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Current Challenges

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This chapter focuses on the challenges that Japan, South Korea and China are currently facing and will face in the following decades. After a brief look at where East Asia stands today and the recent policy course, this Chapter first addresses the general challenges that affect all countries globally (demographic, climate, digital, structural, and cultural change as well as international integration). It then looks at key challenges facing specifically the East Asian countries including the risk of financial crises, the “system competition” between China and the US, the danger of a middle-/high-income trap, and challenges related to productivity/human capital weaknesses and resource scarcities. The Chapter also address the question of which country in Asia could become the next China or model of success, taking a closer look at India and Vietnam.

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Fig. 6.1


  1. 1.

    We choose the USA and UK as representatives of the “West” because these two countries were the dominant hegemonic powers of the last centuries.

  2. 2.

    Japan had surpassed 100% of the UK’s GDP p.c. (in PPP) briefly in 1977/78 and subsequently for a somewhat longer period between 1989 and 2002. However, it then fell back below 100% and starting from 2015 below 90%.

  3. 3.

    In fact, Hong Kong had already surpassed the USA between 2011 and 2013, but fell back since then with the sharpest drop occurring between 2018 and 2019 (a more than 4% point decrease from 97.7% to only 93.5%). This might, at least to some extent, be due to the increasing (political) instability within Hong Kong in recent years.

  4. 4.

    When adjusting for demography (population aging), the Japanese and American economies would have grown at about the same rate over the past 30 years, as Krugman emphasizes (Krugman 2021). However, this does not automatically mean that Japan’s economy would have grown as fast as that of the USA without population aging, as other developments might then have taken a different course (cf. Sect. “Structural (System) Interdependencies”).

  5. 5.

    Having already become a major global industrial power in the early 1900s, Japan’s success was subsequently interrupted by imperial and expansionist ambitions and by military disaster, due to which (after the defeat in World War II) the economy was devastated (ADB 2020: 43). See Chap. 2 above.

  6. 6.

    Hong Kong had already adopted the export-led growth model in the 1950s (cf. Koo 1986).

  7. 7.

    According to this “flying geese” model (Akamatsu 1962), economies that were in earlier development stages, aligned behind industrial nations (particularly neighboring ones such as Japan in East Asia).

  8. 8.

    The IMF emphasizes as the most pressing structural reform needs (those reform needs with “limited progress” so far): SOEs and finance sector reform (IMF 2020: 42).

  9. 9.

    These structural problems at the time included aging, weak corporate governance, and policy uncertainty, which contributed to depressed investment and production offshoring (IMF 2017: 4).

  10. 10.

    See, e.g. Yeung and Lee (2021).

  11. 11.

    The global proportion of older people (60 years and older) in the whole of Asia was 57.1% in 2017 and is projected to be 61.2% in 2050 (see United Nations 2017; an older study is OECD 1996).

  12. 12.

    However, artificial intelligence and automation could improve our ability to produce ideas to the extent that growth in living standards continues even with a shrinking population (see the section “Digital Change” below).

  13. 13.

    For blue-collar women, the retirement age is 50. In addition, increasing China’s fertility rate is relevant. Already in 2016, the Chinese leadership had abolished the one-child policy (in force since 1979 at the provincial level and 1980 at the national level) and allowed two children per couple, with the aim of reaching a birth rate of 1.8 children per couple in 2020, which, however, has by far not yet been achieved even today.

  14. 14.

    In the process, the number of the working-age population will fall disproportionately. The fact is that China’s working-age population has been declining since 2011. At the same time, the proportion of people over 60 has risen from 10.4% in 2000 to 17.9% in 2018. By 2050, it is estimated that one third of the Chinese will be 60 or older. In a report published in 2019, the Chinese Academy of Social Sciences warned that China’s main pension fund could run out of money by 2035. Further indebtedness of the state (see subsection “Indebtedness” below) may then become necessary. Data are from the “Economist” of 30 April 2021 “Is China’s population shrinking?” (see also Zheng et al. 2019).

  15. 15.

    On digital transformation regarding companies, see, e.g. Westerman et al. (2014).

  16. 16.

    In some countries such as Germany, the main obstacle is the rigid data protection laws there, which has also severely hampered pandemic control.

  17. 17.

    On cultural change, see, e.g. Persson and Tabellini (2020).

  18. 18.

    It is not entirely clear whether there is a common “East Asian culture” or exactly which countries belong to this cultural community. American sinologist and historian Edwin O. Reischauer grouped China, Korea, and Japan into a cultural sphere that he called the Sinic world, a group of centralized states that share a Confucian ethical philosophy (see Reischauer 1974).

