2 Aug, 2011

Asia 2050: How Asian Leaders Can Avoid A “Perfect Storm”

Imtiaz Muqbil

“Asia 2050 – Realizing the Asian Century”, a new book commissioned by the Asian Development Bank (ADB), says that Asia’s future prospects are bright but face a “perfect storm” of bad macro policies, finance sector exuberance with lax supervision, conflict, climate change, natural disasters, changing demography, and weak governance.

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The following is an Executive Summary of “Asia 2050 – Realizing the Asian Century”, a new book commissioned by the Asian Development Bank (ADB). The books says that Asia’s much-vaunted future prospects are largely bright but face a “perfect storm” of bad macro policies, finance sector exuberance with lax supervision, conflict, climate change, natural disasters, changing demography, and weak governance. The book has a number of recommendations on how to address these challenges.

Editor’s Note: Readers are urged to treat the recommendations purely as guidelines worthy of further debate. As they reflect the ADB agenda, they cannot be considered “gospel-truth” solutions. Some of them deserve to be challenged in their own right.

More details of the book are available here.

Open Text of Executive Summary (edited slightly to remove references to graphs and charts)

Asia is in the midst of a historic transformation. If it continues on its recent trajectory, by 2050 its per capita income could rise sixfold in purchasing power parity (PPP) terms to reach Europe’s levels today. It would make some 3 billion additional Asians affluent by current standards. By nearly doubling its share of global gross domestic product (GDP) to 52 percent by 2050, Asia would regain the dominant economic position it held some 300 years ago, before the industrial revolution.

But Asia’s rise is by no means preordained. Although this outcome, premised on Asia’s major economies sustaining their present growth momentum, is promising, it does not mean that the path ahead is easy or requires just doing more of the same. Indeed, success will require a different pattern of growth and resolution of a broad array of long-term challenges requiring strong political will.

To achieve this promising outcome Asia’s leaders will have to manage multiple risks and challenges, particularly:

(+) Increasing inequality within countries, which could undermine social cohesion and stability.

(+) For some countries, the risk of getting caught in the “Middle Income Trap” for a host of domestic economic, social, and political reasons.

(+) Intense competition for finite natural resources, as newly affluent Asians aspire to higher standards of living.

(+) Rising income disparities across countries, which could destabilize the region.

(+) Global warming and climate change, which could threaten agricultural production, coastal populations, and major urban areas.

(+) Poor governance and weak institutional capacity, faced by almost all countries.

These challenges are not mutually exclusive. They can affect one another and exacerbate existing tensions and conflicts, or even create new pressures that could threaten Asia’s growth, stability, and security.

The ADB book postulates two scenarios of Asia’s future growth trajectory: the Asian Century and the Middle Income Trap. These scenarios are only two possibilities of how Asia’s future may unfold. They have a dual objective: to draw attention to the longer-term implications of the broad trends and to ask “what-if” questions.

Makings of the Asian Century

The Asian Century scenario extends Asia’s past success into the future, putting it on the cusp of a historic transformation. It assumes that Asian economies can maintain their momentum for another 40 years and adapt to the shifting global economic and technological environment by continually recreating their comparative advantages.

In this scenario, Asia’s GDP (at market exchange rates) increases from $17 trillion in 2010 to $174 trillion in 2050, or half of global GDP, similar to its share of the global population. seven economies would lead Asia’s march to prosperity (Box 2). With a per capita GDP of $40,800 (PPP), Asia in 2050 would have incomes similar to Europe’s today. It would have no poor countries (those with average per capita GDP of less than $1,000), compared with eight today. The results of falling into the Middle Income Trap are outlined further below.

Actions at three levels

In its march towards the Asian Century, the region must tackle daunting policy, institutional, and governance challenges. Given widely varying country conditions, the precise actions and their timing must vary. Still, it is possible to draw the contours of the major changes necessary for the region along three dimensions: national, regional, and global. The ability of countries to realize the promise of the Asian Century will be determined by their success in these three areas.

National action agenda

Seven overarching intergenerational issues require national action throughout the region.

