Asia's rapid growth has lifted hundreds of millions of people out of poverty. But almost 1.9bn Asians, more than four times the population of the European Union, still survive on less than $2 a day. If this number is to fall, Asian economies must create more jobs.

At least 500m Asians out of a total labour force of about 1.7bn are unemployed or underemployed. And some 245m new workers will enter the region's labour markets over the next 10 years. The outlines of an employment crisis are already taking shape.

Strong economic growth alone will not solve the problem. Even in countries that have achieved relatively high growth rates of output, employment growth has been disappointing. This is particularly true in the formal sectorof economies where production iscapital-intensive, productivity is high, and workers have well-defined wage and employment contracts.

The booming Chinese and Indian economies are no exception. In China, layoffs at state-owned enterprises resulted in a surprisingly large decline of about 15 per cent in manufacturing employment between 1995 and 2002. Jobs in urban areas have increased by 3 per cent a year since the early 1990s but labour force surveys suggest most are in the informal sector.

In India, in spite of high economic growth throughout most of the 1990s, the share of formal sector employment in total non-agricultural employment fell from 19.5 per cent to 16.8 per cent. The share of formal employment has declined or stagnated in Indonesia,the Philippines and Thailand in recent years.

It is common to blame rigid labour laws for this worrying trend. Labour laws could surely be improved in many Asian countries but they are not the main drag on job creation, and better labour laws alone would not spark a surge in new jobs.

Asian governments need to look at the bigger picture. Businesses invest in new production when and where they see the potential to profit. These investments create jobs and can have knock-on effects far beyond the factory or plantation built.

In a number of developing Asian economies, rigid banking, bankruptcy, and land laws interact to cause industrial stagnation and discourage investors. Weak infrastructure and fragmented local markets for goods impede new investments and therefore new jobs. Only with reform in these critical areas will changes to labour rules make a difference and lead to productive opportunities for more workers.

The challenge is made more complex by competitive pressures on businesses to adopt labour-saving technologies. It is unlikely that a manufacturing expansion today would bring the employment expansion it did in Asia's newly industrialising economies in the 1970s and 1980s. And more jobs in the cities, while certainly positive, would not help the vast majority of Asia's poor who live in the countryside.

Overcoming these challenges will require new thinking, new growth-promoting policies and strong political will in many countries. To attract productive investment to rural areas, governments must first invest in rural infrastructure - the roads, bridges and markets required to enable greater economic activities.

To strengthen rural economies and the urban informal sector, governments must establish property rights for entrepreneurs running informal enterprises and provide them with better access to credit and services. To create jobs on the scale needed to make a dent in poverty, governments must work more closely with the private sector to develop non-traditional, profitable, but relatively labour intensive options for growth. To capitalise on these actions, governments must invest more in their people to help them develop marketable skills.

This is a full agenda and would require difficult decisions in many developing countries. The need for rural infrastructure, access to capital and education is not new. Neither are the growing demands on national budgets. The new element in the jobs equation is the persistence - indeed the growth - of unemployment and underemployment in some rapidly expanding Asian economies. Governments must identify ways to spur job growth.

The potential of developing Asian economies is widely recognised - the region may record strong economic growth for the next 20 years - but unless Asian governments make job creation a central national objective backed by time-bound, feasible, credible and funded policies, the region may well remain plagued by huge unemployment, underemployment and poverty - and all the social challenges those create.

This article first appeared in The Financial Times