Seminar on Asia 2050

Speech | 18 October 2011

Speech by Rajat M. Nag, ADB Managing Director General, at the Lee Kuan Yew School of Public Policy, Singapore

I. Introduction

Honorable Chair, distinguished faculty, guests and dear students.

On behalf of the Asian Development Bank, I would like to thank the Lee Kuan Yew School of Public Policy for hosting this Seminar on our study Asia 2050: Realizing the Asian Century. This study develops plausible scenarios of where the region could be in the next four decades; identifies drivers of change and policy choices the region must make; and provides guidance on the implementation of national, regional, and global agendas. We hope this study will be the beginning of a dialogue on Asia's long-term prospects.

Asia has indeed done very well over the past four decades. The economic center of gravity is shifting towards Asia, leading many to dub this as the Asian Century. However, as we look forward to the next four decades, we realize that the challenges we face now are significant and will be quite different from those we have overcome to get here. In a nutshell, while an Asian Century is plausible, it is far from pre-ordained.

The study presents two alternative scenarios for Asia's economic trajectory between now and 2050: the Asian Century Scenario and the Middle Income Trap Scenario. Under the Asian Century, some 3 billion more Asians would become more affluent and enjoy higher living standards. But the Middle Income Trap Scenario would bring a very different set of outcomes. Under the Middle Income Trap, Asia's GDP per capita would be only about half of what could be achieved under the Asian Century Scenario. Each scenario is closely examined in this study, underscoring the potential payoff of proactive policies compared to the cost of inaction. The two scenarios are rough sketches of how Asia's future might unfold depending on how policy choices are made and pursued.

To fulfill Asia's development potential, we face multi-generational challenges that need to be addressed to ensure that we stay on the correct path amid a constantly evolving global and regional economic environment.

Today I will focus on four key challenges among others facing Asia: (i) Promoting Inclusive Growth (ii) Avoiding Middle Income Trap (iii) Action on Climate Change and lastly, (iv) Improving governance. Before concluding, I would also like to leave some thoughts on Asia taking on greater responsibilities as it re-emerges as a rising influence in the global economy.

II. Promoting Inclusive Growth

The promise of the Asian Century does not stop at successfully avoiding the Middle Income Trap—securing sustainable growth will also depend on narrowing inequities in the region. Asia has made marked progress in reducing poverty, with the number of poor people living on less than $1.25 a day falling from 1.5 billion to 947 million between 1990 and 2008. While commendable, both income and non-income inequalities have remained high or even risen in a number of countries. For example, in Southeast Asia, rising income inequality has accompanied falling poverty rates in most countries. The region's progress toward achievement of the Millennium Development Goals (MDGs) has also been largely uneven, particularly those relating to sanitation and childhood and maternal health-related outcomes.

These persistent inequities have given rise to the term "the two faces of Asia." The widening disparities in terms of incomes, the urban–rural divide, and demographic changes are cause for concern. Islands of prosperity will not survive in a sea of poverty. The rapid growth of Developing Asia may have disguised the growing inequalities in the region but, if left unattended, this dualism may aggravate social and political tensions and even lead to conflict, posing a threat to Asia's stable growth and social cohesion. Such an outcome can currently be seen in parts of the Middle East and Latin America—Asia must do all it can to avoid the same fate.

Asia needs to pursue a development strategy that promotes inclusive growth, using policy instruments focused on human capital development and improvement of infrastructure services. This will require targeted interventions in areas such as healthcare, nutrition, and sanitation. Policy makers should emphasize job creation for the broader population and education to help the poor build the skills needed for higher paying jobs as essential elements of inclusive growth. Increasing access to finance for the poor and vulnerable is another important element. Government redistribution policies and social safety nets, including those pertaining to labor market policies and social insurance, must be carefully designed and implemented to ensure that the most vulnerable groups are provided targeted assistance.

III. Avoiding The Middle Income Trap

Asia's path to prosperity will be led by fast growing economies such as the People's Republic of China, India, Indonesia and Viet Nam. The entry of these Asian economies to the group of middle-income economies will have significant implications on the region's growth structure, with declining dependence on the region's traditional export markets and domestic demand emerging as a major source of growth. However, economies must be wary of falling into the "Middle Income Trap" if the region's growth trajectory is to be sustained.

The Middle Income Trap refers to the situation in which a country's growth plateaus and eventually stagnates after reaching middle income levels. The problem arises when such economies find themselves unable to compete with advanced economies in high-skill innovations or with low income, low wage economies in the export of manufactured goods. As wages rise and cost competitiveness declines, middle income growth strategies need to introduce new processes and find new markets to maintain export growth. Domestic demand is also important in sustaining growth as an expanding middle class begins to use its increasing purchasing power to buy high-quality, innovative products.

