Key Details
In Asia’s New Growth Challenge, Krishna Srinivasan, Director of the IMF’s Asia and Pacific Department, examines how the region can sustain growth as its established engines become less effective. The article reflects the author’s views and does not constitute IMF policy.
Indicator | Finding |
|---|---|
Asia’s global role | Nearly 40% of global output and two-thirds of global growth |
Productivity | Growth has slowed across much of Asia since the global financial crisis |
Ageing | By 2050, one in five Asians could be aged 65 or above |
Regional trade | Less than 30% of final-goods exports are traded within Asia—about half the share in Europe and North America |
Integration gains | Deeper regional integration could raise Asia’s real GDP by approximately 1.8% over the long term |
AI potential | In better-prepared Asian economies, AI could add as much as one percentage point to annual growth relative to a no-AI scenario |
India’s services strength | Modern services account for about one-quarter of India’s exports |
Asia’s Established Growth Formula Is Delivering Lower Returns
Asia now produces nearly 40% of global output, up from about one-quarter in the 1990s, and accounts for roughly two-thirds of global growth. But the model behind this rise — industrialisation, high investment, expanding workforces and global trade — is becoming less powerful.
Productivity growth has slowed across much of Asia since the global financial crisis, while additional investment is generating diminishing returns. Bank-dominated financial systems can also favour established firms, including state-owned enterprises, over younger and more innovative businesses.
The next phase of growth therefore depends more on allocating it towards productive firms and new activities, supported by broader financial access, deeper capital markets and venture finance.
Asia Faces Diverging Demographic Pressures
Asia’s fertility rate has fallen from around six children per woman in the 1960s to about 1.6 today, while life expectancy has risen from roughly 50 years to the mid-70s. By 2050, one in five people in Asia could be 65 or older.
But demographic trajectories differ sharply. Japan, South Korea and China already face shrinking workforces; India, Malaysia and Vietnam retain demographic advantages that are beginning to fade; and countries such as Nepal and the Philippines continue to experience labour-force growth.
Ageing economies need productivity gains and greater participation by women and older workers. Younger economies need enough productive, higher-quality jobs to convert labour-force growth into a demographic dividend.
Trade Fragmentation Is Weakening an External Growth Engine
Asia accounts for around one-third of global trade, leaving its export-oriented economies exposed to protectionism, geopolitical tensions and supply-chain shifts.
Greater intraregional trade could provide a buffer, but less than 30% of Asia’s final-goods exports remain within the region, around half the comparable share in Europe and North America. Intraregional trade within ASEAN is also below one-quarter of its total trade.
The article identifies logistics constraints, uneven human capital and non-tariff barriers as important obstacles. Model-based estimates suggest deeper integration covering goods, services, digital trade, competition and standards could increase regional real GDP by around 1.8% over the long term.
Such integration also requires infrastructure, adjustment support and fiscal capacity to absorb tariff-revenue losses.
Services and Domestic Demand Are Becoming More Important
As manufacturing’s share of output peaks in several economies, finance, IT and business-process services are becoming more important sources of productivity and trade.
India illustrates this shift: modern services account for about one-quarter of its exports, supported by software capabilities and digital public infrastructure.
Services cannot fully substitute for manufacturing as a source of mass employment, particularly where they require specialised skills. But they provide another route to productivity and exports as conventional manufacturing-led growth becomes harder.
Greater reliance on domestic demand and regional markets could also reduce Asia’s vulnerability to external trade shocks.
AI Could Raise Growth but Widen Economic Divides
Asia accounts for more than two-thirds of global digital-technology innovation, while around 90% of its population is online. AI could raise productivity and help ageing economies offset shrinking workforces.
In better-prepared Asian economies, model-based estimates suggest AI could add up to one percentage point to annual growth relative to a no-AI scenario.
But unequal access to skills, capital and institutional capacity could widen differences both between and within countries. Education, retraining, worker mobility, regulation and income support will therefore influence how widely productivity gains are shared.
Energy Dependence Is Becoming a Growth Risk
Industrialisation and digitalisation are increasing Asia’s electricity needs while many economies remain dependent on imported fossil fuels. Energy-price shocks can therefore affect inflation, external balances and industrial competitiveness.
Renewables and storage can reduce import dependence, but the transition must preserve affordability and reliability. Growing electricity demand from AI and data centres makes this balance more important.
Energy policy is consequently becoming part of macroeconomic and industrial strategy, not only climate policy.
Policy Relevance
For India, the central challenge is to use its remaining demographic advantage, services strength and digital capabilities to build a more productive economy before these advantages narrow.
Convert the demographic window into productive employment: India’s relatively young workforce remains an advantage only if education, skills and job creation raise productivity, formality and earnings.
Treat services and manufacturing as complementary: Modern services are an export strength but cannot alone absorb India’s workforce. Finance, logistics, digital and professional services can simultaneously improve manufacturing competitiveness.
Use Asian integration to diversify trade risk: Greater regional commerce can reduce exposure to fragmentation elsewhere, but requires progress on logistics, standards, services and digital trade, not tariffs alone.
Improve capital allocation, not only investment volumes: Financial development should help MSMEs, younger firms and innovative sectors access capital rather than reinforcing established borrowers.
Connect AI adoption with workforce adjustment: Digital infrastructure provides a foundation, but gains will depend on skills, firm adoption, computing access and retraining as tasks and occupations change.
Make energy security part of competitiveness policy: Manufacturing, AI and data centres will increase electricity demand. Renewables, storage, grids and reliable supply will determine whether growth can expand without greater exposure to imported-energy shocks.
Relevant Question for Policy Stakeholders: How can India use its remaining demographic window and digital-services strength to create productive employment at scale, while trade fragmentation, uneven AI adoption and rising energy demand weaken the older export-led growth model?
Follow the Full Article Here: Asia’s New Growth Challenge by Krishna Srinivasan, Finance & Development, September 2026