An Eight-Point Development Agenda for Sustained Growth in Asia - Takehiko Nakao

Speech | 19 September 2014

Keynote address by ADB President Takehiko Nakao at the 5th Asian Development Forum on 19 September 2014 in Ha Noi, Viet Nam (as delivered).

I. Introduction

Your Excellencies, distinguished guests, friends, ladies and gentlemen,

It is an honor to be here to participate in this 5th Asian Development Forum. I want to thank the Ministry of Planning and Investment, and Minister Vinh, for the excellent preparations of this event. This Forum started in 2010 in Seoul, to discuss development issues among policymakers and other development partners in Asia. Actually I was the Chairman of the Second meeting in Tokyo in 2011 when I was at the Ministry of Finance in Japan. I am glad to see this important Forum gather even greater momentum.

During the past 50 years or so, Asia's remarkable economic progress has gained global admiration. When the Asian Development Bank (ADB) was founded in 1966, Asia was regarded as a region with pervasive poverty. The most important challenge was how to feed its vast population; the question was whether productivity growth in agriculture could match population growth.

Since then, Asia's poverty has declined dramatically. Its share of global GDP in purchasing power parity increased from 23% in 1990 to 38% in 2013.1 ADB’s publication--Asia 2050: Realizing the Asian Century--envisaged that the Asia and Pacific region could represent more than 50% of global GDP by 2050.2 This is indeed realistic, considering that Asia represents half of the world’s population.

But we also face daunting challenges such as persistent poverty in a large part of the region, growing inequality, climate-induced natural disasters, and intense competition for natural resources. Some countries risk falling into the middle income trap.

Since I became President of ADB in April last year, I have visited about 20 of our developing member countries. These visits have given me hands-on insights into how these countries ignite and sustain growth. Reflecting on these, I have come up with an 8-point development agenda.

Today I would like to share with you my thinking about these 8-points, what I call a "back to basics" approach. These are: 1) security and political stability, 2) macroeconomic stability, 3) infrastructure investment, 4) investment in education and health, or human capital, 5) open trade and investment regimes, 6) good governance, 7) inclusiveness in the society, and 8) a clear and shared vision for development.

For low-income and lower middle-income countries, I believe it is possible to reach the upper middle-income level if these 8-points can be effectively implemented. For upper middle-income countries to overcome the middle-income trap, they need to boost productivity through upgrading industries and services, promoting innovation, and enhancing human capital development. For these countries, I still think it is equally important to adhere to the 8-point basic agenda.

II. An 8-point development agenda

The first of the 8 points is security and political stability. Hard won gains in growth and poverty reduction can be lost if security issues or political instability interfere. Conflict disrupts development, usually hurting those who can afford it least. Conversely, ending conflict can bring tremendous progress. For example, since the end of civil war in May 2009, Sri Lanka has been recording solid rates of growth. What is especially striking is that economic activity in the post-conflict Northern and Eastern Provinces expanded almost twice as fast as in the rest of the country.

The second point is macroeconomic stability, which sets the stage for high rates of saving and investment. No economy can prosper in the midst of macroeconomic volatility. As we know, the 1997/98 Asian financial crisis was a wake-up call. Policymakers across region worked to strengthen their fiscal, monetary and financial sector policies. Fiscal deficits are now smaller. Inflation is better managed. The banking sector is better capitalized and regulated. In addition, regional cooperation, such as the Chiang Mai Initiative Multilateralization, has advanced to help build resilience to external shocks. Policymakers should continue to pay utmost attention to maintaining macroeconomic stability.

The third point is infrastructure investment. Good quality infrastructure boosts productivity, reduces trade costs, and promotes investment from both home and abroad. It also provides people with access to basic services like health care and education, and to jobs and other economic opportunities. Developing Asia’s infrastructure gap is huge, with needed investments estimated at $750 billion a year through 2020, particularly for transport and power.

I have noticed that the countries with a higher ratio of infrastructure investment to GDP, such as the newly industrialized economies of the 1970s and 1980s and, more recently, the People’s Republic of China, tend to enjoy higher and more sustained growth. Poor infrastructure in some other economies prevents them from unleashing their potential. Public infrastructure spending must increase. Countries must improve the mobilization of domestic resources including, most importantly, tax revenues. In addition, they must make more and better use of public-private partnerships.

Cross-border infrastructure--ports, rails, and roads--is also important to improve connectivity between neighboring countries, and thus promote trade and growth. The benefits Viet Nam has gained from the Greater Mekong Subregion program are testament to this. Development of the Southern Economic Corridor, with upgrading of the Ho Chi Minh City-Phnom Penh highway and support for trade facilitation, has halved the travel time and resulted in a 70-fold increase in border trade.

