Economic Prospects in China and ASEAN4: 2016-2030
September 2016

Economic Prospects in China and ASEAN4―China’s growth continues to slow, Philippines and Indonesia hold steady
Asian Economic Forecasting Team of JCERPoints With labor, capital investment, and productivity growth decelerating, the growth rate in China
will decline to a level below 3% in 2030. Income per capita will barely miss the level for ahigh-income country in 2030. There are huge issues around reducing excess capacity andexcess debt.
 The growth rate in Malaysia will decline due to a slowdown in the labor force, with average
growth of around 3.5% for the period 2026-30. Although the country will enter the ranks ofhigh-income nations in the late 2020s, reforms such as upgrading the industrial structure arevital for further growth.
 In the context of a rapidly aging society and a low birthrate, the average Thai growth rate forthe period 2026-30 will be the lowest among the ASEAN4 at 2.6%. Income per capita isunder pressure from both the Philippines and Indonesia. Labor costs are rising andmanufacturing industry competitiveness is declining, but tourism and other service exports
are expanding.
 With an average growth rate at 5.3% for the period 2026-30, the Philippines will have thehighest growth among the ASEAN4. The expanding labor force and capital stock arecontributors. Business Process Outsourcing (BPO) will heighten its presence as the engine
driving the economy.
 Due to labor force and capital stock growth, Indonesia is expected to see average growth
rates of around 5% during the 2020s. Whether or not the country can revitalize its declining
manufacturing industry is an important point. If the reforms are delayed, there is potential forthe growth rate to take a downward turn.



Ryuichi Ushiyama, Kengo Tahara, Masashi Uehara, Tsuyoshi Minami, Hiroyuki Motegi and Yukiko Nakajima-1-Economic Prospects in China and ASEAN4: 2016-2030
September 2016

1.

China



China’s growth rate below 3% by 2030 as growth in the labor force, capital stock, andproductivity slows

Labor productivity slowing to “Asian speeds” as efforts to adjust overinvestment and excess
debt continue

By 2030, income per capita will still be a little below levels in high-income countries
Figure 1-1: Economic prospect

Figure 1-2: Contributions to potential growth

Forecast
C.Y. （5-year average）
06-10 11-15 16-20

Real GDP(YoY%)
GNI per capita(USD1,000/capita)
Labor force(YoY%)
Consumer price index(YoY%)
Current accountbalance (% of GDP)
Exchange rate to thedollar (yuan/USD)

12
21-25

26-30

(annualized growth, %)Laborforce
Capital stock
TFP
Potential growth

10

11.3

7.8

5.4

3.8

3.1

3.2

6.8

9.0

11.5

15.0

0.4

0.4

0.0

-0.2

-0.3

4

2.9

2.9

2.1

1.9

1.9

2

7.2

2.3

2.6

2.6

1.4

0

7.23

6.27

6.91

6.85

6.68

-2

8

Forecast

6

2001-05 06-10

Source: Haver Analytics

11-15

16-20

21-25

Source: JCER estimate

26-30(C.Y.)The outlook for the Chinese economy is that the growth rate will drop below 3% in 2030 as
growth in the labor force, investment, and productivity alike slows down through 2030 (Fig. 1-1,
Fig. 1-2). Led by investment, China has achieved annual growth rates of around 10% since 2000,
but adjusting the resulting excess capacity and debt will lead to a pronounced deceleration of
investment in particular (Fig. 1-3).
Figure 1-3:

Contributions to real GDP growth

Figure 1-4:

Scale of GDP in dollars(comparison with U.S., Euro area, Japan)
16
14
12
10
8

annualized
growth, %Net exports
Gross capital formation
Government consumption
Private consumption
Real GDP
Forecast

35
30
25

USD Trillion
U.S.
Forecast
China

20

6

15

4

Euro area

10

2

Japan

5

0

0

-2
01-05 06-10 11-15 16-20 21-25 26-30

2000 2005 2010 2015 2020 2025 2030

Sources: Haver Analytics; CEIC; JCER

Sources: IM F; Haver Analytics; JCER

-2-

Economic Prospects in China and ASEAN4: 2016-2030
September 2016

The GNI per capita is expected to fall slightly below the threshold of high-income countries by2030. In terms of nominal GDP, China overtook Japan in 2009 to rank second in the world and is
expected to step up its presence by overtaking the euro zone in 2020, but the gap with the UnitedStates, the world’s largest economy, will remain at nearly 30% even in 2030 (Fig. 1-4).
Falling birthrate and aging population
Partly due to the impact of the one-child policy of the past, the Chinese population is aging
rapidly while the birth rate is decreasing. The outlook is for the population to decline as of themid-2020s, and the labor force is also expected to start to decrease around 2018 (Fig. 1-5). The
one-child policy has been relaxed in recent years and as of 2016 couples are allowed to have asecond child. However, it has been pointed out that the decline in the birth rate is not only afunction of policy, there are also major socio-economic factors at work1, so the expectation is thatthe policy changes will have limited effect on boosting the number of births.
The labor force participation rate for the elderly is moderate, but the assumption is that it willrise (Fig. 1-6). At present, the retirement age is low compared to advanced countries: sixty for men,fifty-five for women in white-collar positions, and fifty for other women. A gradual rise in theretirement age is under consideration and an announcement of proposed revisions is expected in2017. In the Green Book of Population and Labor published in December 2015, the Institute ofPopulation and Labor Economics at the Chinese Academy of Social Sciences outlined plans toraise the retirement age to sixty-five for both women and men by 2045 (Fig. 1-7).
Fig. 1-5: Change in population and labor force
1.2

YoY, %
Labor force

1.0
0.8

Population
Forecast

0.6
0.4
0.2
0.0
-0.2

100
90
80
70
60
50
40
30
20
10
0

Fig. 1-6: Male/female labor participation%

Male (2015)
Female (2015)

Male (2030)
Female (2030)

15 20 25 30 35 40 45 50 55 60 65｜ ｜ ｜ ｜ ｜ ｜ ｜ ｜ ｜ ｜ ＋
19 24 29 34 39 44 49 54 59 64(Age)
Source: ILO-0.4
2000 2005 2010 2015 2020 2025 2030
Sources: United Nations; ILO

1

For example, Cai, Yong (2010) “China’s below-replacement fertility: government policy or socioeconomic
development?” Population and Development Review, 36 (3), pp. 419-440-3-

Economic Prospects in China and ASEAN4: 2016-2030
September 2016

Figure 1-7: Proposed rise in retirement age(IPLE-CASS)
70

(Age)

2045: Male/female
retirement age is 65

Figure 1-8:

80

Population aged 65 and over
Population aged under 15
Dependency ratio
Forecast

70

65

60

60

Dependency ratio

50
40

55

30

2017: Female retirement age
consolidated at 55

50

20
10

Male
Female (white-collar)
Female (other)

45
40

0
1980

2015 2020 2025 2030 2035 2040 2045
Source: Prepared based on press materials etc.

1990

2000

2010

2020

2030

Note: Dependency ratio = (Population aged under 15+ 65 and over)／(Population aged 15-64)×100
Source: UN, World Population Prospects: Rev.2015

Despite ongoing policy changes designed to curb the decline in labor force population, it is notpossible to offset the aging factor. From an annual increase of 0.4% in the early 2010s, the labor
force is expected to decrease by 0.3% in the late 2020s and to slow by approximately 0.7
percentage points over a period of fifteen years.
Until around 2010, the demographic bonus supported growth amid a decline in the ratio of thedependent population of children (under 15) and the elderly (over 65) to the working-age
population (aged 15 to 64), but from now on the ratio of the dependent population is expected toincrease taking the country into a period of demographic onus (Fig. 1-8). At the same time as thelabor force supply comes under pressure, the social security burden will also grow heavier.
Excess capacity and excess debt weighing on growth
After the global financial crisis in 2008, the Chinese government introduced a four trillion yuan
stimulus package to accelerate investment in infrastructure and real estate. Although this measure
supported the economic climate in China and around the world, corporations are now dealing withexcess production capacity and debt as a result of continuing investments without some level ofregard for profitability over several years. The capacity ratio in the manufacturing industry has
declined by more than ten percentage points over the past five years (Fig. 1-9). By the end of 2015,
corporate debt had ballooned to approximately 170% of GDP (Fig. 1-10). This level surpasses thepeak in Japan (approximately 150% of GDP at the end of 1994) after the collapse of the bubble
economy.
The government has announced measures to cut production capacity including numerical targets
for the coal and steel industries where the excesses are particularly large. In the first half of 2016,-4-

