ASIA’S JOURNEY TO PROSPERITYPolicy, Market, and Technology over 50 Years

Disclaimer: Views expressed in the presentation are those of the authors and do not necessarily reflect views of ADB or its Board of Governors or the governments they represent.

1. 50 years of Asian development

2. The role of markets, the state, and institutions

3. Dynamics of structural transformation

4. Modernizing agriculture and rural development

5. Technological progress as key driver

6. Education, health, and demographic change

7. Investment, savings, and finance

8. Infrastructure development

Table of Contents

9. Trade, foreign direct investment, and openness

10. Pursuing macroeconomic stability

11. Poverty reduction and income distribution

12. Gender and development

13. Environmental sustainability and climate change

14. The role of bilateral and multilateral development finance

15. Strengthening regional cooperation and integration in Asia

2

1. Asia’s key development achievements

2. What explains Asia’s economic success

3. Issues subject to extensive debate

a) Is Asian development unique?

b) The role of industrial policy

c) Can industrialization be bypassed?

d) Importance of institutions

4. Asia’s challenges ahead3

Outline of the presentation

• Rapid economic growth led to rising share in global GDP…

2.2

4.0

5.0

4.9

6.2

5.5

4.7

0 5 10

1960s

1970s

1980s

1990s

2000s

2010s

1960-2018

Average annual per capita GDP growth, (%)

4

PRC1.1%

India1.3%

Philippines0.2% Rest of DA

1.5%

Japan7.0%

AUS & NZL

2.2%

Latin America & the Caribbean

7.1%

MENA3.9%

Sub-Saharan Africa2.2%North America

30.6%

European Union36.2%

Rest of the World6.6%

1960

Developing Asia (DA)’s share in global GDP increased from 4% to 24% in 1960-2018; including Japan, Australia and New Zealand, Asia’s share rose from 13% to 34%.

PRC13.1%

India3.4%

Philippines0.4%

Rest of DA7.1%

Japan7.5%

AUS & NZL

1.9%

MENA4.3%

Sub-Saharan Africa2.2%

North America23.9%

European Union23.2%

Rest of the World5.6%

2018

Latin America and the Caribbean 7.4%

Asia’s key development achievements

• … and improvement in broad development indicators.

Developing Asia

1960 1980 2000 2018

Per capita GDP (constant 2010 US$) 330 647 1,762 4,903

Extreme poverty rate (% of population) … 68.1 33.1 6.9

Life expectancy at birth (years) 45.0 59.3 65.8 71.8

Infant mortality (per 1,000 live births) 137.8 80.1 48.1 26.2

Mean years of schooling (age 20-24) 3.5 6.0 7.7 8.95

Asia’s key development achievements (cont.)

• Peace and stability, especially after the Viet Nam War

• Favorable demographic conditions

• Free trade and investment policies in advanced countries

• A low-income level providing potential to catch up

• Critically, Asia’s economic success owes much to creating better policies and stronger institutions.

6

What explains Asia’s economic success?

• In the last half century, Asian development policy shifted from state-led industrialization to market-oriented growth

Late 1940s to late 1950s:Post-war political independence, reconstruction, and start of state-ledIndustrialization and import substitution.

Late 1950s to late 1970s:Export promotion and market-led growth in Japan and “four tigers”, and state control and inward orientation in PRC, India and many other countries.

Late 1970s to early 1990s: “ East Asian Miracle” fully recognized , and first wave of opening and market-oriented reform in PRC, Viet Nam, India, and Central Asia.

Early 1990s to 2007:Broadening of opening and market-oriented reform, growing trade and capital flows, Asian financial crisis, and post-crisis reform.

2008 to present: Global financial crisis, Asia leading global growth, promotion of inclusive growth and good governance, and rethinking positive role of the state in overcoming market failure.

