In EAP outside China, potential output growth rose to 4.5 percent in 2011-21, 0.6 percentage point higher than in 2000-10. Following the 1997 Asian financial crisis, Indonesia, Malaysia, the Philippines, and Thailand introduced policy reforms that helped investment growth rebound from its collapse during the crisis. In some countries, however, potential growth declined in 2021-21 compared to 2000-21 largely owing to unfavorable demographic trends and idiosyncratic factors. In Thailand, for example, potential growth weakened to around 3.2 percent a year in 2011-21 (from 3.5 percent in 2000-10), close to the lowest in Southeast Asia, as demographic dividends diminished, and domestic uncertainty and frequent flooding weighed on TFP growth and capital accumulation (World Bank 2020a).

The pandemic disruptions of 2020-22 are expected to have lasting negative effects on economic growth across EAP through their adverse impact on human capital and fixed capital formation. Following a significant contraction in 2020, investment in the region rebounded in 2021 but remained about 4 percentage points below its pre-pandemic trend; this gap is not expected to close over the remainder of the decade. Actual and potential output in the region was also negatively affected by pandemic-related school closures, lost working hours and job skills, and especially large declines in earnings of those working in the informal sector—a significant proportion of the workforce in some economies in the region (World Bank 2020b). The collapse in activity, investment, and trade, as well as prolonged border closures, is also estimated to have dampened TFP growth.

Of the 1.4 percentage point decline in EAP’s annual potential growth rate between 200010 and 2011-21, falling TFP growth is estimated to account for about three-fifths, with the remaining two-fifths attributable equally to slowing labor supply growth and capital accumulation (figure 5). The shift in each of these drivers was strongly influenced by developments in China, which experienced a broad-based slowdown in all drivers of potential growth. The slowing in China’s TFP growth may be attributed to several factors, including narrowing room for productivity catchup, declining returns to investment and a misallocation of resources during a prolonged investment boom, and shifts of resources from manufacturing to services (Maliszewski and Zhang 2015; Nabar and N’Diaye 2013). Nevertheless, the contribution of TFP growth to potential output growth in China in 2011-21 remained above the EMDE average (Anand et al. 2014; World Bank 2018a).

The reduced contribution of labor force growth to potential output growth reflects a sharp slowdown in China’s working-age population growth related to aging. Thus, the contribution of labor force growth to China’s potential output growth fell from 0.5 to 0.2 percentage point between 2000-10 and 2011-21. Finally, the reduced contribution of capital accumulation to China’s potential growth in 2011-21 reflects a moderation from the stimulus-driven investment peaks of 2010-12, which had produced overcapacity in some sectors. Nevertheless, China’s investment-to-GDP ratio was still as high as 60 percent, on average, in 2011-21.

Aside from China, the rest of the region relied more heavily on growth in factor inputs, particularly capital, to drive potential output growth during 2011-21. Notably, a diminished contribution from slowing labor force growth was outweighed by a larger