Economic Prospects in China and ASEAN4: 2016-2030
September 2016it was announced that efforts to reduce excess production capacity were well underway, but there
are also signs that rationalization is not straightforward such as the sudden recovery in production
output in the steel industry when market conditions improved in the spring of 2016. The outlook is
for a prolonged adjustment phase and for investment growth to remain at an average of 2%
through to 2030.
Figure 1-9: Manufacturing industry
capacity utilization ratio
85%

Figure 1-10: Corporate debt andnon-performing loans (NPL) ratio
180
160

80

140

75
70
Capacity utilization ratio
65% of GDP
Corporate debt

2008

2010

2012

1.9

120

1.7

100

1.5

80

1.3

60

1.1

40

0.9

0

2006

2.3
2.1

NPL ratio (rhs)

20

60

%

20142015(Quarter)

0.7

0.5
09:1 10:1 11:1 12:1 13:1 14:1 15:1 16:1
16:2
Sources: China Banking Regulatory Commission;
Haver Analytics; BIS

Source: China Enterprise Survey System (CESS)

Gradual rebalancing of the economy
The thirteenth five-year plan adopted by the National People’s Congress in March 2016 cites
five principles for development including innovation, coordination (harmonious interregional
development), green development (protecting the environment), openness, and inclusive
development (sharing outcomes). This suggests that the focus has shifted from the pace of growth
to the content of growth such as adding value and income distribution.
Looking at a breakdown of the demand-side, the Chinese government has since the early 2000s
signaled a shift from the export and investment-led economy of the past to a domestic demand-led
economy. In the early 2010s, the ratio of investment to GDP rose, partly due the impact of theeconomic stimulus measures following the global financial crisis in 2008, but now a rebalancing
from investment to consumption is underway (Fig. 1-11). While investment decelerates,
consumers aspire to high quality and consumption is increasingly weighted toward services in stepwith the rise in household incomes.
By industry, the weight of the tertiary industry is increasing, accounting for more than 50% of
GDP in 2015 (Fig. 1-12). With demand shifting from investment to consumption, it is expectedthat in addition to the wholesale and retail industries, the relative importance of the service
industries including medical care and welfare, cultural pursuits and entertainment will rise further-5-

Economic Prospects in China and ASEAN4: 2016-2030
September 2016

in the future.
There has also been a rise in awareness of environmental pollution including air pollution due toPM2.5 fine particulate matter. As mentioned above, one of the five principles of the thirteenth
five-year plan is green development, which incorporates targets for improving air and water quality.
Similar to Japan since the 1970s, corporations are expected to spend more on measures to protect
the environment.
Figure 1-11: Consumption and investment
as share of GDP
70% of GDP

100
90
80
70
60
50
40
30
20
10
0

Forecast

60
50
40
30
20
Consumption expenditure
Gross capital formation

10
0
1990

2000

2010

2020

Figure 1-12:%

Tertiary
industry
SecondaryindustryPrimary
industry
1995

2030

Sources: Haver Analytics; JCER

Share of GDP by industry

2000

2005

2010

2015

Source: Haver Analytics

Progress of structural reforms key to productivity
Amid an inevitable slowdown in labor and capital input, the key to future growth is to what
extent it is possible to maintain a rise in productivity.
Aiming to add value to its industry, the Chinese government has announced one policy after
another including the Made in China 2025 initiative, which aims to upgrade the manufacturingindustry to a “manufacturing powerhouse,” and the Internet Plus initiative, which promotes theintegration of IT (information technology) in existing industry. There are in actual fact many
IT-related companies posting rapid growth.
But there is a lack of clarity around the timetable for upgrading industry under the current
system. The 2015 guidelines for deepening reform at state-owned enterprises present policies for
optimizing state-owned enterprise and accepting private-sector capital depending on the public
interest. However, up to this point in time, the trend for increasing the presence of state-owned
enterprises is more conspicuous. The government aims to integrate and consolidate over one
hundred state-owned enterprises affiliated with the State-owned Assets Supervision and
Administration Commission of the State Council (SASAC) into approximately forty companies by
2020. Large-scale mergers of state-owned corporations in transport infrastructure, resources,-6-

Economic Prospects in China and ASEAN4: 2016-2030
September 2016

maritime transportation, and other areas have already been announced.
There are concerns around the maintenance of the market monopoly of the state-owned
enterprises. Compared to private enterprise, state-owned enterprises tend to earn lower returns (Fig.
1-13) and the proportion running deficits is also high. The fear is that the benefits of productivity
improvement through market competition will not be sufficiently utilized.
The reform of the household registration system that restricts mobility is another factor that
influences productivity. Workers who come from rural areas to work in the cities cannot accesssocial security unless they have an urban residence permit (hukou), but the major cities, inparticular, still impose restrictions on moving the household registry. In 2014, 55% of the
population was permanently resident in cities, but the proportion of the population with urbanhousehold registrations remains only around 37% (Fig. 1-14). The expectation is that theregulations will be relaxed from the perspectives of justice and efficiency, but if so, one of theissues will be sources of funding for social security.
Based on this situation, the rate of growth for total factor productivity (TFP) will gradually slow
to less than 2% under the baseline scenario.
Figure 1-13: Return on asset of companies
in the industrial sector
10 %
9
8
7
6
5
4
3
2
1
0
2000 02

Figure 1-14:
70

Urban population ratio%
Target: 60%

60
50
40

45%

30

04

All enterprises

20State-owned enterprises

10

06

08

10

12

14 15

Ratio of urban residents
Ratio of residents with urban hukou

0
2000

2005

2010

2015

Sources: CEIC; The State Council

Source: CEIC

-7-

2020

Economic Prospects in China and ASEAN4: 2016-2030
September 2016

Pessimistic Scenario: Growth slows to the lower 2% level – Productivity slows to the samepace as Japan after the oil crisis
The baseline scenario outlined above assumes that productivity gains will gradually decline, but
if in addition to the reforms of the state-owned enterprises, the reforms of the social security
system including moving the household registry, and deregulation of private and foreign capitalstagnates, or corporate investment slumps by a credit crunch due to a worsening bad debt problem,
another likely scenario is that productivity will slow even further. In a pessimistic scenario where
TFP growth declines by another 0.5%, the rate of economic growth will slow to the 2% level by
2030 (Figs. 1-15, 1-16).
If we look at the relationship between past GNI per capita and growth rates for laborproductivity (TFP x capital equipment ratio) in seven high-income or upper middle-income
economies in Asia (Japan, Korea, Taiwan, Hong Kong, Singapore, Malaysia, Thailand), except
China, in 2015, growth is on average high despite some scatter in labor productivity gains at the
low-income stage, but as incomes rise there is a tendency for productivity gains to slow (Fig. 1-17).
Growth rates for labor productivity in the Asian economies presented in the diagram are highcompared to the world average, but even so the impressive growth recorded in China in the 1990s
and 2000s stands out in comparison. However, the outlook for the future is for productivity to slow
down due to the structural adjustments described above. In the baseline scenario, laborproductivity growth in China will slow to a pattern that conforms to past trends in the seven Asian
economies. In the pessimistic scenario, it is expected that income levels in China in the late 2020s
will be at the same level as Japan in the early 1980s and that labor productivity growth will decline
to the same level (under 3%) as Japan at the time. In addition, labor productivity growth in Japan
has slowed to around 1% since the collapse of the bubble economy in the early 1990s.
Fig. 1-15: Pessimistic scenario

Fig. 1-16: Contributions to potential growth

Forecast
C.Y. （5-year average）
06-10 11-15 16-20

Real GDP(YoY%)
GNI per capita(USD1,000/capita)
Labor force(YoY%)
Consumer price index(YoY%)
Current accountbalance (% of GDP)
Exchange rate to thedollar (yuan/USD)