  19. 19.

    The October 2020 report “Era of Pandemics” by the United Nations Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services, authored by 22 experts from a variety of fields, says anthropogenic destruction of biodiversity is paving the way to the era of pandemics and could lead to as many as 850,000 viruses being transmitted from animals—particularly birds and mammals—to humans.

  20. 20.

    This is also indicated by the fact that East Asian countries were not uniform in their pandemic control policies. For example, unlike most other East Asian nations, Japan did not adopt a “zero tolerance” policy (in the first year of the pandemic). Instead, the Japanese government focused on keeping the economy running as undisturbed as possible. Thus, there were never any harsh curfews or closures in Japan. What seems to have been more important there, as in other East Asian countries, was that citizens complied with government requests, such as wearing masks.

  21. 21.

    In the absence of the above virtues of the East Asian countries, the Western countries had to rely to a greater extent on expansive financial compensation aid and stimulus programs, which, however, brought with it the problem of massively increased national debt.

  22. 22.

    Here, one should also consider that the great caution/risk aversion shown during the pandemic up to now (with respect to contacts, restriction to international travel) that so far has been beneficial for the corona pandemic management might in the future constrain growth opportunities.

  23. 23.

    See the description of the Policy Initiatives of the Moon Jae-in Government in Sect. 6.2 above.

  24. 24.

    The following section closely builds upon Wagner (2019).

  25. 25.

    In the current era of digital transformation and the “Industry 4.0” phase, tertiarization (compared to the past) need not (anymore) necessarily lead to a decline in productivity growth if a large part of tertiarization is based on B2B services (i.e. a combination of industrial and service elements). But the construction of a welfare system is more likely to be characterized by the expansion of services with traditional Baumol’s cost disease, which are associated with below-average productivity gains (see also Murach and Wagner 2017).

  26. 26.

    The following section closely builds upon Wagner (2013).

  27. 27.

    See, e.g. Brenner et al. (1991, eds.). See also Steckel and Floud (1997), Szreter (1997), Kniivilä (2007), Rosenbloom and Stutes (2008) ZOECD (2021) Working age population (indicator),, and OECD (2012). Imbalances and volatilities here refer mainly to current account imbalances and “price imbalances and volatilities” incorporated in inflation episodes and asset-price booms and busts.

  28. 28.

    Debt will also rise (especially in China and South Korea) due to the need (there) to build up a welfare system or expand the existing one, which has been explained in the previous section “(Sectoral) Structural Change and Welfare System”.

  29. 29.

    According to calculations by the Bank of International Settlements (BIS), the proportion of zombie firms worldwide rose to 18% in the first year of the pandemic, the highest figure ever measured. (Before the crisis, it was 12%.) According to the authors of the BIS study, around 70% of the current zombies will remain so permanently, which the BIS attributes in part to low-interest rates. On this topic see also Banerjee and Hofmann (2020).

  30. 30.

    So far, the state has refrained from explicitly ordering companies to share data (China’s law states that personal data belongs to the individual). Changing this, however, should not be a major hurdle.

  31. 31.

    Nevertheless, according to official figures, real-estate loans still accounted for 26% of total new loans in China at the end of 2020. The number of unreported cases is estimated to be even higher.

  32. 32.

    Only the USSR was at times a serious competitor in the military field.

  33. 33.

    Russia, too, is currently going down the path of “decoupling” in order to better protect itself from the threat of sanctions by the USA (the West) for human rights violations and other things and is allying itself with China in the process.

  34. 34.

    The latter somehow resembles the import substitution strategy in the earlier industrialization process.

  35. 35.

    Not only China but also basically all highly developed countries—the USA, the EU countries, Great Britain, Japan, South Korea, and others—are currently trying to become more technologically independent by reforming the global supply chains, partly due to the observed problems in pandemic control.

  36. 36.

    See Allison (2017).

  37. 37.

    Historical background is Japan’s occupation of the Korean Peninsula in the run-up to World War II. During that time, thousands of so-called comfort women were forced into sexual slavery and thousands more were forced to work without pay.

  38. 38.

    But Australia, almost 40% of whose exports go to China, has also had increasing tensions with China recently (in the context of Huawei’s exclusion from supplies for the 5G network, as well as Australia’s withdrawal from the BRI project).

  39. 39.

    “The government under Xi Jinping presidency is trying to rely on additional, in part new, instruments for system stabilization. These include (i) the emphasis on nationalism (national sentiment), (ii) the One Belt One Road project with the aim of making China great again, and (iii) the widespread use of digital surveillance. If (as long as) the population accepts this, the government can maintain its course.” (see Wagner 2021: 12; see there for more details).