Growth and inclusion. Growth and inclusion need not be mutually exclusive; indeed they can be mutually reinforcing. To sustain growth over the long-term, almost all Asian countries must give much higher priority to inclusion and reducing inequalities — rich/poor, rural/urban, literate/illiterate, and along gender and ethnic lines. Inclusive growth must not only address poverty, but also deal with aspects of equity, equality of access and opportunity, generation of employment and provision of protection to the vulnerable in the various facets of daily living.

Entrepreneurship, innovation, and technological development. The continuing rapid growth of Asian economies over the next 40 years will require a harnessing of the full potential of technology, innovation and, critically, entrepreneurship. More Asian countries need to emulate Japan, Republic of Korea, and Singapore, and come closer to (preferably achieve) global best practice. The fast-growing converging economies, particularly PRC and India, must move from catching up to frontier entrepreneurship and innovation to create breakthroughs in science and technology. A particularly fruitful area will be inclusive innovation to meet the needs of those at the bottom of the pyramid. A core requirement is a high-quality education system at all levels that promotes creativity.

Massive urbanization. By 2050, Asia will be transformed, as its urban population will nearly double from 1.6 billion to 3 billion. Asia’s cities, which already account for more than 80 percent of economic output, will be the centers of higher education, innovation, and technological development. The quality and efficiency of urban areas would determine Asia’s long-term competitiveness and its social and political stability. Asia must take advantage of being early on its urbanization growth curve to promote compact, energy-efficient, and safe cities.

Financial transformation. As its share of global GDP rises to 50 percent or more, Asia should also have about the same share of the world’s financial assets, banks, and equity and bond markets, etc. In transforming its financial systems, Asia’s leaders must remain mindful of the lessons of the 1997–1998 Asian financial crisis and the Great Recession of 2007–2009. Asia will need to formulate its own approach to finance, avoiding both overreliance on market self-regulation and excessive central government control of bank-dominated systems. It will also need to become more open to institutional innovation, also to support inclusive finance.

Radical reduction in the intensity of energy and natural resource use. The anticipated affluence of some 3 billion additional Asians will put tremendous pressure on the earth’s finite natural resources. Asia will be the most affected by, and responsible for, excessive reliance on energy imports. Out of self-interest, it will need to take the lead in radical energy efficiency and diversification programs by switching from fossil fuels to renewable energy. Asia’s future competitiveness will depend heavily on how efficiently it uses its natural resources and progresses to a low-carbon future.

Climate change. Climate change will affect everyone. With over half the world’s population, Asia has more at stake than any other region. This has far-reaching implications for the way Asia needs to move forward: dramatically increasing energy efficiency and reducing reliance on fossil fuels; adopting a new approach to urbanization by building more compact and eco-friendly cities; relying much more on mass transit for urban dwellers and railways for long-distance transport; and changing lifestyles to alleviate pressures on finite natural resources.

Governance and institutions. The recent deterioration in the quality and credibility of national political and economic institutions (illustrated by rising corruption) is likely to become a binding constraint to growth in Asia. High-quality institutions will help fast-growing converging economies avoid the Middle Income Trap, and slow or moderate-growth aspiring economies move towards a higher growth trajectory. Throughout Asia, an expanding middle class will exert new demands for greater voice and participation, greater accountability for results, and greater personal space. Although daunting, eradicating corruption is critical for all countries to maintain social and political stability and retain legitimacy. These common challenges all require effective governance, both at central and local levels. Asia must retool its institutions with an emphasis on transparency, accountability, predictability, and enforceability.

These intergenerational issues apply to most Asian economies, but their relative priority will vary over time, depending on the group a country belongs to at a given time.

High-income developed economies (Brunei Darussalam; Hong Kong, China; Japan; Republic of Korea; Macao, China; Singapore; and Taiwan): This group of seven economies should lead the rest of Asia in two areas: making the scientific and technological breakthroughs that are crucial to Asia; and moving beyond high economic growth toward promoting broader social well-being.

Fast-growing converging economies (Armenia; Azerbaijan; Cambodia; PRC; Georgia; India; Indonesia; Kazakhstan; Malaysia; Thailand; and Viet Nam): Avoiding the Middle Income Trap should be the main objective of this group’s eleven countries. They should—in addition to further reducing inequalities and consolidating the fundamentals of development—train a world-class, skilled labor force and build credible and predictable institutions that protect property rights (physical and intellectual) and allow fair dispute-resolution. Constantly improving the business climate will be key.