12
21-25

26-30

annualized growth, %Laborforce
Capital stock
TFP
Potential growth

10

11.3

7.8

4.9

3.0

2.5

3.3

6.9

8.6

10.4

12.9

6

0.4

0.4

0.0

-0.2

-0.3

4

2.9

2.9

2.0

1.6

1.8

2

7.2

2.3

2.9

3.4

1.4

0

7.23

6.27

6.98

7.11

6.90

-2

8

Source: Haver Analytics

Forecast
Baseline
Pessimistic
scenario

2001-05 06-10

11-15

Source: JCER estimate

-8-

16-20

21-25

26-30

Economic Prospects in China and ASEAN4: 2016-2030
September 2016

Figure 1-17:

Income per capita and labor productivity rate of increase

Labor productivity growth (%)

12
China
(dotted line indicates forecasts for 2015-30)

10
8Baseline

6Regression line for 7 economies
excluding China:
y = -0.000056 x + 4.83

420

Pessimistic

-2
0

10000

Japan (1991-95)

20000

Japan (2011-15)

30000
40000
50000
60000
GDP per capita (USD, 2015 prices)

70000

80000

90000

Notes: Plots the average for every five years between 1950 and 2015 for eight upper middle-income andhigh-income economies in Asia as of 2015. GDP is obtained by converting the dollar volume based on
2011 PPP to 2015 prices.
Source: The Conference Board, Total Economy Database-9-

Economic Prospects in China and ASEAN4: 2016-2030
September 2016

2．Malaysia
Real GDP growth rate to average 3.5% between 2026 and 2030



Expected to join the ranks of high-income countries in 2025



Educational system reforms, industrial development based on private-sector initiatives key tosustained growth
Figure 2-1: Economic prospect

Figure 2-2: Contributions topotential growth

Forecast
C.Y. （5-year average）
06-10 11-15 16-20

Real GDP(YoY%)
GNI per capita(USD1,000/capita)
Labor force(YoY%)
Consumer price index(YoY%)
Current accountbalance (% of GDP)
Exchange rate to thedollar (MYR/USD)

7.0
21-25

26-30

(annualized growth, %)Laborforce
Capital stock
TFP
Potential growth

6.0

4.5

5.3

4.5

3.9

3.5

7.3

10.4

10.6

14.0

18.7

2.6

4.2

1.8

1.4

1.0

3.0

2.7

2.4

2.0

2.3

2.6

2.0

14.5

5.4

1.6

1.8

1.7

1.0

3.4

3.3

4.0

3.9

3.8

0.0

5.0

Forecast

4.0

2001-05 06-10

Source: Haver Analytics

11-15

16-20

21-25

Source: JCER estimate

26-30(C.Y.)

Growth in working-age population down to 1% between 2026 and 2030
The

deceleration

of

the

Malaysianeconomy is likely to strengthen throughFigure 2-3: Contributions to real GDP Growth2030. Real GDP growth rate will average 12(annualized growth, %)Net exports
Gross capital formation
Government consumption
Private consumption
Real GDP

3.5% between 2026 and 2030, which is a 10
decline compared to the 5.3% result for the8

period 2011 to 2015 (Fig. 2-1). In the same

6

period,consumption

4

contributions and gross capital formation2

are down at 1.9% (3.5% in 2011-15) and

00.8% (1.8% in 2011-15) respectively (-0.9%

-2

both

privateForecast(C.Y.)
9195

in 2011-15) (Fig. 2-3).
Looking at a breakdown of the potential

9600

0105

0610

1115

1620

2125

2630

Sources: Haver Analytics; CEIC; JCER

growth rate, labor force contributions, in particular, are decreasing (Fig. 2-2). The growth in labor
force is expected to decline from 4.2% in 2011-2015 to 1% in 2026-2030 (Fig. 2-4). Since nomajor growth in capital stock is expected as oil-related investment falters due to the drop in
resource prices, total factor productivity (TFP) will be key, but the contribution is likely to decline- 10 -

Economic Prospects in China and ASEAN4: 2016-2030
September 2016

with the rise in income levels. The Malaysian government has set a goal of joining the ranks ofhigh-income countries by 2020, but according to our forecasts, this is likely to be delayed until
20252.
The environment will be severe in the near future. According to our forecasts, GDP growth rateis expected to slow from 5% in 2015 to approximately 4% in 2016. The sluggish growth inconsumption and exports will have an effect. At 89%, the high level of household debt-to-GDP
ratio (2015) will hobble consumption. Compared to the other key ASEAN countries, Malaysia ishighly dependent on China for its exports, so the slowdown in the Chinese economy is anothernegative factor. In the period January to June 2016, year-on-year net profit at the state-owned
PETRONAS petroleum company fell by 84% due to the impact of the low price of crude oil. A
reduction in government tax revenue looks unavoidable due to the dependency on tax yields anddividends from PETRONAS and other resource companies for the majority of annual income.
The Malaysian government has long flagged improved productivity as an important issue andhas also indicated that the country wants to escape the “middle-income trap.” The Eleventh
Malaysia Plan (Fig. 2-5), the five-year plan covering the period 2016-20 that was announced in
May 2015, emphasizes entry into the ranks of high-income countries and promotes structuralreform including (1) an inclusive society, (2) improved wellbeing, (3) human capital development,(4) environmental measures, (5) strengthening infrastructure, and so on, by investing 20% of the2015 nominal GDP, or 260 billion ringgit, during the period. If the oil prices recover, growth rates
are likely to improve temporarily, but this is not to say that growth will strengthen in the medium
to long term.
Figure 2-4: Population prospects
40
35

Figure 2-5: The Eleventh Malaysia Plan
numerical targets (2016-20)(million people)

Real economic growth rate: Average 5-6%

Labor force
Population aged 65 and up
Total population

Real private consumption: Annual average 6.4%
Public investment (nominal): Expand by average of 131billion ringgit annually30

Private investment (nominal): Expand by average of 291billion ringgit
annually
Annual revenue: Expand by annual rate of 7.9%, reduce dependency on
petroleum-related income from 21.5% to 15.5%

25
20

Fiscal deficit: Reduce from 3.2% of GDP to 0.6%

15

Government debt: Reduce from 53.3% of GDP to 43.5%

10

Inflation rate: Low and stable. Annual average of 2.5-3%

5

Unemployment rate: 2.8%

0
2000
2010
Source: UN

2020

GNI per capita: 54,100 ringgit

2030 Increase average monthly household income from 6141 ringgit (2014) to(C.Y.)

15,400 ringgit
Note: Prepared from press materials, 1 ringgit=approx. 25 yen (September 16, 2016)2

Depreciation of the ringgit has had an impact since the end of 2014.

- 11 -

Economic Prospects in China and ASEAN4: 2016-2030
September 2016

Halting the decline in export competitivenessOne of the structural issues of the Malaysian economy is the decline in the competitiveness ofexports. According to the present forecast, it is assumed that the extent of the contribution ofexports of goods and services to the growth rate will decline from 3.2% in the period 2016-20 to2.4% in the period 2026-30. The context is sluggish growth in appliances and electronics.
Malaysia developed as an export hub for appliances and electronics in the 1980s based on
Prime Minister Mohamad Mahathir’s Look East Policy of learning from economic growth in Japanand Korea. But, the cost advantages have been eroded with the intensifying price war aroundsemiconductors, which account for the largest share of exports, and the rise in wage levels at homewhere the monthly salary per person in the manufacturing industry for the period April-June 2016
was 3058 ringgit, an increase of a little over one third compared to five years ago (2291 ringgit)3.
China, which is one of the main shipping destinations, has expanded their own production capacity,which has also had an impact.
In fact, since peaking in 2006, semiconductor
export value has made little progress and theratio of manufactured goods as a share of the

Figure 2-6:

Manufacturing investment by
type of industry

100%

Other

80%

Basic metals

60%

Chemicals

export of goods has declined from a peak of 80%
in 2000 to 67% in 2015 (World Bank survey).
The appliances and electronics sector, including
semiconductors,

accounted

for

12%

of

manufacturing industry investment in 2015, adrop of approximately 7% points compared to
two years previously (Fig. 2-6).

