Two faces of Asia's economic success

THE world economy is a worry once again.

Sluggish recovery in advanced economies has been aggravated by Europe’s sovereign debt problems and budgetary discord in the United States. Close ties with these markets affect Asia’s exports. Yet, despite this, Asia’s economy continues to thrive.

Asia’s average annual gross domestic product growth over the past two decades – a robust 8.6 per cent – is the highest worldwide and the source of regional pride. Asia again proved its resilience during the 2008/09 global crisis: Recovery was quick and solid; inflation may be rising but remains manageable; most budgets remain sound; and poverty has declined significantly – between 2005 and 2008 alone, an estimated 150 million exited extreme poverty, defined by the World Bank as living on less than US$1.25 (S$1.50) per day. That trend is continuing, according to a new study by ADB researcher Guanghua Wan.

That’s the good news. But a proper Asian perspective requires a strong dose of reality. The region as a whole may be developing rapidly. Yet Asia is one of the world’s most heterogeneous regions. That is where our success can fool a casual observer.

The bad news is that the same study shows poverty in Asia’s least developed countries is not improving fast. Actually, four countries showed a larger number of poor in 2008 than in 2005 – as population growth outpaced poverty reduction. And in most of those that have done well, governments admit that while they may now be labelled middle-income economies, income and non-income inequality is in fact widening.

The stellar economies of the People’s Republic of China and India account for 77 per cent of those 150 million lifted out of extreme poverty. Moreover, between the US$1.25 and US$2 per day poverty lines, the number of poor fell only marginally – by around 18 million, which means that most people who moved out of extreme poverty still remain moderately poor.

Asia continues to be home to over 1.6 billion – or over 60 per cent – of the global population surviving on less than US$2 a day. The United Nations monitors the 2015 Millennium Development Goal (MDG) targets. Substantial, and relatively even, progress has been made in primary education enrolment and access to safe drinking water. But progress in other areas diverges widely – such as in reducing child and maternal mortality, access to anti-retroviral drugs, and in providing improved sanitation. Several low-income countries have no chance of reaching MDG targets. But so too some middle-income countries won’t meet all their targets either.

The question is why, despite rapid growth, Asia has been slow to address income and non-income inequalities? Of course, special attention must be given to low-income, least-developed economies.

And while many middle-income countries successfully shifted from traditional agriculture to manufacturing-driven growth, low-wage and low-quality employment remains the norm due to fierce competition, causing problems for the working poor. Many work with no formal contracts – with no access to benefits or job security. Between 1990 and 2008, Asia’s informal employment barely slipped –from 69 per cent to 67 per cent. That is twice as high as Latin America (33 per cent) and eight times larger than the Organisation for Economic Cooperation and Development (8 per cent).

Asia’s challenge is to narrow income and non-income inequalities before they create social tension or political instability – negating the region’s hard-won gains in poverty reduction and sustained growth. We must take development to the next level. We must promote growth that is more inclusive – both within and across countries. Low-income countries must accelerate their transformation to middle-income status. And middle-income countries need to better use existing resources to provide effective social safety nets, improve job quality, move up the technological ladder towards greater innovation, continuing to deepen financial and regional cooperation. Without these, the move to high-income status is nigh impossible – and economies can get stuck in the so-called “middle-income trap”.

So, from the perspective of economic development, don’t be fooled by Asia’s huge success. The good news is that poverty fell substantially despite the crisis – and the trend is continuing. The bad news is that some least-developed countries are seeing poverty worsen, and most middle-income success stories are seeing inequality widen.

In sum, it means three things: First, development lending works; second, more is needed; and third, it must be effectively targeted to those least developed, or within economies with widening inequalities. Inclusivity is key. Without it, sustained growth and poverty reduction will remain an unfulfilled dream.