Slow or modest-growth aspiring economies (Afghanistan; Bangladesh; Bhutan; Cook Islands; the Democratic People’s Republic of Korea; Fiji Islands; Iran; Kiribati; the Kyrgyz Republic; Lao PDR; Maldives; Marshall Islands; Federated States of Micronesia; Mongolia; Myanmar; Nauru; Nepal; Pakistan; Palau; Papua New Guinea; the Philippines; Samoa; Solomon Islands; Sri Lanka; Tajikistan; Timor-Leste; Tonga; Turkmenistan; Tuvalu; Uzbekistan; and Vanuatu): The highest priority of this group of 31 countries must be to raise economic growth toward that in their more successful Asian neighbors. They should focus on the fundamentals of development: faster and more inclusive growth by reducing inequalities through better education for all; infrastructure development; and major improvements in institutions, the business environment, and openness to external markets.

Regional cooperation and integration

Regional cooperation and integration is critical for Asia’s march toward prosperity. It will become much more important for a number of reasons: it will cement the region’s hard-won economic gains in the face of vulnerabilities to global shocks; it could be an important bridge between individual Asian countries and the rest of the world; with development assistance, it can help reduce cross-country disparities in income and opportunities (which, if left unchecked, could generate instability or conflict); it can be a stepping stone for poorer countries to move up the value chain and maximize their growth potential; in technological development, energy security, and disaster preparedness, it can help respond better to global challenges, and yield significant synergies and positive spillovers; and, through managing the regional commons, it can contribute to Asia’s long-term stability and peace.

Given its diversity, Asia will need to develop its own model that builds on the positive experience of East Asia: a market-driven and pragmatic approach supported by an evolving institutional framework that facilitates free regional trade and investment flows throughout Asia, as well as some labor mobility. An Asian economic community must be based on two general principles — openness and transparency. Openness will be a continuation of Asia’s long-standing policy of open regionalism, a key factor in East Asia’s past success.

Crucial for increased regional cooperation is strong political leadership. Building Asia’s regionalism will require collective leadership that recognizes a balance of power among participants. Asia’s major economic powers, like PRC, India, Indonesia, Japan, and Republic of Korea, will be important in integrating Asia and shaping its role in the global economy.

Global agenda

Asia’s growth and larger footprint in the global economy will bring new challenges, responsibilities, and obligations. The region will need to take greater ownership of the global commons. It will need to gradually transform itself from a passive onlooker in the debate on global rule making and a reticent follower of the rules, to an active debater and constructive rule maker. As an emerging global leader, Asia should act as — and be seen as — a responsible global citizen. When formulating its domestic or regional policy agenda, Asia will need to consider the regional and global implications. It will need to delicately manage its rapidly rising role as a major player in global governance non-assertively and constructively.

As Asia becomes the center of the global economy, it will be in its own interest that the rest of world also does well economically and politically. Peace and security throughout the world will be essential for its long-term prosperity. The Asian Century should not be Asia’s alone but the century of shared global prosperity.

Asia’s efforts to enhance regional cooperation must not be at the cost of its traditional openness to the rest of the world. Asia must adhere, as mentioned, to its long-standing strategy of open regionalism.

Need for enhanced resilience

Asia’s rise will almost certainly not be smooth. Economic history tells us that there will be many ups and downs along the way. For example, in the past 40 years, financial crises have occurred roughly once every 10 years. It is most likely that between now and 2050, there will be major crises: financial or economic (even social and political). How countries navigate through them will decide Asia’s fortunes. Fortunately, with each successive crisis, Asia has demonstrated a growing capacity to manage them. The region’s much enhanced resilience to external shocks was demonstrated vividly during the Great Recession, as it became the first region to recover, with a v-shaped recovery.

But the region must not become complacent. It must continue to reinforce its resilience by following prudent fiscal and monetary policies and by making its financial systems more robust. Overall, the adaptability, flexibility and capacity to respond to the changing global economic landscape will carry a high premium.

Asian Century vs. Middle Income Trap

The agendas in this book — national, regional, and global — are wide-ranging and require far-sighted leadership. The region has to face up to the daunting task of realizing the opportunities that lie before it. How many countries will meet this challenge? The answer is unclear. Given this reality and uncertainties about the future, the book postulates two quantitative scenarios with very different outcomes.