40%

Appliances andelectronics

20%

Petroleumrefinery andproducts

0%2005

The petroleum refinery and products sector

2010

Source: CEIC2015

(C.Y.)

has increasingly made its presence felt as a force for driving investment. Over the past several
years, the industry has accounted for a rising share of investment in the manufacturing industry,outperforming the appliances and electronics sector for the second year running in 2015 with aratio of 36.1%. However, the oil-related industries tend to be influenced by fluctuations in theprice of resources. It is essential for Malaysia to continue to withdraw from the resource-basedindustries and to develop new industries that are internationally competitive.
Some things have started to germinate. For example, ICT-BPO services are expanding in
Malaysia. The ICT-BPO industry develops software for financial and communication industries
and offers value-added services via call centers. Successfully developing this industry would boost
the potential growth rate for Malaysia, raising the possibility for the growth rate to be adjusted
upwards.
3

Based on Haver Analytics- 12 -

Economic Prospects in China and ASEAN4: 2016-2030
September 2016

Improving education standards
Since Malaysia aims to enter the ranks ofhigh-income countries, improving the level of humanresources is essential. Although the enrollment rate inhigher education (tertiary education, universities,

70
60

vocational colleges etc.) is 38.5% (2013) and rising, the50rate is below Thailand (51.4%) and both Indonesia and40

the Philippines are gaining on Malaysia (Fig. 2-7).

30

Higher education as a percentage of the overall
education budget is high at 34%, but this is not linked
to higher enrolment rates. In addition to enhancing
export competitiveness and upgrading the industry
structure, reforming the education system to augment

Figure 2-7: Higher education
enrollment rate in Asia Rate(%)

Indonesia
India
Japan
Malaysia
Philippines
Thailand20
1001970 1975 1980 1985 1990 1995 2000 2005 2010 2014
(C.Y.)
Note: Line breaks indicate missing values.
Source: World Bank

the supply of skilled workers is essential.
The outcome of the Bumiputera policy
Malaysia has continued the Bumiputera policy of preferential treatment for the majority Malay
since the 1970s. Under the policy, preferential treatment is implemented based on a system of
ethnic quotas in various fields including shares, employment, education, business licenses, land,
and financing. The policy has brought political and social stability by giving preference to the
Malays, who are economically disadvantaged compared to the minority Chinese and other ethnic
populations but it has also had adverse effects. For example, a World Bank study in 2011 sounded
the alarm bells saying that ethnic Chinese are continuing to leave Malaysia because they resent thelimitations placed on opportunities for education and employment in the country. This brain drain
phenomenon is a cause of the skilled worker shortage.
The Bumiputera policy is also involved in the problems around the government-linked
companies (GLC) that control the Malaysian economy. The GLCs have a very strong presence inmany sectors in Malaysia including resources, communication, transport, and banking. The GLCs
are, of course, Malay-owned corporations, so the scale of government patronage has been
increased under the Bumiputera policy. Many GLCs are strongly motivated to develop overseas
business and to act as a driving force for developing an international outlook for the economy but,on the other hand, they obstruct healthy competition and distort the economy due to theirunparalleled influence within the country 4 . The government needs to stimulate competition
through privatization and to revitalize private investment.

4

OECD (2013) “Innovation in Southeast Asia”, OECD Reviews of Innovation Policy.

- 13 -

Economic Prospects in China and ASEAN4: 2016-2030
September 2016

However, amid a conspicuous exodus of ethnic
Chinese from the ruling party, the ruling coalition
party led by Prime Minister Najib Razak is

Figure 2-8:Ethnic composition

Malay(Bumiputera)increasing its reliance on the ethnic Malay whose
numbers are on the rise (Fig. 2-8). Since theChineseBumiputera policy is a national policy enshrined in
the Malaysian constitution, any revision would be amajor exercise. Given these issues, the kind of

Indianreform of the social and economic systems thatwould make major contributions to sustained
productivity growth can hardly be expected to takehold in Malaysia.

2005

Other

2015
0

10 20 30 40 50 60 70(%)

Source: Based on EPU (2015, 2010)

High hurdles on the path to Asian NIEs levels
GNI per capita has already exceeded 10,000 US dollars in Malaysia. As mentioned at the outset,
Malaysia is likely to be the first among the five countries discussed in this report to become ahigh-income country. Malaysia is one of the participating nations in the Trans-Pacific Strategic
Economic Partnership Agreement (TPP), but this forecast has not taken the effect of thisagreement into account. The future of the TPP is shrouded in uncertainty, but if the agreementtakes effect, trade and investment can be expected to expand, and it is possible that growth rates
for Malaysia will exceed the forecasts.
However, the Malaysian government aims to raise the country’s economic level to the samelevel as Korea, Taiwan, and other newly industrialized economies (NIEs) in Asia. Seeing that GNI
per capita in Korea is 2.6 times higher than Malaysia (2015), a great deal of effort will doubtless
be required to reach this level.
Where the political climate in the near term is concerned, the suspicions swirling around Prime
Minister Najib’s involvement with the 1MBD state development fund have not yet developed into
a question of the Prime Minister’s liability. Rather, the Prime Minister appears to be consolidating
his authority by expelling opposing forces from the ruling party. In fact, the opposition parties in
Malaysia have been weakened, and it is widely thought that the ruling coalition under Najib’sleadership is likely to once again win the next general election to be held by 2018, and that he willremain in office. However, if it becomes clear that Najib has been involved in wrongdoing, thepolitical situation will instantly become fluid with the potential to have adverse effects on foreign
investment in Malaysia.

- 14 -

Economic Prospects in China and ASEAN4: 2016-2030
September 2016

3. ThailandReal GDP growth rate for 2026-30 forecast to average 2.6%

Total population to take downward turn from 2023, labor force also to decline ahead of 2030



Export of goods is sluggish, but there is hope for service exports focused on tourism

Figure 3-1: Economic prospect

Figure 3-2: Contributions to potential growth

Forecast
C.Y. （5-year average）
06-10 11-15 16-20

Real GDP(YoY%)
GNI per capita(USD1,000/capita)
Labor force(YoY%)
Consumer price index(YoY%)
Current accountbalance (% of GDP)
Exchange rate to thedollar (THB/USD)

5.0
21-25

26-30

3.7

2.9

3.0

2.6

2.6

3.9

5.6

6.3

8.5

11.8

1.4

0.2

0.1

-0.1

-0.3

2.9

2.0

1.5

2.0

2.1

3.5

2.6

8.7

8.0

8.2

34.3

31.8

35.1

34.4

33.1

(annualized growth, %)Laborforce
Capital stock
TFP
Potential growth

4.0

Forecast

3.0
2.0
1.0
0.0
-1.0

Source: Haver Analytics

2001-05 06-10

11-15

16-20

21-25

Source: JCER estimate

26-30(C.Y.)The population will peak in 2023
The real GDP growth rate in Thailand will decline from an average of 3.0% in the period
2016-20, to 2.6% in the 2020s (Fig. 3-1). Gross national income (GNI) per capita in 2030 isforecast to be 13,500 US dollars, a 2.3-fold increase from 2015. But Thailand will not reach thethreshold of a high-income country (approx. 16,800 US dollars in 2030); rather, it will remain aupper-middle income country in 2030. Thailand will maintain a higher standard than Indonesia andthe Philippines, but will come under pressure from both countries where high growth willcontinue.
Demographics is a negative factor (Fig. 3-3). The population of Thailand (65.12 million in2014) will peak at 66.03 million in 2023 before entering a slow decline. The labor force peaked in2012 at 39.41 million. In 2014, 15% of the population was aged 60 or over, but that proportion is
forecast to nearly double to 27% by 2030 as society continues to age. The unemployment rate in
Thailand has long hovered around 1%, but since an increase in the labor force cannot be expected,
the rate is likely to decline to the 0.5% level in the future.
The unemployment rate in Thailand is extremely low compared to neighboring countries. The
reason is said to be that the agricultural sector in Thailand has a high labor absorption capacity,and that unemployed workers in urban areas return to the rural areas to find employment inagriculture. Accounting for 40% of all employment, the agricultural sector is certainly large (Fig.
3-4). However, the agricultural sector in Indonesia also has similar levels of employment, yet the- 15 -

