Opportunities and Challenges of Middle Income Transition

Keynote Speech by Haruhiko Kuroda, ADB President, at the ADB-PRC Knowledge Sharing Forum to commemorate 25 years of ADB-PRC Partnership on Opportunities and Challenges of Middle Income Transition, Beijing, People's Republic of China

Ladies and Gentlemen,

This is indeed a momentous occasion. We are here to commemorate 25 years of partnership between the People's Republic of China (PRC) and the Asian Development Bank. So today is an opportune time to look back at our collective achievements, and look forward to our challenges as we continue this journey of development. ADB's vision is to help the region and all its developing member countries eradicate poverty and improve the quality of life of their citizens. Working closely with the Government, we have supported PRC in fulfilling this vision. ADB's strategy is closely aligned with Government's development priorities and plans. This alignment has translated into the support that ADB has provided over the last 25 years.

Though significant progress has been achieved, many challenges still remain. Among them, rebalancing growth by accelerating the development in the less developed areas of the central and western regions of the country is highly important. Urban-rural inequality needs to be addressed, as do the environment and energy efficiency issues that have come from the huge demand on resources. Steady, balanced development with a focus on inclusive growth is critical to benefit the poor.

Ladies and Gentlemen,

Sustaining economic growth over time requires successfully addressing the many challenges inherent in the growth process. In any economy, each stage of development has obstacles that must be overcome for growth to continue. Hence, a different approach is required at every stage of development. Countries that fail to address these challenges face the risk of income growth stagnation, a phenomenon known in the economic literature as an "income trap".

There are numerous examples of countries that were initially recognized as good economic performers but have stayed at the middle-income level. For instance, Brazil, Morocco, South Africa and Syria all attained high levels of growth in the 1960s and 1970s, but slowed thereafter. Countries caught in this middle income trap situation share a common structural constraint – their higher production costs combined with limited innovation and technological capacity renders them unable to compete with either low- or high-income countries.

Growth performance has varied widely among East Asian economies, even though most countries are actively engaged in regional production networks, and have spent a similar amount of time in their industrialization processes. Most economies followed a similar pattern of growth. Efforts to transit from an agrarian economy to an industrial one were followed by short-lived import substitution strategies, and later replaced by an export-oriented growth pattern.

Japan and Singapore succeeded in reaching high-income status, and the Republic of Korea seems to be making this transition successfully. At the same time, we see some countries who failed to consolidate their gains.

Thirty years of successful reform has transformed PRC into the world's second largest economy. Rapid growth drove the swift transition from low-income to middle-income status. Today, the challenge lies in how to avoid middle income trap and achieve further transition. In this pursuit, a more determined stance towards inclusive growth and environmental sustainability is needed to secure long-term growth, and to overcome the imbalances generated by three decades of rapid growth.

International experience suggests that moving up beyond middle-income status appears to be more complex than moving up from the low-income to middle-income range. Growth strategies that proved successful in earlier stages of development are less effective when moving up to next stage. What is needed at this stage is pragmatic policy making, private sector dynamism and good governance. The main factor determining failure or success relates to the ability of the economies to innovate and upgrade their production process from foreign technology-based, low-value added manufacturing to high-value added products produced by the country. This crucial shift requires flexibility in setting policy and large investments in human capital and research and development (R&D).

More specifically, international experience shows that successful countries devoted considerable efforts and resources in pursuing innovation-driven growth, developing their human capital, fostering private sector participation, developing supportive industries, upgrading logistics, and combating income inequality.

In this regard, I am happy to note that most of the needed reforms are embedded in the context of economic rebalancing, a priority in the Government's reform agenda as reflected in the recently approved 12th Five-Year Plan. However, rebalancing is a complex process that covers a wide range of structural adjustments, on both the supply and demand sides of the economy. Therefore, the process will require a comprehensive reform package of mutually supportive and consistent policies, rather than a single policy pursued in isolation.

The task ahead is indeed daunting and requires substantial economic restructuring and major reforms to transform the current capital-intensive model into one that is more labor-intensive and less dependent on external demand. Efforts will be needed to further strengthen the financial sector, foster personal consumption, improve income redistribution mechanisms, and develop comprehensive safety nets. Similarly, to promote innovation-driven growth, increased education expenditure will help strengthen links between education and vocational training, and the labor market.

Restructuring an economy is a complex and lengthy process, which requires time, money and a concerted, sustained effort. However, I am confident that with the Government's strong commitment to its people, pragmatic policies and a strong fiscal position will help the country succeed.

Ladies and Gentlemen,

As we celebrate our 25 years of partnership, ADB stands committed to support PRC's development agenda in the years to come. I am happy that our event today brings together well known international experts to discuss the experiences of some developed countries in transitioning from middle income status, as well as some economies that could not make it. I am sure that there are many useful lessons and insights in these experiences that PRC and others can draw on for sustainable and increasing prosperity.

I look forward to the various presentations and speeches and wish all of us a productive exchange of ideas and discussions.

Thank You.