(1) Relying on markets and private sector as engines of growth, with proactive state support to address market failure

7

• Review of these experiences suggests, first, market-oriented reforms and opening to the outside world were always followed by rapid economic growth; second, while markets and private sector were engine of growth, the state remains proactive in promoting development. Sustained growth and poverty reduction require efficient markets, an effective state, and strong institutions

• Structural transformation (ST) is the primary driver of growth across the world.

• A stylized fact about ST: over time, resources are transferred from agriculture to industry (up to a certain level) and services, and, within each of the three sectors, from low- to high- productivity production.

• Asia is no exception, but with a faster pace.

(2) Promoting structural transformation

8

71.0%

33.5%

14.1%

25.5%

14.9%

41.0%

1970s

2018

Agriculture Industry ServicesEmployment share (%), developing Asia

• ST also involves move from low- to high-productivity production within each of the 3 broad sectors, through technological progress

Contribution to Asia’s GDP Growth (% of total)Asian economies first

adopted foreign technologies, then began to innovate their own, using a variety of ways:

inviting experts and sending students abroad;

buying foreign licenses;

importing machinery;

promoting trade and FDI

conducting reverse engineering;

investing in R&D.Number of patents granted in US

935

1,416

1,524

2,739

3,810

8,116

11,690

16,549

17,924

52,409

Canada

Japan

France

United Kingdom

Germany

PRC

Taipei,China

Germany

Republic of Korea

Japan

20

15

Top 5 patent grantees in US

Ave

rage

19

65

—1

96

9 60.448.2

41.8

31.2

17.7

8.1

15.0

12.3

9.2

(6.6)

21.9

40.8

1970-1985 1995-2005 2010-2017

Physical capital Labor Human capital TFP

(2) Promoting structural transformation (cont.)

9TFP = Total factor productivity

• High-growth Asian economies made large investment in physical capital, financed largely by domestic savings

Physical capital stock

(2011 constant $,

trillion)

Capital stock

Growth

(%)

1960 2017 1960–2017

Developing Asia 3.9 176.0 6.9

Central Asia - 2.4 -

East Asia 1.3 108.2 8.1

PRC 1.0 94.9 8.3

South Asia 1.4 34.8 5.7

India 1.2 29.9 5.9

Southeast Asia 1.1 30.5 6.0

(3) Investing in productive capacity

10

18

24.9

27.4

32.9

36.6

41

20.3

26.1

28.5

32.3

33.3

38.9

0 5 10 15 20 25 30 35 40 45

1960s

1970s

1980s

1990s

2000s

2010s

Gross domestic savings and investment (% of GDP)

Gross domestic investment Gross domestic savings

(3) Investing in productive capacity (cont.)

• A key part of physical capital investment was for infrastructure - transport, power, water & sanitation, and telecommunications.

117

134

1,398

165

343

4,247

3,648

4,120

321

1,215

2,722

3,501

5,092

5,277

8,615

8,709

10,363

11,491

0 2,000 4,000 6,000 8,000 10,000 12,000

India

Thailand

World

PRC

Malaysia

OECD

Japan

Australia

Republic of Korea

Electricity Generation per Capita (kWh/capita)

1971

2018

11

• During 1971-2018, per capita electricity generation increased by 35 times in Korea, 30 times in China, 19 times in Thailand, 14 times in Malaysia, 9 times in India.

• In comparison, it doubled in OECD countries and tripped for the world as a whole.

• Large infrastructure investment alleviated production bottlenecks and improved living standard.

• Many Asian economies made efforts to build human capital, by making education a basic right and through compulsory education, investment in schools and education reform.

(4) Building human capital

12

25

37.5 39

52.1

78.9

2.4 5 6.511.6

34.3

0

10

20

30

40

50

60

70

80

1970 1980 1990 2000 2018

Gross Enrollment Ratio (%), Both Sexes

Secondary Tertiary

2.12.5

2.7

3.33.6

0

0.5

1

1.5

2

2.5

3

3.5

4

1970-1979 1980-1989 1990-1999 2000-2009 2010-2018

Public Spending on Education (% of GDP)

• During 1970s-2010s, developing Asia’s public spending on education increased from 2.1% of GDP to 3.6% of GDP.• Public spending on education contributed to rising school enrollments at all levels.• Expanding education boosted productivity and improved people’s well-being.