Economic Prospects in China and ASEAN4: 2016-2030
September 2016

unemployment rate in Indonesia is higher than in Thailand, so the high labor absorption capacityof the agricultural sector alone is not a credible explanation for the low unemployment figures5. In
Thailand, agriculture accounts for no more than 9% of nominal GDP and the wages are low at
approximately 40% of the average wage in 2015. It is assumed that the problem is a structural one,
where agricultural laborers are satisfied with relatively low wages and do not shift to sectors withhigher wages.
Compared to neighboring countries, the rapid advance in the aging population and low birth ratein Thailand suggests that the employment situation with its extremely low availability of workers
is set to continue. Labor input is expected to make a negative contribution to potential GDP growthin the years leading up to 2030 (Fig. 3-2). Full employment will be maintained, but Thailand islikely to need policies to enhance productivity in the agricultural sector in order to shift surplus
workers to the non-agricultural sectors, and to accept migrants from neighboring countries.
Figure 3-3: Total population, old-age
Figure 3-4: Employment in the agricultural
population, working-age population
sector and the unemployment rate
90000

(thousand people)

80000

Total population
Population aged 60 and up
Working-age population

60

Forecast

50

70000
60000

(%)

40

50000

Agricultural employment ratio in Thailand
Agricultural employment ratio in Indonesia
Unemployment in Thailand
Unemployment in Indonesia

30

40000

20

30000
20000

10

10000

0
2000

0
2000

2010

2020

2030

2005

Source: World Bank etc.

2040

2050
Note: Working-age population forecast by JCER (C.Y.)

2010

2013
(C.Y.)

Source: UN

Weight of growing household debt
Although the growth rate of private consumption will gradually decline, it will stay at the 3%
level until 2030. The population will decrease, but growth in employment income per capita will
be maintained at a little less than 6% to reach 265,000 baht in 2030, or 2.4 times the 2014 figure.
The increase in consumer purchasing power will accelerate the trend toward a consumption-led
economy. Meanwhile, the expected increase in the ratio of household debt to nominal GDP from
72% in 2015 to 100% in 2030 will weigh on consumption growth.
5

Kumagai, Shotaro (2012) “Naze Tai no shitsugyōritsu ha hikui noka? – Teishitsugyōritsu no haikei to bukka he noeikyō” (Why is the unemployment rate in Thailand low: Background to low unemployment rate and impact on thecost of living), The Economic and Social Research Institute, Cabinet Office- 16 -

Economic Prospects in China and ASEAN4: 2016-2030
September 2016

No major growth in private investment can be expected due to sluggish growth in the domestic
market and a decline in international competitiveness. Growth is expected to fluctuate at the 2-3%
level. Increased income for workers is a positive, but it is a negative factor for overseas
manufacturing industry in search of a cheap labor force. If integration with markets in theneighboring countries goes ahead by means of the ASEAN Economic Community (AEC), there
will be no need to place production hubs in Thailand where the cost of labor is high. As a result ofsluggish domestic and international demand, there is currently excess automobile manufacturing
capacity with corporations refraining from major investment in the near future. It will likely takesome time before direct overseas investment recovers (Fig. 3-5). Consumption as a share of GDP
will rise somewhat from 67% in 2015 to 69% in 2030. Investment will stay at 24-25% (Fig. 3-6).
The current forecast is premised on assumptions about external conditions such as (1) economic
growth in China will slow to 2.8% by 2030, (2) crude oil prices will recover to USD100 through2030, and (3) interest rates in the United States will rise to 2.75% by 2030. Under these conditions,the consumer price index in Thailand will rise in line with the increase in crude oil prices from the
1-2% level in the late 2010s until the early 2020s before stabilizing around 2% (Fig. 3-7)6. Interest
rate variations are also expected to move in tandem with inflation trends. Expectations forinfrastructure improvement and other public investment is rising, but with an accelerating
deterioration in the fiscal balance, outstanding public debt is also expected to increase, raising
issues about sustainability. Social welfare spending will also increase by 2030 in line with theaging society. Both government investment and government spending will remain at the 1% level.
Figure 3-5: Gross fixed capital formation

5000
4500
4000
3500
3000

Figure 3-6: Real GDP composition ratio(1 billion baht)
Public investment
Private investment
Gross fixed capital formation
Inward direct investment
Forecast

120

Capital formation
Net exports
Forecast

100
80

2500

60

2000

40

1500

20

1000

0

500
0

-20
2000

2005

2010

2015

2020

Sources: Haver Analytics, JCER estimates

6(%)

Export ratio
Consumption

2025

2030
(C.Y.)

2000

2005

The Bank of Thailand inflation target is currently 2.5% plus/minus 1.5%.

- 17 -

2010

2015

2020

Sources: Haver Analytics, JCER estimates

2025

2030
(C.Y.)

Economic Prospects in China and ASEAN4: 2016-2030
September 2016

Figure 3-7: Policy interest rates,
inflation and unemployment
6
5
4

(%)

Figure 3-8:
12000

Policy interest rates
Consumer price index
Unemployment rate

10000

Goods and services exports (real)(1 billion baht)
Exports
Service exports
Goods exports
Forecast

8000

Forecast

3

6000

2
4000

1

2000

0

0

-1

2000 2005 2010 2015 2020 2025 2030
(C.Y.)

2000 2005 2010 2015 2020 2025 2030
(C.Y.)
Sources: Haver Analytics, JCER estimates

Sources: Haver Analytics, JCER estimates

Service exports are compensating for the slowdown in manufactured goods exports
Thailand is an export-dependent economy. Exports grew by an annual average of 5.5% in the
period 2001-15, but will slow to 2.3% in the period 2016-30. Exports accounted for 75% of GDP
in 2015, but the share will decline to 70% by 2030. Since domestic demand is not expanding much,
imports are also sluggish, resulting in net exports maintaining a plus. The export-oriented
economic structure is not undergoing much change. With the deepening of the AEC, it is thoughtthat exports to neighboring countries will continue to expand with the focus on automobiles andautomotive products. Since the electronics industry, which includes hard disk drives (HDD) andwhite goods, is confronted with a shift to new electronic devices and other structural changes in
the industry, its position as an export industry is likely to decline. Direct investment by foreign
enterprise is flowing into Vietnam and the Philippines where labor is plentiful. The rise in laborcosts is probably linked to the declining influence of Thailand as a hub for export manufacturing7.
The competitiveness of the manufacturing industry is likely to decline, but the tourism andservices industries are compensating for the decline. The proportion of the services export industry
as a percentage of goods and services exports will rise from 23% in 2015 to 38% in 2030 (Fig.
3-8). The outlook is for industry to become increasingly service-oriented with the focus on the
tourism industry. In 2015, Thailand received thirty million overseas visitors, but the number oftourists is expected to top ninety million by 20308.
Toward infrastructure upgrades and the digital economy in the 12th development plan
The Thai government is currently controlled by the military. In a national referendum on a
proposal to reform the constitution held in August 2016, 61% of voters chose in favor of the draft
7
8Bank of Thailand, Monetary Policy Report, June 2015
Incidentally, Japan aims to triple the number of overseas visitors from 19.74 million in 2015 to sixty million by 2030.

- 18 -

Economic Prospects in China and ASEAN4: 2016-2030
September 2016

proposal. After approval by the king, the new constitution will formally take effect in November.
There are prospects for a general election to be held by late 2017 to pave the way for a return tocivil government. However, in the five years since implementation, the military government can
appoint almost all 250 members of the upper house and the upper house can also participate in the
choice of prime minister. There will be no return to the democracy prior to the coup d’état evenafter the election, and it is likely that the administration will be heavily tinged by military control.
The provisional military government will be in place until late 2017, but it is preparing
economic policies to raise Thailand’s international competitiveness in the long term. The National
Economic and Social Development Board (NESDB) is formulating the 12th National Economic
and Social Development Plan, the five-year plan covering the period 2017 to 2021. According topress reports, the goals are to achieve 5% annual economic growth and to increase GNI per capita
from the present 6000 dollars to 8200 dollars9. However, as mentioned at the outset, we forecast
that reaching these goals will be difficult.
The 12th development plan is set to hammer out ten strategies including developing humanresources, eliminating the income divide, developing hi-tech and technical innovation, upgrading
the transport and logistics infrastructure, promoting urban expansion and special economic zones,
and cooperating with neighboring countries to improve connectivity. The policies include plans to
upgrade the rail and road networks by investing approximately 1.8 trillion baht in upgrades to theinfrastructure by 202010. In terms of industrial policy, there are plans to cultivate new industry
such as robots, aircraft and transportation, biotech, medicine, and the digital industries on the basisof the existing automobile and agricultural industries, in addition to the cluster policy outlined in
September 2015, which aims to concentrate specific industries in specific regions11. Concerning
the digital industries, it was decided to set up a Ministry of Digital Economy and Society byreorganizing the Ministry of Information and Communication Technology12.
If these plans are quietly advanced under the supervision of the military, the growth rate andnational income per capita are likely to rise higher than the forecasts by means of improving
productivity and accumulating capital stock.