The fourth point is investment in human capital, that is, education and health. The region has already achieved much. Average schooling increased from 4.2 years in 1990 to 6.6 years in 2010.3 But this remains well below the 11.5 years in high income Asian economies. In 2010, developing Asia's public spending on education was only 2.9% of GDP, compared with 5.3% in advanced economies; and health spending was just 2.4%, compared with about 8% in advanced economies.4 Much more needs to be done.

Fifth, open trade and investment regimes are another key driver of growth. Engagement with the world economy is central to achieving high and sustained growth. Open trade and investment regimes allow economies to exploit their comparative advantages, gain access to the global market, tap foreign capital, and benefit from advanced technology and know-how. No economy could ever develop with a closed door.

Countries should also make efforts to eliminate red tape, support small and medium enterprises, reform state-owned enterprises, promote competition, and improve the functioning of the financial system. In Southeast Asia, the framework and peer review provided by the ASEAN Economic Community will help accelerate open trade and investment across the region.

Sixth is good governance. Without good governance, people may divert their energy from innovation and hard work to unproductive activities. Estimates show that corruption consumes the equivalent of over 5% of global GDP. I am pleased to see an increasing number of countries are stepping up anticorruption efforts--for example in the PRC, Indonesia, India, the Philippines, and here in Viet Nam.

Speaking more broadly about governance, the gap between developing Asia and advanced countries remains large in terms of efficiency of public service delivery. Legal frameworks must be strengthened to better protect people and property rights. Tax enforcement and collection must be improved. Good governance should also mean greater transparency and accountability, with greater participation by citizens in policy development and implementation.

Seventh, society must be inclusive to provide people with incentives to participate in economic and social development. In this regard, I am concerned that developing Asia's rapid economic growth has been accompanied in recent years by rising income inequality. According to ADB estimates, 80% of Asia's population now lives in countries with rising inequality. This not only hampers poverty reduction, but also creates social tension and undermines growth. To promote inclusiveness, we must create more quality jobs. We must target disadvantaged segments of the society through better access to education and health, wider financial inclusion, and greater gender equality.

We can also extend the idea of inclusiveness to future generations and the global community by making environmental protection, and climate change mitigation and adaptation an integral and essential part of development policies. These policies are crucial to sustain a country's development. Indeed, many Asian countries have already started prioritizing the harmonization of environment and climate with growth in their national strategies.

Finally, the government must have a credible vision for a brighter future and set a strategy to achieve it. The vision and strategy should transcend administrations and be shared by the people. While we know the private sector is an engine for growth in any country, it is the government's responsibility to set policies, prioritize public spending and investment, and create an appropriate environment for private sector development, in line with the national strategy. The strategy should be coherent, realistic and flexible in responding to changing circumstances.

III. How ADB can help

Since its establishment in 1966, ADB has worked with our developing member countries. Early on, most of our clients were low-income countries, mired in poverty. It is our privilege to be able to contribute to the region’s massive transformation over these five decades.

ADB supports the 8-point basic development agenda through financing, capacity building, knowledge sharing, and policy dialogue. It is also my hope that ADB can contribute to security and stability of the region by promoting regional cooperation and integration, and the spirit of working together.

Our recent mid-term review of Strategy 2020, ADB's long term strategic framework, was designed to address remaining challenges such as persistent poverty in a large part of Asia, and adapt our operations to new realities, such as rising inequality, climate change, and issues facing middle-income countries.

We will ensure that our financing is efficient and brings development results. ADB's direct lending is limited considering demand, so we must combine our lending with leveraging and knowledge. Since taking on the leadership of ADB, I have focused on reforms and innovation within the institution to better serve our client countries. I started reforming the procurement and other business procedures in order to ease the burden on client countries and accelerate project implementation. I recently established a dedicated Public Private Partnership Office to provide transaction advisory services and better coordinate PPP works within ADB. I am also working on empowering our Resident Missions by providing them greater capacity and mandate, so that they can better respond to client needs.

IV. Conclusion

To conclude, as developing Asia’s transformation continues, we must all work together to sustain growth, reduce poverty and create a better quality of life for all. I look forward to today’s discussions--with the confidence that we will better define the steps needed to implement the 8-point development agenda I just highlighted, and other policy priorities.

Thank you!

1 ADB. 2014. Key Indicators for Asia and the Pacific 2014.
2 ADB. 2011. Asia 2050: Realizing the Asian Century.
3 ADB. 2014. Key Indicators for Asia and the Pacific 2014 Special Supplement, Framework of Inclusive Growth Indicators.
4 ADB. 2014. Asian Development Outlook 2014 Theme Chapter, Fiscal Policy for Inclusive Growth.
5 ADB 2013. Asian Development Outlook 2013 Update Theme Chapter, Governance and Public Services Delivery.