• High-growth Asian economies all maintained open trade and investment regimes, making Asia a center of global manufacturing production and value chains.

(5) Opening trade and investment

0%

5%

10%

15%

20%

25%

30%

35%

40%

0

100

200

300

400

500

600

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2016 2017

$ b

illio

n

Asia's Foreign Direct Investment

Inflow (left) Outflow (left)Inflow, % of world total (right) Outflow, % of world total (right)

Asia’s top 5 merchandise exports (% of total)

13

11

8

7

6

5

0 10

Textile yarn, fabrics,made up articles, etc.

Textile fibers, notmanufactured, and

waste

Transport equipment

Iron and steel

Electrical machinery,apparatus, and

appliances

1960-1969

20

14

9

6

5

0 10 20

Electrical machinery,apparatus, and

appliances

Machinery, otherthan electric

Transport equipment

Petroleum andpetroleum products

Clothing

2010-2018

• They initially promoted exports of labor-intensive manufacturing products, and over time, moved up to export more sophisticated products such as cars, electronics and machines. In the last 2-3 decades, they participated in GVCs.

• To attract FDI, they set up SEZs and provide tax incentives, making developing Asia one of the most attractive FDI destinations, accounting for 35% of the world total in 2017.

• Compared with other developing regions, Asia did better in macroeconomic management, whether looking at growth fluctuation, inflation, or frequency of economic crises

Average annual GDP growth by decade (%)

(6) Maintaining macroeconomic stability

9.0

5.5 6.6

5.5 4.1

3.22.6

3.3

0

2

4

6

8

10

12

PRC India NIEs ASEAN5 Rest ofDeveloping

Asia

LatinAmerica

Sub-Saharan

Africa

OECD

1970–1979 1980–1989 1990–1999 2000–2009 2010–2018 __ Full period average

__ Full period average

14

4.0

7.3

5.1

8.7

9.1

7.4

22.6

12.2

0

5

10

15

20

25

PRC India NIES ASEAN5 Rest ofDeveloping

Asia

LatinAmerica

Sub-Saharan

Africa

OECD

Average Inflation by decade (%)

1970–1979 1980–1989 1990–1999 2000–2009 2010–2018

7061.9

_ Full period average

• Good macro management provided basis for sustained growth, and reforms in response to the Asian financial crisis laid foundation for future resilience.

• Rapid economic growth and targeted policies led to rapid poverty reduction.

(7) Promoting social inclusiveness and gender equality

15

Malaysia Singapore

Hong Kong, ChinaPhilippines

Thailand

Indonesia

Republic of Korea

Taipei,China

Peru

Mexico

Brazil

Colombia

Venezuela

Chile

Argentina

-20

-15

-10

-5

0

5

-1 0 1 2 3 4 5 6 7 8 9

Ch

ange

in G

ini (

19

81

-19

90

min

us

19

65

-19

70

)

Average per capita GDP growth, 1965-1990

Changes in income inequality and per capita GDP growth, 1960s-1980s

PRC

MONBAN

BHU

IND

NEPPAK

SRI

INO

LAO

MYA

PHI THA

VIE

PNG

SOL

VAN

y = 0.25x + 0.42R² = 0.38

0.0

0.5

1.0

1.5

2.0

2.5

3.0

0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0

An

nu

al r

ate

of

po

vert

y re

du

ctio

n (

p.p

.)

Annual growth of per capita GDP (%)

Economic Growth and Poverty Reduction, 1981‒2015(based on international poverty lines)

• Asia had stable inequality in 1960s-1980s, a pattern known as “growth with equity” in East Asia; since 1990s, growth has been accompanied by rising inequality in some economies.

• Asia benefited from engaging with bilateral partners and MDBs in implementing development projects, especially infrastructure, education, and health.

