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Asian Development Outlook, April 2020

Economic Forecasts

Growth in the region is expected to slow sharply to 2.2% in 2020 under the effects of the current health emergency and then rebound to 6.2% in 2021.

Key Messages

  • Developing Asia’s growth will slow sharply to 2.2% in 2020 due to the COVID-19 outbreak.
  • The growth decline is broad-based, affecting the People's Republic of China (PRC) and India and the rest of developing Asia’s economies.
  • Risks are extremely large due to uncertain evolution and effects of the COVID-19 pandemic.
  • Updated estimates of the outbreak’s impact—including on individual countries and sectors—suggest a much larger impact than previously envisioned.
  • The theme chapter identifies five key drivers of innovation that should inform policy: sound education systems, innovative entrepreneurship, conducive institutions, deeper capital markets, and dynamic cities that bring together top universities and forward-thinking firms.

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Asia Reels from the COVID-9 Outbreak

Growth in developing Asia slowed in 2019, handicapped by trade tensions, a downturn in electronics, and weak domestic investment. Just as recovery in the electronics sector and progress toward what would become the “phase one trade agreement” between the United States and the PRC began to lift the region’s prospects in late 2019, the momentum was halted by the outbreak of COVID-19. The outbreak emerged in January 2020, severely affecting the PRC and rapidly spreading across the world. The evolution of the outbreak, and hence this outlook, remain highly uncertain, but the baseline forecast is that regional growth will slow steeply in 2020 before recovering in 2021.

Outlook by Subregion

Global demand weakened by the pandemic will weigh on the 2020 outlook, particularly in the more open subregions and tourism-dependent economies like those in the Pacific. Growth in East Asia will dip from 5.4% in 2019 to 2.0% in 2020 before reaccelerating to 6.5% in 2021. As the larger Southeast Asian economies wrestle with COVID-19, growth in the subregion is forecast to drop to 1.0% in 2020 before recovering to 4.7% in 2021. Growth in Central Asia will also slow to 2.8% this year with lower oil prices, and the Pacific will contract by 0.3% with declining tourism, before rebounding in 2021. South Asia’s growth rate is forecast to slow from 5.1% in fiscal 2019 to 4.1% in fiscal 2020 and reaccelerate to 6.0% in fiscal 2021, largely tracking recovery in India. Across Asia and the Pacific, the authorities have introduced stimulus packages to support economic activity.

Inflation to Increase in 2020

Regional inflation increased from 2.5% in 2018 to 2.9% in 2019, driven mainly by rising food prices, particularly pork prices in the PRC and vegetable prices in India. However, inflation has remained under control, below the 3.3% average in the past 10 years, which has allowed many central banks across developing Asia to cut policy rates to stimulate growth. Regional inflation is projected to increase to 3.2% in 2020, driven by pork prices in the PRC, before easing again to 2.3% in 2021. Weakening economic activity and softening commodity prices will partly offset the effect of food prices.

Theme Chapter: What Drives Innovation in Asia?

This edition of the Asian Development Outlook identifies five key drivers of innovation that should inform policy: sound education systems, innovative entrepreneurship, conducive institutions, deeper capital markets, and dynamic cities that bring together top universities and forward-thinking firms.

Human capital has many determinants: health and nutrition; education, training, and work experience; social and communication skills; habits and personality traits; and individual fame and brand image. It is evident that education plays a fundamental role in building human capital in the form of knowledge, skills, values, beliefs, and habits. Further, a sound education system can create a pool of potential innovators by fostering inquisitiveness and creativity.

Learning poverty and GDP per capita in Asian economies

Note: Bubble size represents population size. Learning poverty is the percentage of children aged about 10 who are unable to read and comprehend a short text appropriate for their age. Data from World Bank (2019).
Source: Newman, Gentile, and dela Cruz, forthcoming.

How entrepreneurship, innovation, and economic development interact is more complex than is often thought. Entrepreneurs are a mixed bag, as are the teams they form and the new businesses they create. Most entrepreneurs are not economically innovative, as few create new jobs in any significant number or have the means to be productive.

New and entrepreneurial business categories

Source: Autio, forthcoming.

This study has examined the role of human capital in spurring innovation in developing Asia, taking into account the intrinsically and fundamentally human nature of innovation. It analyzed the role of the education system and the entrepreneurial ecosystem in fostering an innovative culture that can encourage more Asian innovators. Notwithstanding the central role played by brilliant individuals in innovation, it takes teamwork, networking, and collaboration to transform innovative visions into reality.

Registration of IPRs in the Republic of Korea, 1970–2010

IPRs = intellectual property rights.
Note: Utility model registration rapidly diminished because that process changed in 2006 into an evaluation system. At the same time, patent registrations decreased because large firms such as Samsung and LG reduced their registration of patents with the Korean Intellectual Property Oƒce. Since the mid-2000s, large ROK firms have applied for and registered patents with the United States Patent and Trademark Oƒce instead, to better compete in the global market.
Source: Lee, Kang, and Park, forthcoming.

Access to finance is indispensable to innovation, which is inherently costly and fraught with risk and uncertainty. There is almost no way of knowing beforehand which particular innovations will turn out to be commercially successful. It is even more difficult to predict whether an innovator can turn his innovative vision into a viable reality. Yet even the greatest inventions need financing to succeed. While Apple is widely associated with Steve Jobs, for example, the iconic tech giant would never have emerged without the bold, high-risk investment of Mike Markkula, who provided critical seed money and managerial support during Apple’s embryonic phase. A crucial component of viable innovation is, therefore, a sound and efficient financial system that can channel resources to aspiring innovators.

Urban agglomeration plays an important role in fostering innovation (Feldman and Audretsch 1999, O’Huallachain 1999). As shown above, economies in developing Asia are becoming increasingly innovative. At the same time, they are experiencing rapid urbanization. Urban innovation clusters or hubs can be a powerful promoter of innovation. Silicon Valley, the birthplace of the global tech industry, is perhaps the bestknown example. Some well-known urban innovation clusters in developing Asia are Zhonguancun, Shenzhen, and Zhangjiang in the PRC; Bangalore and Hyderabad in India; and Pangyo Tech Valley in the ROK. But is there a systematic relationship between innovation and urbanization? Most existing evidence on the effect of urban agglomeration on innovation comes from developed economies. Systemic evidence is lacking as to whether urban agglomeration affects innovation, and if so, what the channel might be for it to occur in the developing world, including Asia.

Share of urban population and innovative firms in the 10 most innovative cities in selected countries

PRC = People’s Republic of China, R&D = research and development.
Note: The 10 most innovative cities in each country are the ones with the highest share of firms that undertake process innovation. Each cell is the sum of shares of these 10 cities.
Source: Chen, Hasan, and Jiang, forthcoming.

Publication and Links

Asian Development Outlook 2020 publication cover

Asian Development Outlook (ADO) 2020: What Drives Innovation in Asia?

The Asian Development Outlook analyzes economic and development issues in developing countries in Asia. This includes forecasting the inflation and gross domestic product growth rates of countries throughout the region, including the People’s Republic of China and India.