9

The Nation (website), “Human resources at the core of 12th national development plan: PM”, 15 September, 2015
Nikkei Shimbun (electronic version), dated March 4, 2016
11
The Government Public Relations Department, Office of the Prime Minister, “Thailand’s 20-Year National Strategy
and Thailand 4.0 Policy”, 2 August, 201612
Library of Congress, “Thailand: Digital Ministry Established as Part of National Digital Economy Plan”, 14 June201610

- 19 -

Economic Prospects in China and ASEAN4: 2016-2030
September 2016

4．The Philippines


Maintain real GDP growth rate at the 5% level in the 2026-30 period

BPO revenue becomes driving force as it exceeds overseas remittances

Improving the investment environment is an issue. For now, attention is on economic reforms
by the Duterte regime
Figure 4-1: Economic prospect

Figure 4-2: Contributions to potential growth

Forecast
C.Y. （5-year average）
06-10 11-15 16-20

Real GDP(YoY%)
GNI per capita(USD1,000/capita)
Labor force(YoY%)
Consumer price index(YoY%)
Current accountbalance (% of GDP)
Exchange rate to thedollar (PHP/USD)(annualized growth, %)Laborforce
Capital stock
TFP
Potential growth

8.0
21-25

26-30

7.0

4.9

5.9

6.2

5.5

5.3

6.0

2.1

3.2

4.3

6.5

9.9

5.0

1.3

1.4

1.8

1.7

1.6

5.1

3.3

3.3

3.4

3.4

4.0

3.2

-1.5

-2.4

-1.7

1.0

46.9

43.6

47.3

46.0

43.9

0.0

Forecast

4.0
3.0
2.0

2001-05 06-10

Source: Haver Analytics

11-15

16-20

21-25

Source: JCER estimate

26-30(C.Y.)

Economy led by consumption and investment
Real GDP growth rate for the period 2026-30 in the Philippines is expected to clock 5.3%, downfrom 5.9% in the period 2011-15, but remaining at the 5% level (Fig. 4-1). This is still the highest
growth rate among the ASEAN4. The demographic bonus is set to continue as the labor force
increases due to the high birthrate with the population reaching 124 million in 2030 (100 million in2015) and the labor force increasing to approximately 54 million (42 million in 2015). If the rateof increase of the labor force averages 1.6% annually in the period 2026-30, it will likewise be thehighest rate of increase in the ASEAN4.
Consumption and investment are driving growth(Fig.4-3).

RodrigoDuterte,inaugurated

as

Figure 4-3: Real GDP growth rate
9.0

President of the Philippines at the end of July 2016,8.0

has disclosed aims to raise the budget for

6.0

infrastructure development as a share of GDP from

4.0

7.0

3.0

in

1.0

It

is

likelythat

government-led

infrastructure investment in roads, airports, bridges

2.0

0.0
-1.0
91-95

etc. will expand over the next several years.

96-00

01-05

06-10

Sources: Haver Analytics; CEIC; JCER

- 20 -

Forecast

5.0

4.3% in 2015 to 7% by the end of his term in office2022.

(annualized growth, %)Net exports
Gross capital formation
Government consumption
Private consumption
Real GDP

11-15

16-20

21-25

26-30
(C.Y.)

Economic Prospects in China and ASEAN4: 2016-2030
September 2016

Consumption performance will also remain steady due to the population increase and the rise inremittances by Overseas Filipino Workers (OFW). The rate of contribution of private consumption
to the GDP growth rate in the period 2016-20 is forecast to exceed 70%. The scenario where
consumption and investment are the drivers will continue in 2026-30. The potential growth rate
will roughly consistently stay at the 5% level until 2030. Labor force contributions will gradually
decline, but capital stock growth will rise.
BPO and OFW are the two great engines
BPO (Business Process Outsourcing) and OFW

Figure 4-4: Fluctuations in BPO
and OFW income

are expected to take on the role of economic
engines in the medium to long term. OFW

350

remittances, which account for approximately

300

10% of GDP, will increase with the rise in OFW

250

numbers and growth in the world economy,

200

pushing up domestic consumption. Meanwhile,

150

BPO is stepping up its sense of presence to100outshine OFW. In recent years, OFW remittances

50

have increased by USD 1.5 billion annually, but0

BPO is continuing to rise at twice the pace, or
USD 3.5 billion annually (Fig. 4-4).

(million dollars)
Forecast

Total BPO income
Overseas remittances by
OFW(C.Y.)
2008

2010

2012

2014

2016

2017

Note: BPO forecast by IBPAP. OFW for 2016, 2017 based on own calculations.
Sources: Haver Analytics, IBPAPBPO is outsourcing some corporate business functions such as HR and accounting, customer
service, or other indirect operations to an external party. According to the IT and Business Process
Association of the Philippines (IBPAP), total BPO revenue for 2015 rose by 12% year-on-year to
USD 21.2 billion. According to IBPAP management, BPO could potentially rise to USD 28.9
billion in 2017 to exceed overseas remittances.
The Philippines is competitive as a destination for BPO because (1) it has the largest populationof English speakers in Southeast Asia, (2) labor costs are low, and (3) the government is supportive(corporate tax exemptions for a limited period and other incentives). The classic example is thecall center operations with telephone operators on standby. In fact, the Philippines has the world’s
largest share of call centers. Many major U.S. companies outsource operations to the Philippines.
According to statistics for 2013, the Philippines accounted for 55% of all such outsourcing interms of order volume.
In recent years, there has also been an increase in IT-related services producing sophisticatedsoftware for financial institutions, which are expected to become a new driver for BPO. Japanese
corporations are also prominent customers in this field. Six special IT zones have already been
introduced in Davao City on Mindanao, which is President Duterte’s birthplace. There is also
potential for the BPO business to expand to areas outside Metro Manila.
- 21 -

Economic Prospects in China and ASEAN4: 2016-2030
September 2016

According to industry officials, salaries for IT-related work, including software production, startfrom 20,000 pesos (approx. 50,000 yen), which is high compared to the 15,000-20,000 pesos atcall centers. According to the Philippine Software Industry Association, there are more and more
highly skilled professionals in the IT field and competitiveness is increasing. For the time being,
sales are forecast to rise at a rate of 20% annually, and employment to expand. In addition to the IT
field, medical records and other hospital systems, animation and game development are also
expanding. Originally, animation was mainly done by hand, but with the advance of 3D and othertechnologies, it has turned into a business with relatively high unit costs.
The issue of reducing disparity
There are major regional disparities in the Philippines, which is a factor that prevents economic
standards from rising. According to a government survey, the top 29% of households account for
63% of total household income13. The benefits of high growth have not been adequately passed on
to the low-income groups. As indicated in Fig. 4-5, there are also great regional disparities with alarge gap in poverty rates (annual income of 19,000 pesos or less) between the National Capital
Region (3.9%) and the Autonomous Region in Muslim Mindanao (55.8%). GDP per capita in the
NCR (including Manila) is conspicuously high at 399,000 pesos, but the figures for Mindanao,
where there are large Muslim populations, and Bicol are fairly low at 27,000 and 47,000 pesos
respectively. As the first president from Mindanao, Duterte is eager to make Davao City asuccessful model for regional cities. The plan is to concentrate budget allocation to the regionswith the intent to correct regional disparities.
Figure 4-5: GDP per capita and poverty rate disparity by region50(%)(10,000 pesos)