• In South Asia and Southeast Asia, development assistance financed 10-20% of gross domestic investment in the 1970s and 1980s.

• Such partnerships remains relevant to Asia’s changing needs, providing responsive support by combining financing with policy advice.

(8) Engaging with development partners and promoting RCI

16

1.4 2.4 1.9 1.74.4

8.1

13.3

9.17.5 6.8 5.9

6.4 5.9

5.6 3.4

3.9

2.7

1.1

1.6

1.1 0.7

0.5

-5

0

5

10

15

20

25

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2017

Net Capital Inflows by Nonresidents to Developing Asia, 1970-2017 (% of gross domestic investment)

Net FDI inflows Net official flowsNet bank lending and bonds Net portfolio equity inflows

• Regional cooperation and integration (RCI) has played an important role in supporting Asian development by contributing to

• peace and security;

• intraregional trade and investment;

• provision of regional public goods.

• In 2018, close to 60% of Asian trade were among Asian countries and 50% of FDI inflows were from within Asia and the Pacific region

57.5

48

30

35

40

45

50

55

60

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Shares of Intraregional Trade and Intraregional Foreign Direct Investment Inflows, Asia and the Pacific

Trade

Foreign Direct Investment

%

(8) Engaging with development partners and promoting RCI (cont.)

17

10 policy recommendations of the Washington Consensus

Fiscal discipline

Public expenditure reform

Tax reform

Financial liberalization & market-determined interest rates

Competitive exchange rates

Import liberalization

FDI liberalization

Privatization of state-owned enterprises

Deregulation

Protection of property rights

Issue one: Is Asian development unique?

18

• Some studies considered Asian experience unique, or there is an “Asian development model”, which emphasizes the role of state interventions, as opposed to the so-called “Washington Consensus”, which follows more closely with standard economic theory of market economies.

• The book argues that Asian economies implemented policies and reforms that are not very different from standard economic theories of market economies –in this sense, Asian development is not unique.

• What made many Asian economies unique is their gradual approach and pragmatism in implementing policy reforms, including the practice of testing or piloting major policy changes before full-scale implementation and careful sequencing.

• Many Asian economies have used industrial policies (IP) to promote development. “Horizontal” IP has worked by improving business environment. But targeted IP has been more controversial and outcomes mixed.

Targeted IP was discredited after Asian financial crisis but received renewed attention in recent years.

• The book argues that targeted IP, if used badly, can lead to rent-seeking, unfair competition, and inefficiency; but if used wisely, it can be effective, especially in areas with strong positive spillovers and coordination problems.

• Targeted IP is more likely to succeed when it is performance-based and promotes competition, with clear targets, sunset clauses, and transparent implementation rules.

• As a country becomes more developed, IP should focus more on supporting R&D to promote technological innovation that are less intrusive.

Issue two: The role of industrial policy

19

• Many Asian economies achieved high growth by promoting manufacturing and exports.

NigeriaUSAVenezuela

Brazil

Colombia

Egypt

Australia

Bangladesh

India

Indonesia

PRC

Japan

Pakistan

Nepal

New Zealand

Philippines

Sri Lanka

Papua New Guinea

Rep. of KoreaSingapore

Hong Kong, China

Fiji

Malaysia Taipei,ChinaThailand

0

2

4

6

8

10

0 2 4 6 8 10 12 14 16 18

GD

P g

row

th (

ann

ual

ave

rage

, %)

Export Growth and Economic Growth, 1960–2017

Bubble size: Population (2017). Color

gradient: Trade/GDP (2017)

Growth in export of goods and services (annual average, %)

Issue three: Can industrialization be bypassed?

0

10

20

30

40

India PRC NIEs ASEAN4

Manufacturing Employment (% of total)

1970-1979 1980-1989 1990-1999 2000-2009 2010-2018

20

• They used a variety of ways to promote manufacturing: large capital investment, investment in R&D, opening to trade and FDI, education and skills training, setting up SEZs.

• Historically, manufacturing was important almost in all high-income countries worldwide before de-industrialization.