Most of the discussion is based on the optimistic Asian Century scenario. This scenario assumes that: (i) the 11 economies with a demonstrated record of sustained convergence to best global practice over the past 30 years or so continue this trend over the next 40 years; and (ii) a number of modest-growth aspiring economies will become convergers by 2020. In this scenario, Asia will take its place among the ranks of the affluent on par with those in Europe today; some 3 billion additional Asians will become affluent by 2050. This is the desired or ideal scenario for Asia.

The Middle Income Trap scenario assumes that these fast-growing converging economies fall into that trap in the next 5–10 years, without any of the slow or modest-growth aspiring economies improving their record; in other words, Asia follows the pattern of Latin America over the past 30 years. This is the pessimistic scenario and could be taken as a wake-up call to Asian leaders.

There will be a huge difference in the outcomes of the two scenarios. The economic and social costs of missing the Asian Century are staggering. If today’s fast-growing converging economies become mired in the Middle Income Trap, Asia’s GDP in 2050 would reach only $65 trillion, not $174 trillion (at market exchange rates). GDP per capita would be only $20,600, not $40,800 (PPP). Such an outcome would deprive billions of Asians of a lifetime of affluence and well-being.

The possibility of a “perfect storm” cannot be ruled out in thinking about Asia through 2050. A combination of bad macro policies, finance sector exuberance with lax supervision, conflict, climate change, natural disasters, changing demography, and weak governance could jeopardize Asian growth. In this worst case — or doomsday — scenario, Asia could stumble into a financial meltdown, major conflict, or regionwide chaos well before 2050. It is impossible to quantify this scenario, but Asia’s leaders must be aware of the potential for such a catastrophe and avoid it at all costs.

The intangibles

Four overriding intangibles will determine Asia’s long-term destiny.

First is the ability of Asia’s leaders to persevere during the inevitable ups and downs and to focus on the long term. The region’s ability to maintain the current momentum for another 40 years will require continual adjustments in strategy and policies to respond to changing circumstances and shifting comparative advantages. This will place a tremendous premium on far-sighted and enlightened leadership. Second is the willingness and ability of Asia to emulate the success of East Asia to adopt a pragmatic rather than ideological approach to policy formulation and to keep focused on results. Third is to continue Asia’s success in building much greater mutual trust and confidence among its major economies, which is vital for regional cooperation. And fourth is to extend the commitment and ability of Asian leaders to modernize governance and retool institutions, while enhancing transparency and accountability.

Many of the required actions have long gestation periods that extend over many decades. yet, their impact must be felt well before 2050 to allow Asia to continue on its path to prosperity. Asia’s leaders must act with urgency if the promise of the Asian Century is to be realized.

Sidebar 1: The Middle Income Trap: Unable to compete

The Middle Income Trap is illustrated in the figure which plots per capita incomes of three middle-income countries over 1975–2005. In a steadily growing economy per capita GDP rises continuously — the experience of the Republic of Korea. But many middle-income countries do not follow this pattern. Instead, they have bursts of growth followed by periods of stagnation or even decline, or are stuck at low growth rates.

They are caught in the Middle Income Trap — unable to compete with low-income, low-wage economies in manufactured exports and with advanced economies in high-skill innovations. Put another way, such countries cannot make a timely transition from resource-driven growth, with low-cost labor and capital, to productivity-driven growth.

Sidebar 2: The engines of the Asian Century are the Asia-7 economies

Asia’s march to prosperity will be led by seven economies, two of them already developed and six fast growing middle income converging economies: PRC, India, Indonesia, Japan, Republic of Korea, Thailand and Malaysia.

These seven economies had a combined total population of 3.1 billion (78 percent of total Asia) and GDP of $14.2 trillion (87 percent of Asia) in 2010. Under the Asian Century scenario, their share of population by 2050 would be 73 percent and their GDP would be 90 percent of Asia. They alone will account for 45 percent of global GDP. Their average per capita income would be $45,800 (in PPP) compared with $36,600 for the world as a whole.

Between 2010 and 2050, these seven economies would account for as much as 87 percent of total GDP growth in Asia and of almost 55 percent of global GDP growth. They will thus be the engines of not only Asia’s economy but also the global economy.