The biggest challenge is moving from resource-driven growth that is dependent on cheap labor and capital to growth based on high productivity and innovation. Policies should focus on helping middle-income economies move from catch-up to frontier status in technology by strengthening human capital development and building an environment conducive to innovation and entrepreneurship. An important requirement here is building a high-quality education system which encourages creativity and supports breakthroughs in science and technology. Avoiding the Middle Income Trap also requires more responsive and modern institutions to support competition and innovation. Such institutional development is often a long-term endeavor that presents a challenge for policy makers since the benefits are not immediately visible and may be difficult to attribute directly to specific policies. Hence, political leadership is essential in averting the Middle Income Trap and sustaining the goal of sound, long-term growth even after the material well-being of a select few has been secured.

IV. Action on Climate Change

The study concludes that while climate change can affect every human being on the planet, with over half the world's population, Asia has more at stake than any other region. Climate change has far reaching implications for the way Asia needs to move forward. Asia needs to increase energy efficiency and reduce its reliance on fossil fuels. Asia needs to adopt a new approach to urbanization by building more compact and eco friendly cities. It needs to rely much more on mass transit and Asians must change their lifestyles to alleviate pressures on finite resources.

The ability to mitigate the adverse effects of climate change including economic damage and social disruption makes economic, political, and social sense. Fortunately larger economies like the PRC and India, are already pursuing technological development and innovations needed to promote green economies. The examples set by Japan and Korea are both an inspiration and competitive challenge for both PRC and India. Further, despite their expressed reservations about a binding treaty at global negotiations in Copenhagen and Cancun, over the past two or three years major Asian economies have accelerated their actions on climate change and clean energy. During the recent global and economic crisis several countries in Asia led the world in terms of the percentage of economic stimulus devoted to green measures. The economic stimulus plans of Korea and PRC allocated 80 per cent and 38 per cent of their respective totals to investments consistent with stabilizing and then cutting emissions of greenhouse gases.

Policy makers also recognize that there is close synergy between energy security and the climate change agenda. Energy efficiency offers the greatest and most economical potential for improving energy security and reducing carbon emissions.

Much of what needs to be done in Asia must be done by Asian countries themselves if for no other reason than enlightened self interest of the region. By taking proactive actions to mitigate climate change, major Asian countries are also demonstrating that they are willing and able to play a constructive role in tackling this pressing common global challenge.

V. Improving Governance

As the region seeks to cement the gains from a decades-long economic boom and sustain its growth momentum, Asia will need to take bold action to address the multitude of governance challenges facing the region. Prominent among these challenges is the scourge of rising corruption in many economies that has widened governance deficit in government, businesses and institutions. While corruption is not a new phenomenon and nor is it just confined to the region, but if left unchecked it will weaken institutions, corrode the fabric of governance and unravel the hard-won gains of Asian economies. Failure to address persistent and pervasive corruption in Asia creates a binding constraint to efforts to maintain social and political stability and build legitimacy in the region.

Changes in demographics, increasing urbanization, and an expanding middle class will create new pressures that will drive the transformation of governance and institutions in Asia over the next 40 years.

The next 40 years are expected to see major transformations in Asians' needs, demands, and expectations for governance reforms. The general trend seems to indicate the emergence of a more empowered citizenry with higher expectations and demands from the state in terms of greater transparency and accountability and more efficient service delivery. Policy prescriptions for good governance abound, but true change will need to come from within the region. It is hoped that the new aspirations accompanying the prospect of realizing the Asian Century will allow for demand-led reform built on an unwavering commitment to genuine transformation of governance across the region.

VI. Role of Asia

As Asia becomes a larger player in the global economy, its role in the world in terms of global governance and in the realm of economics and politics will necessarily entail transformation.

Asia's growth and rapid expansion will bring new challenges and obligations, particularly for its largest economies such as the PRC, India, Indonesia, Japan, and the Republic of Korea. Greater attention must be given when formulating domestic and regional policy agendas—these will have far-reaching implications for the region, for its long term prospects, and for its relations with other parts of the world.

Asia thus has a growing responsibility to help manage the global commons—whether in terms of tackling climate change or maintaining international peace and prosperity. Global public goods—such as free trade, financial stability, climate change, and security, among others—are responsibilities Asia must embrace. It is imperative for the region to keep its borders open in order to have equal access to markets worldwide. As a growing economic force, Asia must lead by example, by being a responsible global citizen. Asia's long-term prospects will depend much on ensuring well-being, peace, and security throughout the world.

VII. Conclusion

Clearly, Asia faces daunting challenges in its march toward shared and sustainable long-term prosperity. There is much work to be done. The changes in policies and strategies proposed have long gestation periods spanning many decades. Specific steps must also be designed to fit each country's unique conditions and policy needs. We must act with utmost urgency in developing and implementing new policies and strategies while national leaders must take ownership of their respective action plans to ensure that they are seen through and effectively implemented.

As we move forward, we should also recognize that this is not the story of Asia alone. As Asia becomes the center of the global economy, it will be in its own interest that the rest of the world also does well economically and politically—conversely, countries outside the region have a stake in the region's success as well. The Asian Century should not be exclusively Asia's but the century of shared global affluence. As we reflect on the issues raised during today's discussions, we hope that today's discussions will be but another step in the continuous process of fostering commitment to the goal of shared and sustainable global prosperity.

Thank you!