• Why manufacturing is important: tradability and generating foreign exchanges, having high income elasticity of demand, large scope for innovation, scale economy, and creating better paying jobs.

Issue four: The importance of institutions

21

y = 0.39x + 3.86R² = 0.60

0.0

1.0

2.0

3.0

4.0

5.0

6.0

-2.0 -1.0 0.0 1.0 2.0 3.0

Government effectiveness score

Government Effectiveness Score and Per Capita GDP in 2011, Developing Asia

Log

(Per

Cap

ita

GD

P)

• There is a positive association between quality of institutions and economic development, and Asia is no exception. But this correlation may vary across different dimensions of institutions and depends on a country’s stage of development.

• At a low-income stage, igniting growth is a priority, and government effectiveness, regulatory quality and control of corruption are important (see Figure on the right). As a country becomes more developed, the priority is sustaining growth, and accountability and wide citizen participation could become more important.

• In some Asian economies, creating a vision for the future that was shared across a wide spectrum of society and promoted by forward looking leaders, made a difference, especially when backed by a component bureaucracy.

• Asia’s development gaps with advanced countries remain large – in 2018, developing Asia’s per capital GDP was just 13% of OECD level.

• Asian economies should maintain sound policies that prove to have worked, and address remaining and emerging challenges, such as

• Promoting innovation-based growth

• Making growth more inclusive and narrowing gender gaps

• Improving education quality and achieving universal health coverage

• Reducing large infrastructure gaps

• Protecting environment and tackling climate change

• Responding to demographic change and population aging

Asia’s challenges ahead

22

Improving education quality and achieving universal health coverage (1)

16.2

18.5

39.5

44.6

48.6

52.7

57.5

71.8

77.4

79.2

81.0

82.7

87.3

89.2

90.5

92.6

92.8

93.5

93.5

93.8

0.1

0.1

0.3

0.4

0.3

1.4

1.4

1.1

5.8

11.6

10.5

2.7

24.6

20.7

28.6

24.0

11.6

22.2

20.8

37.0

0 20 40 60 80 100

India*

Kyrgyz Republic

Philippines

Indonesia

Azerbaijan

Georgia

Thailand

Mongolia

Malaysia

OECD

US

Armenia

PRC*

ROK

Taipei,China

Japan

Viet Nam

Hong Kong, China

Kazakhstan

Singapore

Average Science/Mathematics Test Scores (% of student participants achieving 400+ and 600+)

600+ 400+

Notes: People's Rep. of China includes only Beijing, Shanghai, Jiangsu, and Guangdong. India includes only Himachal Pradesh and Tamil Nadu. The test scores are standardized to range from zero to 1,000. Sources: 2015 PISA / TIMSS scores except for Armenia and Philippines (TIMSS 2003); Mongolia (TIMSS 2007); Azerbaijan, India, and Kyrgyz Republic (PISA 2009). 23

Sources: ADB estimates.

Baseline Climate adjusted

Total % of GDP Total % of GDP

Central Asia 492 6.8 565 7.8

East Asia 13,781 4.5 16,062 5.2

South Asia 5,477 7.6 6,347 8.8

Southeast Asia 2,759 5 3,147 5.7

The Pacific 42 8.2 46 9.1

Asia and the Pacific 22,5515.1

26,1665.9

Annual Average 1,503 1,744

Developing Asia’s investment needs, 2016–2030 ($ billion in 2015 prices)

Reducing large infrastructure gaps (2)

24

Addressing rising income inequality (3)

Gini coefficients change in 1990s-2010s End-year value

RegionPre-tax and Pre-transfer Gini (mean)

Post-tax and Post-transfer Gini (mean)

% Difference

Developing Asia 40.0 37.4 (6.3)

Japan, Australia, and

New Zealand45.7 32.6 (28.6)

Latin America and the

Caribbean47.1 43.4 (7.7)

Sub-Saharan Africa45.9 45.0 (1.8)

European Union 46.8 29.9 (36.0)

