see Findlay (2019).

(2.) This era of globalization created winners and losers, unleashing conflicts and rivalries, which brought it to an end in 1914. See Hobsbawm (1987), Rodrik (1997), Williamson (2002), Nayyar (2006 and 2013).

(3.) On the intersections between imperialism and nationalism, and the dialectical relationship with decolonization, with a discussion on how it differed across regions and countries, see Duara (2004).

(4.) This hypothesis is developed, at some length, in a perceptive analysis of the Cold War as a historical period in Asia, and elsewhere, by Duara (2011).

(5.) Estimates of the number of people who were killed in this purge range from 0.5 to 2 million.

(6.) This argument, that the globalization of Islam has emerged a counter-hegemonic force outside the Western world, is developed by Duara (2011).

(7.) In addition, four other Asian countries—Thailand (12), Turkey (14), Indonesia (16) and Iran (18)—were among the top twenty producers of motor vehicles in the world.

(8.) For a discussion on manufacturing in Asia as a part of global production networks, see Baldwin and Forslid (2014).

(9.) See UNCTAD Foreign Direct Investment online database.

(10.) Calculated from UNCTAD Foreign Direct Investment online database US dollar values of stocks and flows.

(11.) See UNCTAD (2018, annex tables).

(p.261) (12.) These thirteen firms, with their ranks, and industry where necessary, in brackets, were: China Shipping Corporation (COSCO, 2), China National Offshore Oil Corporation (CNOOC, 4), China MinMetals Corporation (CMC, 17), and China State Construction and Engineering Company (CSCES, 20) from China; Tata Motors (12) and Oil and Natural Gas Corporation (ONGC, 14) from India; Samsung Electronics (4) Hanwha Corporation (wholesale trade, 13) from South Korea; Broadcom Ltd (electronic components, 6) and Singapore Telecommunications (15) from Singapore; Hon Hai Precision Industries (electronic components, 3) from Taiwan; Petronas (oil, 8) from Malaysia; and C.K. Hutchison Holdings (retail trade, 1) from Hong Kong. See UNCTAD (2018, annex tables).

(13.) See UNCTAD (2018, annex tables). The four in the top fifty (economy and rank in brackets) were Hutchison (Hong Kong, 21), Hon Hai (Taiwan, 31), Samsung (South Korea, 39) and COSCO (China, 47).

(14.) For an analysis of different underlying factors, with examples, see Nayyar (2008a).

(15.) For a detailed discussion on possible economic implications, see Nayyar (2008a).

(16.) See, for example, Lecraw (1977), Lall (1983), Wells (1983), Dunning et al. (1998), Mathews (2006), UNCTAD (2006), Kumar (2007), and Nayyar (2008a).

(17.) For a macroeconomic analysis, see Nayyar (2003) and Ocampo and Stiglitz (2008).

(18.) For a discussion on the Asian financial crisis, see Palma (1998) Chang (2000), Jomo (2001), Chang et al. (2001), and Ocampo and Stiglitz (2008).

(19.) This slowdown is discussed at some length in Chapters 3 and 5. See also Chang and Zach (2019).

(20.) For a more detailed discussion, see Nayyar (2010 and 2011a).

(21.) This argument is developed elsewhere by the author (Nayyar, 2011a).

(22.) See United Nations (2006).

(23.) For a discussion, see Rowthorn (2008) and (Nayyar, 2010).

(24.) For an elaboration of this argument, see Nayyar (1996 and 2014). Trade-effects on employment are, however, also beginning to surface. In an analysis of US labour markets during 1980–2007, Autor et al. (2015) attempt to untangle the effects of import competition from China, and of technology, on employment. They find that the impact of trade on employment rises in the 2000s as imports accelerate, while the effect of technology appears to shift from automation of production activities in manufacturing towards computerization of information-processing tasks in manufacturing.

(25.) This proposition is validated by economic history (Krugman, 1994).

(26.) See Singh (2007), Rowthorn (2008), and Nayyar (2008b).

(27.) See Kaplinsky (2006), Singh (2007), Rowthorn (2008), and (Nayyar, 2008b).

(28.) For an evaluation, see Toye (2008), Cheru and Obi (2010), and Nayyar (2012a). In fact, Chinese over-lending is becoming a problem for some countries in Asia, Africa, and Latin America (Venezuela and, to some extent, Ecuador). Difficulties have also begun to surface with China’s Belt-and-Road Initiative in many host countries.

(29.) The examples from South Korea are Hyundai and Kia in automobiles, with Samsung and LG in electronics, and Posco in steel. Indian firms in developing countries are in pharmaceuticals, steel, information technology, mobile phone networks, and financial services.

(p.262) (30.) Kaplinsky and Morris (2008) analyse the negative implications of Asian manufactured exports on the prospects of industrialization in Sub-Saharan Africa. See also Nayyar (2010).

(31.) The increasing use of robots in China could also adversely affect labour-intensive manufactured exports from Africa. See Hallward-Driemeier and Nayyar (2017).

(32.) See Kaplinsky and Morris (2008), Jenkins et al. (2008) and Nayyar (2012a).

(33.) For a more detailed discussion, see Nayyar (2010 and 2012a).

(34.) The important issue of international migration is not touched upon in this chapter, nor is it addressed in this book, because of the space constraint. But it has been analysed by the author elsewhere in earlier work. See Nayyar (2002b, 2008c, and 2013).

(35.) There is an extensive literature on the subject of global governance. See, for example, United Nations (1995), Nayyar (2002), Nayyar (2002a), Stiglitz (2002), Held and McGrew (2002), ILO (2004), and Stiglitz (2006). On reform of the international trading system, see Nayyar (2002a) and Stiglitz and Charlton (2005). On reform of the international monetary system, see Ocampo (2017).

(36.) This range of issues is analysed, at some length, in Nayyar (2002a).

(37.) The figures cited in this paragraph on the number, or share, of developing countries from Asia (which does include the Pacific Islands), are obtained from the UN, WTO, IMF, and World Bank websites.

(38.) On the share of the top 1 and 0.1 per cent in national income, see Atkinson and Piketty (2010). On rising economic inequality, see Atkinson (2015) and Bourguignon (2015). On wealth inequality, see Piketty (2014). On social and political consequences of inequality, see Stiglitz (2012).