GDP per capita

40

60
48

Poverty rate (right-hand scale)

30

36

20

24

10

12

0

0

Autonomous Region in
Muslim Mindanao

CaragaCentral Mindanao

Southern Mindanao

Northern MindanaoWestern Mindanao

Eastern Visayas

Central Visayas

Western Visayas

Bicol

Mimaropa

Calabarzon

Central Luzon

Cagayan Valley

IlocosCordillera

National Capital
RegionNational average

Note: GDP per capita is for 2015, poverty rates for 2012.
Sources: Philippine Statistics Authority, CEIC

Many people in local business communities are also calling for development of the
manufacturing industries. In the context of rising domestic demand, Toyota Motor Corp.,
13

The Family Income and Expenditure Survey (2012), Philippine Statistics Authority- 22 -

Economic Prospects in China and ASEAN4: 2016-2030
September 2016

Mitsubishi Motors Corp., and other automotive companies are building factories in the Philippines.
However, compared to the other major countries in the ASEAN, the manufacturing industry has amodest presence. As well as absorbing the expanding labor force, stimulating the manufacturingindustry is also crucial for enhancing the industrial base and export capacity.
Ports, roads, and other physical infrastructure in the Philippines have previously been identified
as inadequate. The 2016 edition of the World Bank’s Doing Business Index (189 countries andregions surveyed) also indicates that the Philippines scores badly on systems and rules, ranking
165th in the world for starting a business, 155th for protecting minority investors, and 140th for
enforcing contracts. Requirements include improving the investment environment by relaxing
regulations and attracting foreign investment.
Positives and negatives of the exodus of human resources
The exodus of human resources in the shape
Figure 4-6: OFW by educational levelof the OFW has both positive and negative
aspects for the Philippine economy. According to

4(10,000 persons)Primary education enrollment, graduation

a survey by the Commission on Filipinos
Oversea(CFO),

university

students

andgraduates account for the highest number ofHigh school enrollment, graduation
Vocational college enrollment, graduation
University enrollment, graduation

3

Post-graduate enrollment, graduation

registered OFWs at 38,000, or a little over 50%.
They account for the vast majority, far more than

2high school students or graduates (approx.
17,000), or elementary school students or

1

graduates (approx. 11,000). Moreover, thenumber of registered university students or
graduates tends to increase. This suggests that0

many well-educated people are moving overseas

1988

1993

1998

2003

2008

Source: Commission on Filipinos Overseas

2013
2014
(C.Y.)

in search of work amid limited attractive workplaces in the country (Fig.4-6). These well-educatedworkers are important because they make up the core of the OFWs supporting the Philippine
economy, but on the other hand, the fact that they do not take jobs at home is one reason for thelack of improvement in the skill set of domestic workers.
Professor Tereso Tullao at De La Salle University, the most prestigious private university in thePhilippines, complains about the lack of government investment in education. He goes on to saythat there are many universities in the Philippines, but only 20% of the schools have secured therequired standards. It is not enough to create enough employment in the country to absorb workers,
but it is also important for the Philippine economy to expand the education infrastructure toeducate outstanding human resources.

- 23 -

Economic Prospects in China and ASEAN4: 2016-2030
September 2016

Economic reforms under the Duterte administration
Once ridiculed as an ASEAN failure, the Philippine economy today continues to show thehighest growth rate among the principal ASEAN countries and expectations for further growth arerising. As indicated by this forecast, the Philippine economy has high potential to enhance
economic levels ahead of 2030.
President Duterte has hit the headlines for the way he handled narcotics crime and corruption
during his time as mayor of Davao, but he has rapidly worked out a succession of economic
policies. In his inaugural speech in July, he laid out policies intended to reinforce the economic
infrastructure including (1) fiscal and monetary policies aimed at high growth, (2) lower income
tax rates for individuals and corporations, improving the investment environment, (3) promote
investment in the labor-intensive manufacturing, agricultural, and tourism industries to create
employment, and (4) upgrade national roads and bridges, and improve the infrastructure in the
Mindanao region.
If the series of reform proposals makes steady progress, the foundations for sustained growth
will be reinforced. However, it is uncertain whether or not the reforms will remain on track amid
deep-seated opposition within the country. In some views, the president simply wants to use thestate machine to maintain and reinforce public security. Since Duterte assumed the office ofpresident on a promise to eradicate drug dealers within six months, around one thousand suspecteddrug dealers have been killed14, and Duterte has been criticized by the United Nations for the useof “extrajudicial measures.” Duterte has hit back, warning that he may withdraw from the UN. If
friction with the international community grows stronger, foreign investment in the Philippines
will slow, potentially putting downward pressure on the GDP growth rate.

14

Reported by the Philippine National Police on September 4, 2016. Applies to a period of roughly two months since
Duterte took office as president at the end of June.

- 24 -

Economic Prospects in China and ASEAN4: 2016-2030
September 2016

5．Indonesia
Real GDP growth rate expected to remain at the 5% level in the 2020s.

With the population increasing and incomes rising, consumption will continue to expand,driving growthStimulating the manufacturing industry is an issue. If reforms stagnate, growth will behobbled.

Figure 5-1: Economic prospect

Figure 5-2: Contributions to potential growth

Forecast
C.Y. （5-year average）
06-10 11-15 16-20

Real GDP(YoY%)
GNI per capita(USD1,000/capita)
Labor force(YoY%)
Consumer price index(YoY%)
Current accountbalance (% of GDP)
Exchange rate to thedollar (IDR/USD)

8.0
21-25

26-30

7.0

5.8

5.5

5.0

4.9

4.9

6.0

2.3

3.7

4.2

6.3

10.2

5.0

1.8

1.0

1.4

1.2

1.1

7.8

5.7

4.4

5.0

4.9

1.5

-2.2

-2.7

-5.8

-7.9

1.0

9498 10776 13632 14357 14285

0.0(annualized growth, %)Laborforce
Capital stock
TFP
Potential growth
Forecast

4.0
3.0
2.0

2001-05 06-10

11-15

16-20

Source: JCER estimate

Source: Haver Analytics

21-25

26-30
(C.Y.)

Working-age population will account for 70% of total population in 2030
With real GDP growth rates set to continue at the 5% level as of 2020, Indonesia together with
the Philippines will be the drivers of growth in the ASEAN4 (Fig. 5-1). Stable population growth
is a positive factor. In 2030, the overall population will increase at a rate of 0.7%, but the labor
force will grow by 1.1%, the second highest figures in the ASEAN4 after the Philippines. In 2030,
the working-age population (aged 15 to 64) will account for approximately 70% of the total
population, making it possible to take advantage of abundant labor (Fig. 5-3). In addition to a risein capital stock due to increases in infrastructure investment, regulatory reform progress may also
lead to a rise in total factor productivity (TFP) (Fig. 5-2). As a result, GNI per capita in Indonesia
is forecast to increase from an average of 3700 dollars in 2011-15 to 12,300 dollars in 2030. Even
though Indonesia will not reach the ranks of high-income countries, the country is only 1200
dollars behind Thailand, which finds itself in a situation of low growth compared to Indonesia.
Strong private consumption
Two years have passed since President Joko Widodo took office in October 2014. Due to theeffect of a series of economic reforms including foreign investment deregulation, and economic- 25 -

Economic Prospects in China and ASEAN4: 2016-2030
September 2016

stimulus measures such as cuts to electricity tariffs since September 2015, economic performancein the near term is steady with real GDP growth for the period April to June 2016 at 5.2%. As
indicated by the rise in sales of automobile, private consumption, which accounts for 60% of
nominal GDP, is strong. Consumer confidence is picking up as incomes rise and prices stabilize,
but opening up the e-commerce market and other deregulation has also provided a boost. The
inflation rate is down, the rupiah has stabilized as the economy rallies, and there is some leeway
for cutting interest rates. Assuming that prices remain stable, the population increase will sustain
consumption growth in the medium term. Hinging on the government’s plans for infrastructuredevelopment, gross capital formation is also forecast to rise (Fig. 5-4).
Figure 5-3: Population distribution by age group
100
90
80
70
60
50
40
30
20
10
0

(%)

65 and up

15-64

Figure 5-4: Real GDP growth rate

0-14

10
8
6

(Annual rate, %)Net exports
Gross capital formation
End consumption
Real GDP

Forecast

4
2
0
-2
-4

2000 2005 2010 2015 2020 2025 2030
(C.Y.)
Source: UN population prospects

91-95 96-00 01-05 06-10 11-15 16-20 21-25 26-30(C.Y.)

