## ASIA’S NEW GROWTH CHALLENGE

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### Momentum and headwinds
- Asia accounts for nearly 40 percent of output and two-thirds of growth—up from a quarter in the 1990s.
- Past models of export-led industrialization face limits as productivity gains slow and demographic pressures constrain labor supply.
- Trade fragmentation and high energy intensity add vulnerabilities, exposing economies to trade shocks and energy shocks from distant conflicts and the climate transition.
- Rapid technological advances, notably AI, can turbocharge growth but risk disrupting jobs and widening divides.

### Productivity and investment
- Productivity growth has slowed across much of Asia since the global financial crisis.
- Investment remains high, but returns to capital have declined due to rising misallocation and diminishing efficiency.
- Financial systems are heavily bank-centric, favoring large incumbents, including state-owned enterprises, over younger, faster-growing firms.
- Policy directions to boost productivity and reallocate capital:
  - Improve financial access.
  - Deepen capital markets and expand venture finance.
  - Price and allocate capital on market terms so it flows to more productive uses.

### Aging populations
- Fertility rates across Asia fell from about 6 children per woman in the 1960s to about 1.6 today.
- Life expectancy rose from roughly 50 years to the mid-70s.
- By 2050, one in five people in Asia will be 65 or older—double today’s share.
- Asia is heterogeneous:
  - Rapidly aging: Japan, Korea, China (shrinking workforces weighing on growth).
  - Middle: India, Malaysia, Vietnam (demographic dividends fading).
  - Younger: Nepal, the Philippines (labor forces continue to expand).
- Policy responses to mitigate aging pressures:
  - Boost labor participation among women and older people.
  - Invest in skills and facilitate mobility.
  - Manage migration within and across borders.
- Fiscal pressures from pensions and health care spending will rise without policy action.

### Trade fragmentation and regional integration
- Asia accounts for roughly a third of global trade, with increasing intraregional linkages, but global trade integration is changing.
- Geoeconomic fragmentation is reshaping trade patterns, supply chains, and investment flows.
- Less than 30 percent of final goods exports is traded within the region—half the share in Europe and North America.
- Trade within ASEAN accounts for less than a quarter of total trade despite the bloc’s openness.
- Structural constraints limiting intraregional trade:
  - Limited logistics infrastructure.
  - Uneven human capital development.
  - Nontariff barriers.
- Potential gains from deeper regional integration:
  - Deeper integration could raise regional real GDP by about 1.8 percent in the long run—equivalent to adding an economy larger than Thailand’s today.
  - Additional gains would be larger with coordinated reforms across countries.
- Fiscal implications:
  - Deeper integration requires fiscal space to manage transition costs, offset revenue losses from tariff reductions, and support complementary investments.
  - Tax revenue in much of Asia, notably many ASEAN economies, is low relative to peers; raising more domestic revenue is critical.

### Technology and growth (AI and digitalization)
- Asia leads in digital adoption with about 90 percent of the population online and accounts for more than two-thirds of global innovation in digital technologies.
- AI potential:
  - In economies with strong fundamentals, AI could raise growth by up to 1 percentage point per year relative to a no-AI baseline, according to model-based analysis.
  - AI can help offset labor shortages in aging advanced economies like Japan and Korea.
  - Later adoption in lower-income countries could widen regional disparities and raise financing costs if global investment demand increases.
- Distributional risks:
  - AI likely benefits high-skilled workers in complementary roles, while others may be displaced.
- Policy actions to shape AI outcomes:
  - Invest in education, digital infrastructure, and innovation.
  - Implement labor policies for retraining and mobility.
  - Use redistributive policies to share gains and support displaced workers.
- Digitalization benefits:
  - Improves efficiency of financial transactions (example: India’s digital payments move trillions of dollars each year).
  - Digitalizing tax and payment systems can raise government revenues and improve spending transparency.
  - Significant digital divides remain across and within countries.
- Required digital policy framework:
  - Invest in digital infrastructure and platforms (identity, payment systems).
  - Strengthen regulation to ensure trust.
  - Expand digital literacy.

### Energy security: a defining fault line
- Energy security is a near-term macroeconomic challenge, especially in Southeast Asia.
- Continued reliance on imported fossil fuels meets rapidly rising energy demand from Vietnam’s industrial expansion, Singapore’s data centers, and Indonesia’s urbanization.
- Recent price shocks have exposed vulnerabilities.
- Country responses and transitions:
  - Vietnam scaling up renewables to support manufacturing.
  - Indonesia exploring a shift away from coal.
  - The Philippines diversifying to reduce dependence on imported energy.
  - Thailand making the energy transition a policy priority.
- Falling renewables costs and advances in storage ease the transition even as AI and digitalization raise electricity demand.
- The transition challenge is to move fast without compromising affordability or reliability; successful transition yields greater energy security and a resilient growth engine.

### Scenarios, projections, and aggregate effects
- Demographics and technology combined:
  - A shrinking population is expected to subtract about 0.3 percentage point from growth annually by 2050.
  - Productivity gains from AI and related technologies could add 0.2 to 1 percentage point.
  - Together, these forces suggest growth in Asia could remain close to or even exceed recent historical averages if productivity gains are fully realized.
  - Additional gains from trade integration could lift growth further by about 0.1 to 0.3 percentage point.

### Policy priorities to sustain inclusive and resilient growth
- Shift from more to better investment and strengthen financial systems so capital reaches productive uses.
- Deepen capital markets and expand venture finance to support innovation and firm dynamism.
- Pursue comprehensive, enforceable regional agreements covering services, digital trade, competition policy, and standards to lower trade costs.
- Mobilize domestic revenue to finance transition costs and complementary investments.
- Invest in skills, institutions, digital infrastructure, and innovation to capture AI and digitalization gains.
- Implement labor-market and redistributive policies to manage transition costs and ensure inclusion.
- Accelerate a just and affordable energy transition to bolster energy security and resilience.

*krishna srinivasan is director of the IMF’s Asia and Pacific Department.*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2026/09/srinivasan.pdf_