Comments on the publication

With more weight of the global economy shifting to Asia and the region’s rising global footprint, Asia’s economies must take on new obligations as responsible global citizens. As this book points out, it is in Asia’s self interest to preserve the Global Commons and, particularly, to take urgent action to mitigate climate change.”

— Horst Koehler, Former President of the Federal Republic of Germany

Asia 2050 presents a bold and enticing vision for the people of Asia—a vision that is achievable through determined action by Asia’s leaders on the national front, in promoting cooperation across the region, and in taking ownership of the global agenda. It is a remarkably balanced discussion of the challenges and the opportunities that lie ahead.

— Hiroshi Watanabe President and CEO, Japan Bank for International Cooperation

Achieving potentially historic transformation in a region that encompasses half the humanity will be of immense interest to political, economic and business leaders around the globe. The book presents a compelling agenda for unlocking Asia’s undeniable potential.

— Christine Lagarde, Minister of Economic Affairs, Finances and Industry, France

This book suggests that Asia can aim at achieving today’s European levels of prosperity in four decades. But it also warns that we could miss the objective if Asia’s emerging economies get caught in the middle income trap. Asian policy makers are well advised to ponder this challenge. Asia 2050 will help them do so.

— Montek Singh Ahluwalia, Deputy Chairman, Planning Commission, India

Asia’s rise to preeminence makes a fascinating story. The book is a timely reminder that sustained growth will require countries to harness the full potential of technological change, innovation and entrepreneurship. Otherwise, countries could find themselves in a middle income trap where productivity and growth could stagnate for extended periods. The book identifies a wide range of wise and pragmatic policy and institutional interventions that must be made early on to avoid the middle income trap.

— Yoon Jeung-Hyun, Minister of Strategy and Finance, Republic of Korea

This book lays out a bold and ambitious agenda — national, regional and global—to lift an additional 3 billion Asians to affluence by 2050. As a long-standing friend of the region, I wish Asia’s leaders great success in realizing this goal of the Asian Century. The book also highlights the critical role that Asia must play in global governance—as amply demonstrated by the ongoing discussions of the reform of the international monetary system.

— Michel Camdessus, Chairman, Emerging Markets Forum and Former Managing Director, IMF

The book persuasively articulates the agenda to put Asia on a longer-term sustained growth trajectory. The book is being released at a time when Asia’s economic resilience is attracting global attention. In the wake of recent global crisis, Asia has demonstrated the strength of their economies and heightened the aspirations of the Asians. This context makes the book a must read for economic and political leaders interested in long-term social and economic development of Asia.

— Abul Maal Abdul Muhith, Minister of Finance, Bangladesh

In recent years, as the Asian economies are maintaining sustainable development with growing international influence, all eyes are increasingly on the future of Asia. The Study: Asia 2050 — Realizing the Asian Century has mapped out a bright blueprint for it in the next four decades with a comprehensive analysis on the opportunities and challenges to be faced. The study also puts forward some valuable policy notes which deserve our attention and contemplation.

In order to realize the goal of Asian Century as described in the Study, Asian countries should strengthen communication and coordination of their macroeconomic policies, grasp development opportunities and meet various challenges together, promote regional economic and social development and be actively engaged in reforming global economic governance to enhance the influence of Asia as a whole, and eventually make contributions to the development and prosperity of the global economy and society.

— LI Yong, Vice Minister of Finance, PRC

The world is in the grips of powerful long-term processes — including globalization, population change, urbanization, resource depletion, climate change, and a revolution in information technologies — but our politics and analyses tend to be short-term and hence short-sighted. The Asia 2050 volume is a path-breaking and pioneering look at Asia and the world in the process of fundamental change, which greatly enhances our understanding of Asia’s challenges by keeping our gaze on the prospects for Asia in 2050. Kudos to the authors and to the Asian Development Bank for taking the long view at a crucial time In Asia and the world. A sound long-term vision, based on detailed evidence and a clearer understanding of social and ecological change, will help Asia and other parts of the world to reach 2050 as prosperous, fair, and environmentally sustainable societies.

— Jeffrey Sachs, Director, The Earth Institute and Quetelet Professor of Sustainable Development, and Professor of Health Policy and Management, Columbia University