Speech by ADB President Haruhiko Kuroda at the Eminent Persons' Forum Panel Session on October 17, 2011 in ITC Maurya, New Delhi, India
Honorable Ministers, Excellencies, Distinguished Guests, Ladies and Gentlemen.
I am honored to be a part of this distinguished panel. As you know, ADB recently launched a product of a commissioned study called Asia 2050: Realizing the Asian Century. It defines and analyzes the so-called "mega-challenges" our region faces from the perspective of national agendas, regional cooperation, and Asia's global responsibilities.
Many people tend to forget that Asia's much vaunted economic emergence over the past decades is actually a re-emergence. Prior to the Industrial Revolution, Asia accounted for 60% of the world economy. That share declined to 15% by 1950. As countries throughout the region began to set national agendas—and a technological revolution set in—the so-called Asian miracle accelerated in the 1970s. Foreign direct investment and trade flourished. The Four Asian Tigers became industrial entrepôts and ASEAN countries followed. And then, Asia's economic giants—China and India— emerged, using reforms to maximize comparative advantage and globalization to ignite economic growth and plant the seeds of prosperity. The result so far—Asia's share of global GDP has reached 35%.
The consequences of this growth have been dramatic. Not only has middle income countries and the middle-class grown to become a force in the region, but hundreds of millions have been lifted out of extreme poverty. Yet our region still remains home to a majority of the world's poor. We have built significant economic momentum. But we have really only scratched the surface in bringing opportunities for inclusive and sustainable growth to the majority of Asia's people.
In short, yes, an Asian Century is possible. But it is not pre-ordained.
Allow me to outline some of the mega-challenges we must overcome if developing Asia is to maintain its growth momentum.
II. Inclusive Growth
Many speak of the center of economic gravity shifting toward Asia. But there are two faces of Asia. Progress in meeting the Millennium Development Goals (MDGs) is uneven. Almost two billion Asians live without basic sanitation. Nearly half a billion without safe drinking water. Infant mortality in some countries is more than 10 times higher than that in developed countries. And, rising food prices continue to place severe pressure on Asia's poor.
There are "widening disparities in incomes," "the urban–rural divide," and "changes in demography" —— some countries age, while others' population grows. Rapid economic growth can easily disguise deepening inequality. And if left unattended, this dualism could aggravate social, economic, and political tensions. Emerging Asia must adjust its development strategy to ensure this does not happen.
Asia needs to pursue a development strategy that promotes inclusive growth, devising policies that develop human capital as much as physical improvements. Most of the region has the fiscal space and private sector capabilities to create partnerships. By utilizing these available resources, they will be able not only to narrow the infrastructure gap, but also to boost social services such as education, health care, nutrition, and sanitation.
To boost employment opportunities, education must help the poor learn the requisite skills for more productive and better paying jobs. Finance must be deepened to provide increased access to the poor and to rural communities. These are essential elements of inclusive growth. 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 receive targeted assistance.
III. The Middle Income Trap
In assessing the region as a whole, it is easy to forget there are many economies where high growth has been elusive.1 While their economic weight may be small—around 6% of Asia's total GDP—their populations are large. For these economies, stimulating growth remains a major imperative.
But for those economies where growth has already ignited and appears robust—a list that includes India, China, most of ASEAN and East Asia—the challenge of sustaining growth over the next 40 years remains.2
Asia 2050 drew two growth scenarios. One in which Asia grows to account for about half of global GDP by 2050, and where per capita income rises to the level of Europe today. And, the other where it gets stuck in the Middle Income Trap, with per capita income barely half its potential. How does this happen?
The problem arises when countries can no longer compete with "low-income"/"low-wage" economies in the export of commodities and manufactured goods. They lack the innovation and increased productivity to compete with advanced economies. The biggest challenge is moving from resource-driven growth—dependent on cheap labor and abundant resources—to growth based on high productivity and innovation. Domestic demand must grow as a source of growth as an expanding middle class begins to use its enhanced purchasing power to buy higher-quality/more-innovative products produced locally or imported. Policies should focus on strengthening human capital and building an environment conducive to innovation and entrepreneurship. An important requirement here is building high-quality education that supports technological breakthroughs. It requires responsive government and other institutions that support transparency and good governance as much as competition and innovation.
Several countries in Asia and Latin America have already fallen into the trap and are working to break out into a more vibrant, dynamic development model. It is not easy. And political leadership plays an important role.
IV. Climate Change and Other Risks
Another part of the answer will depend on how the region negotiates risks associated with environmental degradation and climate change. Asia's rapid growth has come, in significant part, at the expense of the physical environment. Deforestation, land degradation, and water and air pollution are the "shadows" of this growth. They degrade living conditions even as incomes increase. With further economic growth, how we deal with these challenges remains a key to economic resilience.
A recent ADB study3 focusing on Southeast Asia estimates that if nothing is done, the total cost of climate change for Indonesia, the Philippines, Thailand, and Viet Nam could reach as high as 6.7% of their combined GDP each year before the 22nd century. For Asia, as for all the countries in the world, policies for growth must therefore be designed in consideration of environmental sustainability. Asia's poorest remain the most vulnerable.
V. Realizing the Asian Century
To realize an Asian century, actions will have to be taken nationally, regionally, and globally.
At the national level, no single approach will work for all. Of course, Asia's vast diversity means actions must be country-specific. Generally, however, each country's national agenda should give high priority to inclusion and elimination of inequalities of opportunity.
At the regional level, cooperation and integration are increasingly crucial to maintain Asia's growing prosperity. Greater cooperation will help protect hard-won economic gains from external shocks. Better infrastructure—like transport and energy connectivity—will pave the way to a more integrated market that will facilitate the freer flow of economic activities, and thus a more even spread of prosperity throughout the region. Through these policy measures, Asian economies rebalance growth more toward domestic and regional demand.
Accompanying this is Asia's increasing responsibility to help manage the global commons. Global public goods such as free trade, financial system stability, and climate change, among others are responsibilities the region must embrace. As an emerging leader, Asia must lead by example, by being a responsible global citizen.
VI. Closing Remarks
To conclude, I would like to reiterate that we face daunting challenges. Asia's growth has brought significant benefits to the region. But it is an unfinished agenda, with the majority of the world's poor still in Asia. The region is at a critical crossroads. We must continue to be proactive.
As Asia's premier development bank, ADB shares the responsibilities of promoting a more inclusive and environmentally sustainable growth for the region. Yes, we can avoid the middle income trap. By working together, we can build on our comparative strengths, reduce our shared vulnerabilities, and realize our common vision for shared prosperity and stability for our region.
1 The slow or modestly growing economies include Afghanistan, Bangladesh, Bhutan, the Democratic People's Republic of Korea, Lao People's Democratic Republic, Mongolia, Myanmar, Nepal, Pakistan, Papua New Guinea, the Philippines, Sri Lanka, and a host of economies from Central Asia and the Pacific region.
2 Other economies in this group include Armenia, Azerbaijan, Georgia, and Kazakhstan.
3 ADB. 2009. The Economics of Climate Change in Southeast Asia: A Regional Review. Manila.