  40. 40.

    For example, on 27 February 2021, the Communist Party announced the start of a long-expected purge of its ranks. It will involve, say officials, “turning the knife-blade inwards” to gouge out those deemed corrupt or insufficiently loyal to the party and its leader, Xi Jinping. State-controlled media have described it as the biggest such campaign since the late 1990s within the domestic security system, which includes the police, the secret police, the judiciary, and prisons. It is due to last for about a year. The aim is to ensure that these agencies are “absolutely loyal, absolutely pure and absolutely reliable” (“Economist” March 2021).

  41. 41.

    Official rhetoric still describes China’s economy as “socialist” even though private business generates 80% of urban employment and 60% of GDP.

  42. 42.

    Further appropriate structural remedies are listed in Yoshino and Taghizadeh-Hesary (2017).

  43. 43.

    Nonetheless, China’s share of global manufacturing is still close to 30% (27.74% in 2018)—about the same as the combined shares of Japan, South Korea, the USA, the UK, and Hong Kong (29.12% in 2018; without UK 27.31%; own calculations based on manufacturing value added in current US$; constant 2010 US$ data not available for China). However, China’s focus on this sector, particularly on production of apparel, footwear, furniture, and related products, which peaked in the early 2010s, and its share in their global exports is now in decline.

  44. 44.

    In South Korea, the overall employment has started to recover from the pandemic and by March 2021, the country had again reached pre-pandemic unemployment levels. However, this recovery did not take place evenly across sectors. In particular, employment in many service occupations is still lagging behind (compared with the 2020 levels). Thus, the pandemic has, in general, aggravated the division between high-technology manufacturing, on the one hand, and low productivity services, on the other hand. In addition, even as overall employment has started to recuperate, youth unemployment has kept rising (reaching 10% in March 2021; cf. also the 1 May 2021 “Economist” article entitled “The pandemic has accentuated South Korea’s two-speed economy”).

  45. 45.

    Simultaneously, they are the major engines for global growth and constituted more than half of the global gross domestic product (GDP) in 2017. China—a potential future MIT candidate—alone produces 18% of the world GDP (WTO 2015). Thus, a slowdown in the emerging market economies will also have strong implications for the low-income and high-income countries. Therefore, the danger of the MIT is of great relevance for the future welfare of many people.

  46. 46.

    China produces one in every five college graduates in the world. College admission in China is governed by a single exam—the national college entrance exam, and the government sets admission cutoff scores for elite colleges (see Jia and Li 2021).

  47. 47.

    In a 2015 UNICEF report, the UN Children’s Fund estimated that more than one in three children in China (or nearly 100 million) have experienced the prolonged absence of at least one parent.

  48. 48.

    On Mao’s original policy ideals, see e.g. Graham Hutching’s book “China 1949” (Hutching 2021).

  49. 49.

    China still has only two doctors per 1,000 people, compared with 3.5 on average across the OECD countries, and most are poorly paid.

  50. 50.

    Much of the trouble originated in the 1980s, when the reform of the free, state-funded health care system began. Hospitals, lacking state funding, began to charge patients for treatment and often prescribed too many drugs. Many ordinary people were unable to pay. This created a “general feeling of distrust” towards the medical profession.

  51. 51.

    In contrast, Germany reported a share of 36% and the UK of 25%. China’s and South Korea’s shares are slightly above Japan’s 11% (13% and 14%, respectively) (cf. World Bank 2021).

  52. 52.

    The level of self-sufficiency in semiconductors is currently 100% in Taiwan, 80% in Japan and South Korea respectively, and 60% in China (compared with only 50% in the USA), according to McKinsey (Handelsblatt 14.06.2021, p 20).

  53. 53.

    In terms of economic size, India is projected by Bank of America to have the third largest GDP in the world as of 2030. However, this depends on how much India will still be affected by the current pandemic and its aftermath in the coming years.

  54. 54.

    In its 2019 Country Report, in addition to a credible fiscal consolidation path (and other), the IMF furthermore urged “continued labor, product market, land, and other reforms aimed at increasing labor market flexibility, enhancing competition, and reducing the scope for corruption” (IMF 2019b: Executive Board Assessment).


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See Table 6.7.

Table 6.7 GDP per capita relative to the USA and UK, various databases

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Glawe, L., Wagner, H. (2021). Current Challenges. In: The Economic Rise of East Asia. Contributions to Economics. Springer, Cham.

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