Sources: Haver Analytics; JCER

Initially, the Joko administration faced a situation where opposition parties controlled the
majority of parliament, but the power base has stabilized since the main opposition Golkar party
backed the ruling party and coalition government in May 2016. The Joko administration has
announced thirteen economic reform packages since September 2015. Specifically, the packages
include the simplification of investment procedures, reforms to the wage system, expanding
incentives inside the special economic zones, building energy infrastructure, and encouraging
business startups. In the July 2016 cabinet reshuffle, the president appointed Dr Sri Mulyani
Indrawati, Managing Director at the World Bank, to the post of Finance Minister. Indrawati also
served as Finance Minister in the Yudhoyono administration and is known to enjoy the confidenceof the markets. Inviting a known reformer to join the Cabinet will allow the administration to
implement a series of reform programs while attracting capital from abroad, and to promote alarge-scale infrastructure program, including power stations, highways, and ports, with a total
project cost of approximately 5,400 trillion rupiah (approx. 54 trillion yen).

- 26 -

Economic Prospects in China and ASEAN4: 2016-2030
September 2016

Withdrawing from the resource-based industries is key
Developing the manufacturing industry is likely to be one of the challenges for the Indonesian
economy. Amid the steep rise in resource prices in the 2000s, growth in Indonesia continued torely on resources because oil and coal are the country’s main products. As a result, the presence ofthe manufacturing industry was diminished. The fact is that the manufacturing industry as a shareof GDP continued to decline in the 2000s to the point where it’s now at the same level as thePhilippines (Fig. 5-5).
Figure 5-5: Manufacturing industry as a percentage of GDP
34

(%)

32
30
28
26
24
22
20
18

China

Indonesia

Philippines

Thailand

Malaysia

16
1990

95

2000

05

Source: “World Development Indicators,” World Bank

10

15
(C.Y.)

If we look at Indonesian exports 15 , the top five products are all related to resources oragriculture including coal, palm oil, or petroleum gas, and together they account for approximately
40% of total export value. Industrial products narrowly make it into sixth place with automobiles.
Although not targeted in this forecast, major investment by Samsung in Vietnam, another ASEAN
member nation, led to mobile phones emerging as the largest export item, replacing sewn products
in 2013. This is how the value of Vietnamese exports rose rapidly to overtake the value ofIndonesian exports in 2015.
On top of weakening resource prices, Indonesia has also been a net importer of oil since 2012,
revealing the limits on the conventional resource-dependent growth model. In the future, thecountry will be required to attract substantial foreign investment to the manufacturing sector,
create employment to match the increase in the working-age population, and to promote exports.
Whether or not Indonesia can leverage the location advantage as a production and export hub toattract foreign capital will be critical in this regard. However, similarly to China, the trend forrising unit labor costs (ULC) has been strengthened in Indonesia, where costs are rising at aquicker pace than Thailand in recent years (Fig. 5-6). Although wages have risen substantially inrecent years, they are still at a low level for an ASEAN country, but cost competitiveness is
declining because productivity is low.
15

2014 results based on UN COMTRADE. HS4 digit- 27 -

Economic Prospects in China and ASEAN4: 2016-2030
September 2016

Infrastructure development and deregulation are a given to increase productivity, but it is alsoessential to improve the quality of labor. Indonesia enjoys advantages due to the scale of its
population and labor force. However, despite the high diffusion rate of compulsory education,
education levels are low. According to the OECD Programme for International Student Assessment(PISA)16, students perform badly across the board in the three areas of mathematics, reading, andscience, falling short of other ASEAN countries (Fig. 5-7). Improving the education system is an
important challenge for any country, but we can safely say that the necessity to do so is higher
Indonesia. Women’s labor participation rate is approximately 63% of the male rate (2015), putting
Indonesia just ahead of India and Malaysia in Asia17. Promoting employment for women by
informing women of educational opportunities is also an important measure.
Figure 5-6: Unit labor cost
260
240
220
200
180
160
140
120
100
80

（2002＝100）
China
Indonesia
Korea
Singapore
Thailand02 03 04 05 06 07 08 09 10 11 12 13 14(C.Y.)
Note: The unit labor cost is the average cost oflabor per unit of output.
Source: Regional Economic Outlook: Asia andPacific, IM F

Figure 5-7: International PISA rankings
Numeracy
Shanghai (1)Singapore (2)Hong Kong (3)Japan (7)Vietnam (17)Thailand (50)
Malaysia (52)Indonesia (64)

ReadingShanghai (1)Hong Kong (2)Singapore (3)Japan (4)Vietnam (19)Thailand (48)
Malaysia (59)Indonesia (60)

Science
Shanghai (1)Hong Kong (2)Singapore (3)Japan (4)Vietnam (8)Thailand (48)
Malaysia (53)Indonesia (64)Notes: 2012 survey results.
The Philippines exempt.
Source: OECD PISA

Expand GVC participation
Korea, Taiwan, and other newly industrialized economies (NIEs) in Asia, as well as Malaysia
and other principal Asian countries have continued to grow while boosting their participation in
the Global Value Chain (GVC). Specifically, they have expanded economic relations with several
foreign countries by attracting investment by multinationals in the manufacturing industries andplaying a role in the international division of labor. The size of the trade in parts suggests thedegree of participation in the GVC. In Indonesia, the ratio of the parts trade as a share of total
imports is 13% (2014)18, smaller than Malaysia at 28%, the Philippines at 25%, and Thailand at
18%, suggesting a relative level of neglect where GVC is concerned. Foreign policy is also

16

PISA（Programme for International Student Assessment) is an international academic performance test implemented
by the OECD. 65 countries are surveyed. 15-year-olds are tested on mathematics, reading, and science once every
three years.
17
Based on the World Economic Forum gender gap index
18
Based on RIETI-TID 2014, METI

- 28 -

Economic Prospects in China and ASEAN4: 2016-2030
September 2016

important to increase GVC participation.
Specifically, it is a matter of expanding the framework for economic collaboration with othercountries. As a member of the ASEAN, Indonesia participates in the ASEAN Economic
Community (AEC), which launched at the end of 2015. Unlike Vietnam and Malaysia, however,Indonesia is not participating in the Trans-Pacific Partnership (TPP). Even though the prospects for
ratification by the United States are not good and the outlook for the future is stormy, President
Joko has said that the flow of economic integration will not stop19, indicating a positive stance on
TPP participation. With negotiations scheduled for a free trade agreement (FTA) with theEuropean Union, Indonesia should contribute to GVC participation by tackling trade andinvestment liberalization and developing transparency around rules.
Focus on the President’s leadership qualities
As mentioned at the outset, Indonesia is supported by its population trends and the
medium-term outlook for the economy is relatively bright among the ASEAN4. For the time being,
this forecast assumes that structural reform initiatives, including deregulation, will gradually havesome effect and that we can expect increased productivity. Still, it is difficult to be optimistic about
the future. The standard of the business environment in Indonesia is the lowest among theprincipal ASEAN countries (Fig. 5-8). The country rates low on law enforcement, property
registration, and business licensing, and there are many challenges ahead. In Indonesia, thepresidential term is five years with a maximum of two terms in office. The next presidential
election is in 2019. President Joko will focus on consolidating his power base in the lead-up to thenext election, and once he is reelected, he is likely to tackle difficult issues such as promoting
regional economic partnerships where opposition is strong. If the reforms stagnate, the possibilityof a downturn in the growth rate emerges.
Figure 5-8: Asian countries ranked for ease of doing business
0
20
40
60
80
100
120
140
160

(Rank)
Thailand
VietnamPhilippines
Malaysia
Indonesia

2011 2012 2013 2014 2015 2016
(C.Y.)
Note: Rankings among 189 countries and regions.
Source: “Doing Business Index,” World Bank
19

Nikkei Shimbun dated May 25, 2016.

- 29 -