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How to Outgrow an Export-Led Economy
The global economic crisis was a defining moment for developing Asia. Its resilience and rapid rebound from the recession has changed how others view the region and how the region views itself. Now the region needs to refocus. We must turn our advantage into sustained economic growth. Keep unwinding stimulus, and, above all, get more efficient to sustain the region's growth over the medium- and longer-term.
Developing Asia's recovery has led the world. This year, GDP growth will likely come in at 8.2%, up from just over 5% in 2009. A rapid turnaround in exports (a significant portion intraregional), healthy private demand, and lingering government stimulus, back the expansion.
This dynamism contrasts starkly with the fragile recovery in advanced economies. In the United States, eurozone, and Japan, GDP will likely crawl by about 2% this year and next. And any one of a number of factors could derail even this.
While developing Asia is justly proud of its economic resilience, there is no room for complacency. It must look beyond recovery and grab the opportunity to restructure for steady growth over the longer term. When the crisis hit, there was ample fiscal and monetary space for aggressive, if temporary, stimulus. But stimulus - now being withdrawn gradually, with an eye on timing, policy mix, and pace - cannot produce new permanent jobs or strengthen the productive backbone of an economy, whether in agriculture, industry, or services.
Let's not forget, for all its achievements, developing Asia remains home to two-thirds of the world's poor - more than 1.8 billion Asians subsist on less than $2 day; nearly half a billion are without access to safe drinking water; and about 100 million children under 5 are malnourished. Keeping rapid economic growth on track is key to raising living standards and reducing poverty.
So how do we do this?
First, a reality check. Post-crisis, advanced economies must get a grip on debt; developing Asia must make its savings more productive. In this environment, the region's traditional export-led growth paradigm has to evolve. Just as exports helped much of developing Asia transform from a poor, capital scarce region to a middle-income, capital abundant region, these resources should now be more efficiently allocated for greater productivity, faster technological transfer, and innovation.
Bringing trade, human capital, infrastructure, and financial development to the next level are the pillars for developing Asia's next transformation.
Trade has been a critical component of the region's success. And it will remain core to heighten productivity. We must galvanize the region's huge domestic consumption potential to bolster intra-regional trade without compromising the gains from trade openness and globalization. The corollary is that for developing Asia's weaker, smaller, or landlocked economies unable to tap global trade, we must provide sufficient "aid for trade" - as promoted by the World Trade Organization and the Asian Development Bank - to channel donor support toward infrastructure development, removing "behind-the-border" impediments to trade, and building the expertise required to expand manufacturing and diversify exports.
People are key. We must improve labor productivity while assimilating existing technology and promoting innovation. Education, education, education. It has been the cultural mantra underpinning developing Asia's economic surge. Asians want their kids to learn. And governments must support this by investing in raising enrollment rates - especially at the secondary and tertiary levels - and ensuring quality education. There is huge diversity now among countries. But any educational reform must be ahead of the curve if it is to meet the standards and skill sets required by today's and - crucially - future Asian labor markets.
Then there is infrastructure - a massive investment gap estimated at $8 trillion by 2020. No doubt infrastructure in developing Asia has expanded quickly. But it remains well below world averages in both quantity and quality. Rapid urbanization means that, to keep economies competitive and build a life of quality, new infrastructure is needed to improve traffic congestion, minimize environmental degradation, and ensure adequate services like power and water.
Finally, developing Asia must deepen its financial systems. It must move from mobilizing savings for investment quantity to making quality investments more efficient. To do this, deeper, broader, and more liquid financial systems are needed. The global crisis proved financial stability is a global public good. Instability can batter economic growth. Strong prudential regulation and deepening local currency bond markets are crucial. Promoting finance for small- and medium-sized enterprises - and low-income households - also builds entrepreneurship and opportunity.
The region needs, in sum, to reset its economic priorities. Government policies must be tailored to focus on trade, human capital, infrastructure, and financial development to build the foundation for developing Asia's next transformation - one toward sustained economic growth. With economic rebound in advanced economies likely to be gradual, developing Asia must transform itself once more to become the mantle of global growth.