North America 48.6 34.5 (29.1)

OECD 46.4 31.0 (33.2)

Asia’s Inequality in the Global Context

-10 -5 0 5 10 15

PRC (1990-2017)

Sri Lanka (1990-2016)

Indonesia (1990-2017)

Bangladesh (1991-2016)

India (1993-2012)

Lao PDR (1992-2012)

Pakistan (1990-2015)

Viet Nam (1992-2016)

Mongolia (1995-2016)

Nepal (1995-2010)

Philippines (1991-2015)

Thailand (1990-2017)

Malaysia (1992-2015)

46.7 (I)

39.8 (C)

38.1 (C)

32.4 (C)

35.7 (C)

36.4 (C)

33.5 (C)

35.3 (C)

32.3 (C)

32.8 (C)

40.1 (C)

45.3 (I)

41.0 (I)

25

Narrowing gender gaps (4)

• Challenges to achieve gender equality:

Increase women’s access to the formal labor market and decent work

Reduce women’s unequal share of unpaid care and domestic work

Increase women’s public and political participation

Eliminate gender discrimination in laws, policies and social norms

Share of Vulnerable Employment of Women (% of total female employment)

38.4 46.9

79.053.2

82.855.2

8.122.0

46.0

0

20

40

60

80

100

Central Asia East Asia(excl. ROK)

South Asia SoutheastAsia

The Pacific DevelopingAsia

Japan ROK World

Gender Wage Gap in the World by Income Level, 1995–2015

Developing Asia

Rest of the World

Real GDP per capita (2010 US dollars) 26

Rest of Developing Asia, 12.7%

People's Republic of China,

24.7%

India, 6.8%

Japan, 2.8%

Australia and New

Zealand, 1.2%

Middle East and North

Africa, 8.1%

Sub-Saharan Africa, 5.9%

LAC, 8.4%

North America,

15.3%

Europe,14.1%

2014

Rest of Developing Asia, 11.3%%

PRC, 8.7%

India, 3.5%

Japan, 3.4%

AUS and NZL,1.6%

MENA, 5.3%

Sub-Saharan Africa, 7.7%

Latin America and

the Caribbean, 10.4%

North America,

19.0%

Europe, 29.3%

1990

• Pressure from rapid economic development has created many environmental problems.

• Environmental policy responses were initiated and expanded in recent 2-3 decades.

• But much more action is needed to make the region’s development sustainable and contribute to global efforts.

Global Shares of Greenhouse Gas (Carbon Dioxide Equivalent)Annual Emissions

Protecting environment and tackling climate change (5)

27

36.4 40.4 41.3 38.2 34.0 30.6 26.1 24.0

59.7 56.1 55.1 57.6 61.4 64.0 67.6 68.1

4.0 3.5 3.6 4.1 4.7 5.5 6.3 7.9

1950 1960 1970 1980 1990 2000 2010 2018

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

0

10

20

30

40

50

60

70

80

90

100

1950 1960 1970 1980 1990 2000 2010 2018

Tota

l po

pu

lati

on

, bill

ion

Po

pu

lati

on

by

age

, % o

f To

tal

Total Population (billion) and Population by Age (% of Total), Developing Asia, 1950‒2018

0-14 15-64 65+ Developing Asia

Responding to demographic change and population aging (6)

28

• Asia’s economic success owes much to creating better policy and stronger institutions. The book highlights the following:

1) relying on markets with proactive state support;

2) promoting structural transformation;

3) investing in productive capacity;

4) building human capital;

5) opening trade and investment;

6) maintaining macroeconomic stability;

7) promoting social inclusiveness; and

8) engaging with development partners and promoting RCI.

• Going forward, Asia still faces many challenges and there is no room for complacency.

• Asia must continue to maintain good policy, strengthen institutions, and contribute to the development of science and technology and to tacking global issues.

Summary

29

Thank you!

The soft copy of the book can be downloaded at

https://www.adb.org/publications/asias-journey-to-prosperity

30