The Future of Asia: Forces of Change and Potential Surprises – Supplementary Report

Policy Horizons | Horizons de politiques May 1, 2014

Image of yellow arrows going from left to right against a white background for The Future of Asia Forces of Change and Potential Surprises Supplementary Report blog post

Rethinking Models of Growth and Consumption in Asia

What is it?

The concept of inclusive growth, whereby an economy develops across a number of sectors in accordance with the skills of the labour force, is a common economic development model in Asia.¹ Inclusive growth strategies can facilitate the growth of a robust middle class and lead to a more consumption-led and/or service-oriented economy. When it is successful, inclusive growth helps address inequality issues, promotes the need for social protection by the state and legitimizes the efforts of those in power. However, efforts to reduce waste and extravagant spending as part of inclusive growth strategies, whether by individuals using models such as social capitalism² or through state intervention such as constrained capitalism,³ may result in lower levels of consumption.

Asian consumption patterns will be shaped by the middle class. There is no widely accepted definition of what constitutes a member of the Asian middle class, and this has repercussions for the type and quantity of goods and services that they will purchase. The Asian Development Bank defines a person as middle class if they earn between $2 and $20 a day, adjusted for purchasing power parity. Most Asians are currently members of the lower middle class and earn $2 to $4 a day. In the short term this will mean that Asian consumption levels will not approach those of Western countries.⁴

Asian countries will need to develop innovative goods and services for consumers as they make the transition from working poor to established members of the middle class. One means of achieving this is through frugal innovation, which involves making products or delivering services from a limited amount of resources. Examples of frugal innovation include the Tata Swach,⁵ a low-cost water purifier, and the Mitti Cool Refrigerator,⁶⁷ neither of which require electricity to operate. An example of how frugal innovation has been applied to services is the cardiac care provided by the Narayana Hrudayalaya Group in India, which involves patients’ families in non-specialist care and uses new approaches to micro-health insurance.⁸ Frugal innovation occurs in businesses of every size, and especially in the small and medium-sized enterprises that make up more than 95% of all enterprises, account for 85% of employment and contribute up to 53% of GDP in ASEAN countries.⁹

Why is it important?

Asia’s consumption patterns will influence two of the continent’s biggest challenges over the next fifteen years – reversing environmental damage and sustaining high levels of economic growth. Some governments, notably China, are now officially acknowledging citizen discontent over pollution, and devising policies to address these concerns.¹⁰Asia’s response to environmental issues and consumption patterns will also affect the profitability and competitiveness of particular industries. The requirements of running technologically intensive industries may increase as a result of environmental pressures. Those countries with the ability to rapidly adopt advanced technology will have a competitive advantage in certain fields. Furthermore, companies with new business models and concepts that creatively design products and services at a price point consumers can afford will have market opportunities in emerging economies.¹¹