New imperatives for Asia’s growth

Smoke billows from the chimneys of a coal-burning power plant in Ulan Bator October 14, 2011.

Many Asian economies are slowing not only because of global headwinds but also domestic impediments. Past high growth in East and Southeast Asia was underpinned by an outward orientation, stable macroeconomics, and high savings and investments. But measures that once served the region well need to be recalibrated amid new priorities for reducing income disparities, environmental destruction, and failures in governance.  

Most estimates expect Asia to grow at above 5.5 percent in the next few years compared to the above 6 percent average in previous years. But sustaining growth around these levels will be unlikely unless decisionmakers get to grips with inequality, environmental degradation, and weak governance. Openness to trade and macroeconomic stability are still vital. But the real mileage is going to come from overcoming the new constraints.

Asia is one of the world’s most economically diverse regions, dominated by China’s exceptionally strong growth in recent decades, marked by South Korea’s early emergence as an economic powerhouse and the more recent performances of Indonesia, Vietnam, and the Philippines. South Asia has for a long time lagged behind East Asia, but India today is one of the region’s fastest-growing economies (Figure 1). These country differences notwithstanding, three priorities are at the fore.

Figure 1: GDP growth rates of selected Asian economies


Second, developing Asia is the world’s leading producer of greenhouse gases, accounting for nearly 40 percent of global emissions, twice its share of global GDP. Without bold interventions, this is projected to keep rising. Air pollution is now at dangerously high levels in many Asian cities, and environmental degradation worsening across the region. Meanwhile, the frequency and severity of extreme weather related events are on the rise, with Asia bearing the brunt. Relying on the eventual workings of a Kuznets curve will be irresponsible because some of the environmental destruction is irreversible.

Third, Asia ranks low in some global measures of good governance, and research shows the deleterious effect of poor governance on growth and well-being. For example, Southeast Asian countries generally fare poorly in their control of corruption in governance surveys, and this can affect growth drivers, including foreign investment and credit ratings. In East Asia, the gaps in voice and accountability, that capture perceptions of the extent to which citizens can participate in policymaking processes and the accountability of governments, are wide. South Asia ranks low in political stability.

The first step that many Asian countries can consider is to shift development priorities toward a focus on growth driven by social inclusion, environmental sustainability, and good governance. In countries that have had insufficient investment, such as the Philippines, it will require making investment far more attractive through quality education, clean energy sources, and energy-efficient ports and transport systems. In countries such as China that spend heavily on public works and services, it will pay to redirect more to health, social protection, education, and research.

Implementing these priorities in national plans will put administrations at loggerheads with the often powerful vested interest who will lose out. Evidence on the benefits of these new economic strategies needs to be harnessed to gain public acceptance. International financial institutions, such as Asian Development Bank and the World Bank, might provide financing to support these new and innovative directions rather than limiting to plain vanilla, physical construction per se.

Early actions could focus on win-win steps that generate positive distributional, environmental, and institutional results for everyone. Cutting costly fuel subsidies, as India and Indonesia have begun to do, is a case in point. These subsidies tend to benefit the better-off rather than the poor, and eliminating them would free up precious public fund that could be better invested elsewhere.

Net-win policies will also be needed. An example is switching to low-carbon energy: It might impose immediate costs but generate continuing net gains. The good news is that options for win-win as well as net-win policies exist in Asia; the new strategies are in their early phases, and, with political will, the limited fiscal space can be used to apply them.